Oliver Hartwich: Government the real obstacle to supermarket competition

OPINION:

A 500-gram punnet of grapes: $1.89. A 2 litre bottle of Coca-Cola: also $1.89. Sliced French cheese (200g): $3.04. Maple walnut ice cream (900ml): $3.04. Marinated chicken thighs (400g): $3.47. And, to finish it all off, a small can of Belgian Leffe beer: $1.69.

These are the specials of the week. Sounds good, doesn’t it?

The only problem is the location of the supermarket. It is in Germany, and the prices are taken from the mailer of Aldi, the chain of supermarkets.

To any New Zealand shopper, the German price level must appear unreal. We did not need last week’s Commerce Commission report on the state of our retail industry to realise that New Zealand is an expensive place to go shopping.

It is easy to say we are paying a lot for our groceries. By international standards, we are.

It is more difficult to find out whether we are paying too much. It is much harder still to know whether our big supermarkets are too profitable.

Following the release of the Commerce Commission’s report, many commentators focused on the duopoly nature of the New Zealand retail landscape. As if having two dominant players, in this case Countdown and Foodstuffs, guaranteed the absence of competition and high prices.

Many neoclassical economists believe that competition is a numbers game. They assume that ‘perfect’ competition requires many competitors, whereas there would be no competition with only a single player (monopoly). But it is not that simple.

In many instances, having two big players leads to quite a competitive outcome. Think Coca-Cola and Pepsi for soft drinks. Or Airbus and Boeing for aircraft. Or Canon and Nikon for high-end cameras. In each of these cases, having two dominant players resulted in fierce rivalry.

‘Competition’ is a noun, but that is deceptive. It makes us think of competition as a situation and therefore something measurable. But competitor numbers do not tell us much about competition.

A better way of thinking about competition is to consider the verb ‘to compete’. It is an active process. It is dynamic. It happens on many levels.

Competing companies try many different things, and they do them all at once. They compete on the price of their products, sure. But they also try to outdo each other on customer service. They may want to offer the most convenient shopping experience, the best loyalty programme, the most engaging commercials, or the best variety of products.

All of the above elements together make up competition. Price is a component of this competitive bundle, but it is only one dimension.

That means that even when prices are high, that does not necessarily signal the absence of competition. It could well be that consumers focus on other aspects of the bundles that companies offer. Sometimes we trade convenience for price.

There are other aspects that make it difficult to compare grocery price levels internationally. Sure, the German supermarket prices above sound great but how much of that is due to competition? Their cheaper prices of beers, wines and spirits have more to do with relatively low tax rates. New Zealand, by contrast, has one of the highest excise tax regimes in the world.

Another factor to consider is the wholesale prices New Zealand retailers pay for some of their products. It is a common practice for some suppliers to price discriminate between different countries.

That means, for example, a pack of shaver blades will be sold at varying prices to retail chains around the world. In some cases, international retail prices are lower than the wholesale prices available to New Zealand chain stores.

No wonder some New Zealand retailers are fighting back by parallel-importing such goods. In their submission to the Commerce Commission, Foodstuffs South Island stated they are using this option.

Even the level of profitability for our biggest retailers does not necessarily tell us much about the state of competition. High profits may very well result from good performance in a competitive environment. Indeed, Germany illustrates this nicely.

As the prices above show, Germany is a shoppers’ paradise. German groceries prices are among the lowest in Europe. Still, the list of the richest German families is full of retail barons.

The wealthiest Germans are the two children of Aldi co-founder Karl Albrecht. Their combined fortune is estimated at US$42.5 billion ($60.7b). It is a fortune made by profitably running a supermarket chain offering highly discounted products.

In summary, neither the number of competitors, nor the level of retail prices, nor indeed the sector’s profitability can give us a definitive answer to the competitiveness of the supermarket industry. There are no magic numbers for the ‘right’ price level, the ‘correct’ number of competitors or the ‘justified’ level of profitability.

All that said, there is merit in the Commerce Commission’s analysis because at least it identified obstacles to competition. Ironically, these obstacles have little to do with the two big supermarket chains.

Economists have different ways of thinking about competition. For some, it is a state of affairs. For others like me, it is a process of dynamic discovery. But despite such differences, all economists agree that it should be easy for new competitors to enter the market.

As the Commerce Commission just pointed out, that is simply not the case in New Zealand right now.

For any new international retailer to enter our market, there are many undue hurdles to cross. Land-use planning has reduced the number of sites potentially available to new supermarkets. Existing sites that could be used for new outlets may have restrictive covenants put on them, and these are legally enforceable. It means that these sites are no longer available to potential newcomers.

New entrants also face the prospect of dealing with the Overseas Investment Act. Not just once but each time they want to purchase a new site for a distribution centre or a supermarket. These bureaucratic processes can take years to complete.

For any new entrant, the situation is so complex, it makes it virtually impossible to plan. Will the new distribution centre be approved and available in time? Will there be any supermarket sites available by the time the distribution centre opens? Will there be any sites available at all or will covenants and cumbersome planning processes thwart the efforts?

As a small and remote country, New Zealand is a nice to have for the likes of Aldi. It is not a country that Aldi would feel it must be in – especially not as it is so difficult to navigate on the regulatory side.

The potential interventions discussed in the Commerce Commission’s report are costly, heavy-handed and fraught with risk.

Forcing the two big retailers to sell stores; separating their retail and wholesale businesses; or creating a new government-sponsored retailer: None of these options are easy to implement. Nor are they compatible with secure property rights.

However, the Government could still do something useful, and that is to remove any unwarranted potential obstacle to market entry.

If this is done, we would find out if a duopoly is, in fact, the market structure best suited to New Zealand’s size and geography. Or whether existing price levels and profitability are justified.

Only free entry into the retail market could tell us. Even the credible threat of entry might have a similar effect.

It is entirely up to the Government whether we will get there.

– Dr Oliver Hartwich is the Executive Director of The New Zealand Initiative (www.nzinitiative.org.nz). Disclosure: Foodstuffs North Island and Countdown are members of the Initiative.

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