Vertical integration
Vertical integration across the supply chain is accelerating in New Zealand. While much attention has been focused on the integration of wholesale and retail operations, the integration of production, meat processing, data analytics and retail media poses significant risks to several industries already under pressure.
International experience shows vertical integration can raise competition concerns in some settings if allowed to go unchecked, including reduced grocery affordability and weakened market competition.
New Zealand now has the opportunity to take proactive measures to avoid a similar outcome and ensure its market remains competitive and resilient.
Dual conflicts
Dual conflicts are best described as when a customer or buyer then becomes a competitor. This is most evident when supermarkets introduce private label products that directly compete with their existing suppliers, effectively placing the retailer in the dual role as customer and competitor.
Although private label market share has risen globally, recent reviews by competition regulators highlight that grocery affordability has become a serious concern in many markets.
Regulators in Britain, Austria and Sweden report that in markets dominated by private label, price increases have at times been twice as high as those of branded products.
While private labels were introduced to increase price competition, over time they can erode it instead.
New Zealand still has relatively low levels of private label penetration compared with global markets, but the dual conflict created when a retailer can access a supplier’s commercially sensitive information, and then use that information to compete without offering the supplier equivalent visibility, poses a significant threat to competition in downstream markets.
Private label ultimately affords a retailer greater control over shelf space and supply chains, reducing choice and competition for consumers. New Zealand can seize an opportunity to address these concerns before the impacts become entrenched.
‘Creeping co-ordination’
Competitors reasonably should not work together or enter into arrangements that could substantially reduce competition. Such behaviour constitutes collusion and can be treated as cartel conduct.
In jurisdictions such as Britain and the European Union, competitors are prohibited from sharing competitively sensitive information (CSI), including commercial strategy and operational details. New Zealand, however, does not prohibit this type of information sharing.
Foodstuffs North Island and Foodstuffs South Island are competitors in the procurement of groceries. Yet they jointly own subsidiaries that enable the sharing of strategy information between the two entities.
Our proposed amendment to include CSI within the Commerce Act aims to address this “creeping co-ordination”, which inhibits genuine competition and discourages these firms from entering each other’s island markets.
Historically, these two businesses have operated under distinct names and banners, but over time their branding, activities and market behaviours have converged.
Addressing CSI as creeping co-ordination offers a strong opportunity to enhance competition within New Zealand, without relying on a foreign hero to resolve the country’s grocery affordability crisis.
The key question remains: why, when three major buyers operate in the market, do two choose not to expand into the islands where they lack a presence and therefore have clear potential for growth?
A grey area
Supermarkets act as market facilitators or orchestrators of markets within their stores, also known as categories.
The New Zealand grocery market study found the reduction of competition within each category by the removal of suppliers for greater profit poses a significant risk to competition across other parts of the food supply chain.
Currently, this conduct exists within a grey area of the law.
Clearer legislative wording is needed to prevent retailers from deliberately reducing competition within a category in order to raise profit margins while simultaneously reducing competition between suppliers.
Noticeably absent from the bill amendments, but critically important, is any reference to algorithmic pricing, in which software automatically monitors competitors’ prices and matches them in real time.
This automation of price setting can facilitate collusive behaviour, resulting in anti-competitive outcomes, effectively functioning as cartel conduct. Regulators in Britain and the European Union are actively addressing this issue, yet New Zealand’s competition law reform must focus on future-proofing markets rather than conducting retrospective spot checks on past behaviour.
If New Zealand is to achieve any meaningful improvements on grocery checkout prices, competition within the existing market must be protected and expanded.
This includes the need for Foodstuffs North Island and Foodstuffs South Island to enter the other islands and compete as a genuine third player.
Such a shift could provide New Zealanders with homegrown choice and homegrown competition faster than waiting for external entrants.
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