Reflections on the Grocery Commissioner’s First Annual Report

Reflecting a day later on the Grocery Commissioner’s first annual report, with the massive media and public interest it engendered, leaves three enduring impressions.

We need to get a breakup of the duopoly onto the table – now, not in five years

The Commissioner exceeded expectations by publishing the understanding that a process to solve market failure in groceries would require more tools. Clearly an enforced breakup is beyond his legislative powers, yet in the long term it is the only device that will eliminate the abuse of market power and exploitation of kiwi consumers we are seeing in the sector.

One commentator described enforced divestment as the “nuclear option.” It should not be seen in that light. There is plenty of precedent internationally in antitrust laws in the United States and elsewhere across the developed world. The intentional overbuilding of supermarkets, particularly large scale hyper markets means that a break up is the only way of securing price based competition . incumbents aren’t fools they have had 20 years of Moat building. In fact the OECD economists even recommended a break up in their review of the NZ economy this year.

In New Zealand, we have a hugely successful precedent in the breakup of Telecom. Interestingly this occurred through a mixture of legislative decree, and the government putting Telecom in a position where it would be denied highly lucrative government contracts unless it split wholesale from retail. The outcome was that telecommunications morphed from being a lazy monopoly industry that was a drain on the whole New Zealand economy, to the diverse and dynamic industry with a massive range of choice for consumers that we enjoy today.

Enforced breakup of our supermarkets should not be seen as “nuclear.” Everyone can see that action is needed. Lets do it now – why wait while another generation of Kiwi kids goes hungry because of outrageously high, and increasing profit margins in our supermarkets and our economy suffers from the burden of monopoly rent extraction, creating a drag on economic growth.

The Supermarkets are Not Listening

Responses from the supermarkets show they are cruising along, tone deaf and oblivious to public anger about their performance.

Spencer Sonn, Woolworths NZ Managing Director, responded with a condescending statement full of the standard corporate gobbledygook. They’re “absolutely focused” on “giving customers more value, convenience and a fantastic shopping experience.”

Very nice for those customers who can afford it! But it doesn’t even start to answer the Grocery Commissioner’s expressed concerns about prices that have risen faster than the purchase cost of the goods, or a wholesale regime for external retailers that has attracted so little volume as to be laughable. Its time Woolworths NZ published more detail about their intercompany invoicing between NZ and Australia .

Its childish of the CEO to complain they aren’t making money in NZ when their shareholder representatives are declaring “ “Woolworths has luxurious market structure and globally un precented margins it deserves a 20x valuation “.

It seems Woolworths NZ is tone-deaf – perhaps like its Australian parent whose CEO lost his job after arrogantly walking off the set of a television interview where he was challenged about pricing practices.

Woolworths as an Australian listed company, Foodstuffs North Island as a private company, and Foodstuffs South Island as a cooperative, would do better to show some humility. Perhaps they should engage with government to ask the question “what could we do that would take the possibility of forced breakup off the table?”

Ethical Investors Will Start to Walk Away

Reckless comments, denial, and extortion of society’s most vulnerable are actions that come to the attention of the increasing number of investors who describe themselves as “ethical.”

Companies are increasingly creating their policies, and drafting their commercial agreements, with ESG (environmental, social and governance) considerations in mind. Conversely, companies that ignore such considerations and are motivated solely by profit maximization, increasing find the pool of investors reducing. Ultimately this impacts their shareholder value

CEO Spencer Sonn , let his shareholders down as well as the NZ public , with his distorted focus on his interim bonus pathway , not long term value of the company .We note that Woolworths apologized to its investors after the Dan Murphy Liquor drama in Darwin in April 2021. Its time to repeat that apology after Sonn’s poorly structured response to the ComCom’s work.

Our supermarkets have lost their social license. Media and public reaction to the Commissioner’s report proves that. There is real anger in the streets & workplaces of kiwis.

Commissioner van Heerden has done a service by exposing the enormity of these issues. There is no doubt he will follow up. But it would be very wise for the supermarkets to come to the party and make the next move

Monopoly Watch Team

Sept 2024

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