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Recently the commerce commission came out with a 600+ page report on our grocery industry.

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It found that the current duopoly between Foodstuffs and Woolworths is hurting New Zealand’s economy. It’s a 22-billion-dollar industry, and these two companies are the only major players.

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Many experts believe that the way forward is for a third entrant to come into the market, forcing the other two to act more competitively.

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The Warehouse Group has expressed interest in entering the market, but there are doubts about whether this could be successful.

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The Two Titans – Foodstuffs and Woolworths

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In other countries, there are often 5 or 10 supermarket company chains, all competing on price and value.

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However, in New Zealand, we only have the two: Foodstuffs and Woolworths.

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Although there are different names like Pak n’ Save, New World, Four Square, and Countdown, most chains fall under the banner of either of these two companies.

This puts both suppliers and consumers in a vulnerable position.

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Suppliers have to ‘take what they can get’ and are often in fear of upsetting the two big brands. They can’t afford to annoy them. If they do, then their whole business could be wiped out. All it takes is for the supermarkets to decide not to stock their product, then their sales crash.

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Understandably, many suppliers have felt intimidated by the two grocery companies. This unbalanced arrangement has been described by some as a ‘mafia’ like situation.

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Consumers are in a tough spot as well.

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Since there are only two major choices, the supermarkets don’t have to compete on price. The general trend is that they ‘price match’ rather than give customers the best deal. Unlike other industries, there isn’t the same pressure to give customers the best value for money.

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Katherine Rich, chief executive of the Food & Grocery Council, said, “Until you get genuine competition where the retailers aren't just matching each other but competitively going out and competing on price you're not going to see much movement, that's why a new entrant is important."

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One blatant example of how powerful the two companies are was during the first lockdown. Many people noticed that when the harsh level 4 lockdown rules were enforced, the supermarkets cancelled many of their planned specials. Why have specials when people have to buy from you?

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Now the supermarkets have been accused of ‘locking people out of nutrition’ as fruit and vegetable costs went up 20% in March, while food costs in general have gone up 7.6%. To some, it seems that the supermarkets are making profits at the expense of people’s health.

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Inflation has not helped the image of the supermarkets, as along with rising fuel costs, food is where people notice the price changes the most. While inflation isn’t caused by the supermarkets, many feel resentful towards them regardless. There’s also the question of how much food prices have increased because of inflation, and how much they have increased under the cover of inflation.

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There has been a problem brewing in the industry for the last 20 years, but recently more and more people have been starting to notice the effects.

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This situation resulted in the Commerce Commission authorising a full report into the grocery industry. That report has now been finalised, and some major changes were recommended.

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The commission’s report – how to fix the grocery industry

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In the Commerce Commission’s recently released report, they found that the current duopoly was having a negative impact on both suppliers and consumers. Out of all the OECD countries, New Zealand was the 6th highest for food prices, out of over 36 countries.

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The Commerce Commission’s job is to take action against anti-competition behaviour in the market. That’s why many were hoping they would recommend that the two supermarket companies split up into separate businesses.

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There were a few ways people speculated this could happen.

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The first would be for the supermarket retail stores to divorce themselves from the wholesale outlets. This would make it easier for a third entrant to get access to the 100s of products any supermarket needs to be successful. Another idea was for the supermarket companies to sell off their smaller brands, creating competition out of the current retail outlets.

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However, the commission didn’t go this far. Here were some of their recommendations:

A code of conduct should be put in place with suppliers to prevent unethical dealings.

Get rid of the restrictive covenants and exclusivity clauses that prevent new grocery stores from being developed.

Possibly allowing collective bargaining between suppliers to make things fairer for them.

Requiring supermarkets to display pricing in a consistent format.

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It's up to the Government whether they will implement these recommendations or the others in the report. It looks like the government wants to take action, but it isn’t clear how far they are prepared to go.

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The current underdogs in the market

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While the supermarkets control a majority of the market share, there is a growing number of online stores that deliver directly to people’s homes.

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One of the most popular is Supie, which delivers food around the Auckland region.

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What has made Supie popular is their mission to make healthy food more affordable and accessible. They can do this because they’ve cut out a lot of the ‘middle men’ that supermarkets rely on. The supply chain is shorter, so customers end up with fresher food.

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However, Supie’s revenue cannot be compared with the massive numbers the supermarkets pull day-in, day-out. While Supie and companies like Supie are emerging as great alternatives, they don’t have the size or scale to be considered a true competitor of the supermarkets.

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To successfully challenge the duopoly, a company would need to be able to match the massive scale and experience of the supermarket brands.

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That fact greatly limits the number of potential competitors. Just like airline companies, the staggering start-up costs and logistical issues already raise an almost impossible barrier to entry for most.

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However, there are a few companies that could potentially give it a go.

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Right now there is a $100m-plus Costco wholesale store under construction in west Auckland. This new store has been getting a lot of media attention because of its size and the massive range of products it’ll eventually sell.

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"Once open Costco Auckland will sell members the highest quality products at the best possible prices across a wide range of categories such as apparel, appliances, automotive, bakery, books and media, deli and catering, domestics and homewares, electronics and… groceries…" the business said.

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While Costco will be competing with the supermarkets, it isn’t just a supermarket, and right now it’s only limited to one location. That could change, but many are looking to the Warehouse Group to lead the way and become #3 in the grocery market.

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The Warehouse Group – a possible third entrant

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Back in 2006 the Warehouse tried to enter into the market with the Warehouse Extra Stores, but was unable to scale successfully, so the venture failed.

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But now it’s a different time. The Warehouse group really has three things working in its favour:

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The Commerce Commission’s report explicitly states that the current Duopoly is harming both consumers and suppliers. While the recommended changes are not ‘radical’ enough by some people’s standards, they do address serious concerns in the industry.

The Government has an incentive to fix this industry. Instead of being a niche industry that only affects a few people, the grocery industry impacts all of New Zealand. If they were able to make a positive change here, it would look good for them politically, and help the country.

The cost of food has been rising rapidly, upsetting people across the country. This is largely due to inflation, but since everyone spends money on groceries, many are blaming the supermarket companies at least in part. The ‘mood’ is that something needs to change, so a third entrant would be welcome.

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Nick Grayston, the CEO of the Warehouse Group, said that his company was “seriously considering” moving into the space.

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He added, “So we are interested to see the action that the Government will take that will make a difference to New Zealanders and allow other players like us to enter the grocery market… We are also interested in whether the Government may consider a move to mandate the major grocers to provide a wholesale solution and supply chain for… new grocery retailers.”

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His comments imply that the Warehouse’s decision on whether to enter depends on how far the Government goes in addressing the current problems in the grocery market.

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Since the Warehouse Group failed to scale with their Warehouse Extra stores back in 2006, it’s not surprising that the company may be hesitant about trying again.

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We think that what the Warehouse Group will be waiting on is how the Government will act on the Commission’s recommendations. It’s a simple business strategy to not take on all the risk yourself. If the Government is willing to actively help a third entrant like the Warehouse Group enter the grocery market, then the Warehouse would be able to avoid a lot of the risks they faced back in 2006 with the Warehouse Extra stores. However, there’s a question of how much the Government should intervene on the behalf of ‘fairness.’

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The ideal outcome if the Warehouse did launch its own supermarket brand

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If the Warehouse Group were able to successfully launch a new chain of supermarkets, New Zealand consumers would likely see lowered food costs from all the major brands. There would be more competition in the market, forcing Foodstuffs and Woolworths to change their strategies and give consumers better deals.

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This isn’t just speculation either, as the Warehouse is already pricing well below the supermarkets with their limited food range. For example, at the Warehouse you can get a 500g block of butter for $4, whereas the same block costs $7.30 at Countdown, while a packet of Weetbix costs $5 at the Warehouse was upwards of $7.80 at the supermarkets.

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Nick Grayston said that “We work hard on building direct relationships with our partners and suppliers to make sure we can offer the best range of affordable products for our customers.”

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It's still too early to tell what will happen, but a successful third entrant into the market has to be good for both consumers and suppliers.

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