Final Submission To ComCom Draft Report On Grocery Sector Shows Extreme Remedies Will Not Produce Better Outcomes

Foodstuffs North Island (FSNI) has now provided its final submission on the Commerce Commission’s market study draft report into the retail grocery sector.

Chief Executive Chris Quin says FSNI’s final submission includes an update on its action plan to deliver better outcomes for New Zealand consumers, as well as additional information and analysis to show why other options put forward by the Commission in its draft report are not justified.

“Our final submission provides significant additional information and evidence that further demonstrates why a number of the Commission’s draft recommendations, such as wholesale separation or forced divestment of retail stores, are not justified and will not produce better outcomes for New Zealand customers.

“The market study process has been focused only on the supermarkets part of the industry and allowed a variety of voices to be heard and claims to be made. However, as we enter the final stages of the process it is clear that the more radical options being proposed are not supported by credible evidence and need to be reviewed by the Commission in its final report.

“On profitability, we have provided additional information with support from expert economists to demonstrate that our returns are less than half of what the Commission’s draft report states.

“What is important to note is that the Commission incorrectly tried to treat us as two separate businesses in its draft analysis, being our retail stores and the rest of the co-operative.

“But if you think about the co-operative like a human body, we have a central nervous system comprised of our distribution centre, supply chain, support centre and other shared services, which supplies everything to the limbs i.e., our retail stores. One part can’t operate without the other.

“Since we are fully integrated in the same way as any other major grocery retailer, it’s more appropriate to assess the returns over the whole of our business (instead of trying to artificially split it), the same way it has done for Woolworths and the same as the international competitors.

“Correctly calculated, FSNI’s average return on capital of 9-12% is consistent with the returns made by the appropriate benchmark of overseas supermarkets – the average return on capital of the Commission’s international sample of grocery retailers is 11.3%. We trust our profitability analysis will be reflected in the Commission’s final report.

“On competition, the extra information and data we have provided supports a conclusion that the retail grocery sector is workably competitive and there are not material barriers to entry or expansion.

“We welcome the Commission’s acknowledgement that we have competition from a range of existing competitors for the many missions that customers choose to shop, in addition to the strong direct national competition we face from Woolworths New Zealand.

“On pricing, we’ve been able to demonstrate through this process that international price comparisons say little about the level of competition but, in any event, New Zealand prices are fair by international standards (we rank 21st in the OECD using the appropriate PPP comparison).”

Quin says given how the extra information and data provided affects the Commission’s draft findings, FSNI doesn’t believe there is a credible basis for recommendations beyond those it has indicated support for in its action plan.

“It’s important to recognise that options that involve forced divestment or forced structural separation of existing market participants would be unprecedented in our economic history. While easy to throw around economic terms like divestment, we all have to be clear about what that would actually mean for owner operators in communities around New Zealand.

“To be justified, the competition problem these remedies would be designed to solve would need to be of unprecedented severity, and could only be turned to when other, lesser remedies have been tried. Our final submission clearly demonstrates why we are nowhere near that threshold.

“Our final submission on the draft market study report is another important step in our customer driven transformation journey, and an opportunity to change further and faster for consumers.

“It’s really important the final recommendations focus on what will actually move the needle for consumers, and that the Commission is able to provide robust, credible justification for them.

“There is also work to be done on the Government side to reduce barriers to competition, including making appropriate changes to the RMA and OIA to better encourage and facilitate new entry into New Zealand.

“We look forward to continuing to implement our action plan to improve outcomes for New Zealanders and await with interest the final report from the Commerce Commission.”

Foodstuffs North Island’s final submission will be made available on the Commerce Commission website here.

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