Competition needed to end ‘power imbalance’ in grocery sector

2 August 2021

 

New Zealand should consider a mandatory code of supplier conduct to reduce major supermarkets’ control of vendors, according to a draft version of a report into the country’s grocery sector. The Commerce Competition report has recommended the creation of a mandatory code of conduct to level the uneven playing field between buyers and suppliers in the sector. It has warned that the code may need to be imposed on the sector by the government rather than determined by self-regulation, to help strengthen suppliers’ weak bargaining power. Further, it indicates the final version of the report, to be released in November, may advocate helping new retailers enter the market in order to break up the current “duopoly” of two major supermarket groups, Woolworths NZ and Foodstuffs. The retailers’ dominance of the market reduces the options for suppliers and pushes up consumer prices, said the report. The commission also recommended studying the authorisation of collective bargaining by suppliers looking to enter supply contracts with major grocery retailers.
“We have... observed that competition for the wholesale purchasing of groceries is not working well for many suppliers,” said the report. “Many suppliers have few options and are reliant on the major grocery retailers to sell their products.” Limited competition for suppliers selling their goods enabled grocery retailers to use buyer power to force suppliers to take on additional costs and risks of contracts.
The retailers can also insist upon uncertain terms of supply, and limit suppliers’ dealings with other grocery retailers, the commission said. Suppliers that refuse to agree to unfair contractual terms or requests for discounts often face the threat of having their products delisted from supermarket shelves.
“This can reduce suppliers’ incentives to invest and innovate, ultimately leading to lower quality goods and reduced choice being available to consumers. There is also the risk that prices will rise in the long-run if suppliers exit the market,” said the report. The named retailers have responded to the commission to deny the balance of power in the sector works in their favour and that they value their suppliers. However, submissions from the New Zealand Food and Grocery Council (NZFGC) and Horticulture NZ also highlight concerns over suppliers’ lack of bargaining power. The commission said while it had considered the results of similar reviews in Australia, the UK, South Africa, Spain and Portugal, the situation in New Zealand’s NZ$22bn grocery sector is different due to the exceptional power wielded by Woolworths NZ and Foodstuffs and inability for smaller companies to enter the market, compared to other countries where purchasing strength is more evenly distributed among multiple retailers, the report said. 

New Zealand should consider a mandatory code of supplier conduct to reduce major supermarkets’ influence over vendors, according to a draft version of a report into the country’s grocery sector.

The Commerce Competition report has recommended the creation of a mandatory code of conduct to level the uneven playing field between buyers and suppliers in the sector.

It has warned the code may need to be imposed by the government to effect real change, rather than determined by self-regulation.

Further, it indicates the final version of the report, to be released in November, may advocate helping new retailers enter the market in order to break up the current “duopoly” of two major supermarket groups, Woolworths NZ and Foodstuffs.

Retailers’ dominance of the market reduces options for suppliers and pushes up consumer prices, said the report, which also suggested studying the authorisation of collective bargaining by suppliers looking to enter supply contracts with major grocery retailers.

“We have... observed that competition for the wholesale purchasing of groceries is not working well for many suppliers,” said the report. “Many suppliers have few options and are reliant on the major grocery retailers to sell their products.”

Limited competition has enabled grocery retailers to use their buyer power to force suppliers to take on additional costs and risks of contracts.

Retailers can also insist upon uncertain terms of supply, and limit suppliers’ dealings with other grocery businesses, the commission said. Suppliers that refuse such contractual terms or requests for discounts may be threatened with having their products delisted from supermarket shelves.

“This can reduce suppliers’ incentives to invest and innovate, ultimately leading to lower quality goods and reduced choice being available to consumers. There is also the risk that prices will rise in the long-run if suppliers exit the market,” said the report.

Named retailers have responded to the commission to deny the current system works in their favour and to state they value their suppliers; however, submissions from the New Zealand Food and Grocery Council (NZFGC) and Horticulture NZ also highlight concerns over suppliers’ lack of bargaining power.

The commission said while it had considered the results of similar reviews in Australia, the UK, South Africa, Spain and Portugal, the situation in New Zealand’s NZ$22bn grocery sector is different due to the exceptional power wielded by Woolworths NZ and Foodstuffs and inability for smaller companies to enter the market. Whereas in comparison, other countries have more widely disributed purchasing strength.

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