The Commerce Commission has formally warned three grocery suppliers for demanding a small online store charge more than supermarkets. The commission's next step is fines of up to $10 million.
By speaking out publicly about taking on the big grocery chains, entrepreneur Ben Nathan drew the Commerce Commission's attention to illegal measures which excluded start-ups from competing. Now the watchdog has acted, but too late to save his business.
“Kiwis have been paying far too much for far too long at the checkout," he said when he opened the Honest Grocer's doors. "I think there is a power imbalance, where both consumers and producers are losing out to the might of the big chains."
He encouraged suppliers to "stand strong" in the face of any heavy-handed tactics from the supermarkets – but as Newsroom revealed, suppliers instead demanded he increase his prices or they would pull the pin. One after another withdrew; some said they'd come under pressure from bigger retailers. Eventually, the Honest Grocer was forced to shut up shop – but not before it drew the Commerce Commission's attention to the problem.
Nathan expressed concerns about the withdrawal of products such as bottled water brand Antipodes, a dried pasta range, five wine brands including Otago organic winery Amisfield, cleaning brand Earthwise, and several more.
READ MORE: * Online grocer faces ‘bully tactics’ from supermarkets * Grocery start-ups shut down in shadow of big supermarkets
This week, the Commerce Commission said it had sent 'compliance advice letters' to three unnamed suppliers that it found had engaged in resale price maintenance – that is, requiring retailers to charge above minimum prices for their goods.
It warned the suppliers their conduct could breach the Commerce Act. It declined to says who those three suppliers were; the other suppliers named by Nathan were cleared.
“Kiwi consumers and retailers lose out when suppliers set minimum prices for their goods," says Dr John Small, the commission chair. "It makes it hard for new retailers who want to compete on price to enter the market – without that genuine competition, consumers miss out."
Ahead of its investigation, the Commerce Commission was given examples like Earthwise, which had complained of its cleaners and hand-washes being sold too cheaply. The Honest Grocer's prices matched the lowest prices promoted by Pak'nSave – and Earthwise trading partners had noted the low price, the supplier said.
"Part of our agreement on offering you a very competitive cost price to allow you to achieve competitive pricing, while achieving margin goals was that pricing would not be lower than Pak'nSave everyday pricing," Earthwise wrote in an email to Nathan. "As I'm sure you can understand this can potentially put trading agreements with our major customers at risk."
Antipodes also wrote to the Honest Grocer, a month after it launched, pulling out of supplying the online store. "We believe The Honest Grocer may not be a well suited platform for our customer as a predominantly on-premise brand," the account manager wrote, "as we do not wish to encourage discounting."
Nathan told the Food and Grocery Council last year: "We are getting these daily now. All about pricing." But most suppliers didn't put their threats in writing.
“After loading Italian dried pasta onto the site, all the pictures and prices which takes a long time for us to do... I got a call telling me my prices were too low. A big customer had called them to complain. The supplier said 'pull our account' so we did.
"This is bully tactics."
Insider speaks out
But suppliers say they are 'the meat in the sandwich' – that they are forced by the established supermarket and grocery chains to put pressure on start-up retail brands.
A former insider at one of the companies, who dealt with the decision to stop supplying the Honest Grocer, said this week that they would sometimes get angry calls or emails from big grocery chains.
This would happen especially after small retailers distributed their discounts mailers, the former executive told Newsroom. "'How is The Warehouse able to match our prices?' they would demand. 'What prices are you offering them that make them so competitive?'"
Newsroom spoke this week to Amisfield Wines and Antipodes Water; they said they were not among the suppliers that received warnings from the Commerce Commission.
"The issue of resale price maintenance is a serious infringement of the Commerce Act – even if it is due to retailer pressure – and we were concerned to urgently make sure the supplier sector understands this." – Raewyn Bleakley, Food and Grocery Council
Amisfield chief executive Simon Toneycliffe said most of their dealings with retailers were through distributors.
And Antipodes general manager Rachael Armstrong said their email never sought to set a minimum retail price. "It's a polite way of saying that we don't want to be on your discount site. We're a premium bottled water that sells into high-end restaurants," she explained. "We have a tiny, tiny retail footprint, particularly online."
Earthwise director Jamie Peters couldn't be reached for comment.
The New Zealand Food and Grocery Council said it had been made aware of concerns around minimum pricing when they first surfaced in April. It responded by promptly reminding members of their obligations under the law and providing them with the Commerce Commission’s guidance on this issue.
"The issue of resale price maintenance is a serious infringement of the Commerce Act – even if it is due to retailer pressure – and we were concerned to urgently make sure the supplier sector understands this and its obligations around it," says the council's chief executive Raewyn Bleakley.
"This is a highly competitive market and suppliers are under pressure on many fronts, which means they have to be more mindful of what they can and cannot do. No suppliers have recently reported to NZ Food and Grocery Council any pressure on pricing from the major retailers at this time. We will continue to work with our members as the Grocery Code of Conduct is introduced."
This isn't the first time the Commerce Commission has cracked down on resale price maintenance. In 2006, it prosecuted computer parts wholesaler Morning Star Computer Ltd.
The company had told its resellers not to advertise six products for sale below the recommended retail price. It threatened to increase wholesale prices to the resellers if they advertised the products below the recommended retail prices. Morning Star was convicted and fined $50,000.
After being approached by Ben Nathan and other start-up retailers, the Food and Grocery Council raised concerns about similar practices in groceries. It said (and the Commission agreed) that established grocery retailers were seeking to limit entry and expansion by other grocery retailers, by pressuring suppliers.
"Pressure on suppliers has been aimed at limiting the access to products by the online provider, The Honest Grocer," the council said in its submissions to an inquiry into grocery competition. "After agreeing to supply The Honest Grocer and supplying the new player, many suppliers have withdrawn products due to genuine fear that they risk other parts of their business."
"Some suppliers may decline to supply potential entrants, or choose to supply potential entrants on terms that are less favourable, even without direct pressure, due to concern about the possible response from major grocery retailers." – market study report, Commerce Commission
In its final report in March 2022, the commission said this pressure could occur either directly or indirectly. It could be, for instance, a supplier making the decision not to supply a new entrant to preserve their relationship with existing retailers. The level of concentration in the retail grocery sector was likely to be a contributing factor, it heard, as suppliers are likely to be reluctant to jeopardise their existing relationships with the major grocery retailers, by supplying a new entrant on favourable terms.
"We are aware of examples of some suppliers indicating that they are only willing to supply if a grocery retailer does not undercut the retail prices set by other grocery retailers of the supplier’s products," the commission reported.
"We are also aware of several examples of suppliers allegedly refusing to supply grocery retailers where they are concerned that the retail prices being offered are too low. We have received information which appears to suggest that in some cases the refusal to supply occurred after concerns were raised by another grocery retailer the supplier trades with."
But it wasn't always under express duress from the big supermarket chains: "Some suppliers may decline to supply potential entrants, or choose to supply potential entrants on terms that are less favourable, even without direct pressure, due to concern about the possible response from major grocery retailers."
The commission said it would investigate, as such behaviour made it hard for challengers to enter the grocery market and expand, because they couldn't compete effectively on price.
The Grocery Industry Competition Act, which came into force this month, gives the Commerce Commission new powers to monitor and regulate the grocery sector.
A new Grocery Supply Code is promised, to address the imbalance in power between retailers and suppliers. It will contain a dispute resolution scheme for suppliers and wholesale customers of the major grocery retailers.
This month, the former chair of the Food and Grocery Council was named as New Zealand's first Grocery Commissioner. Pierre van Heerden was also previously chief executive of the Mojo coffee chain and general manager of Sanitarium.
"We want to level the playing field so that we can improve competition, lower prices," van Heerden said, "but also the big thing is to give consumers choice."
