The breaking up of the telco duopoly had wide-reaching impacts for consumers and the economy. Will the appointment of a grocery commissioner have similar effects for the supermarket sector? Don’t count on it, writes Bernard Hickey.

When 2degrees launched against Telecom/Spark and Vodafone in 2009, it helped power a substantial reduction in mobile phone charges, which, along with the carving off of Telecom’s copper lines and the new UFB fibre network into a closely regulated wholesale provider in Chorus, helped suppress domestic inflation in a significant part of the economy in the years that followed.

Within the Reserve Bank it became known as the “2degrees effect”. It essentially broke up a duopoly of two companies with strong “network effects” making it hard for competitors to set up, and it drove through much more intense competition that ultimately benefited both consumers and shareholders. Our mobile and internet costs were transformed from being among the most expensive and poor quality in the OECD to among the best.

But it wasn’t easy or cheap, and it depended on some uniquely easier-to-regulate features of the telecommunications market that aren’t easily replicated in groceries.

A full-court-press set of interventions started by the Helen Clark-led Labour government from 1999 to 2008 and continued by the John Key-led National government from 2008 to 2017 included:

• The creation of a regulated wholesale access regime for the copper network and the new (government-subsidised to the tune of over $1.4bn) optic fibre cable network owned by Chorus, which led to a flourishing of competition between retail fixed line operators such as Orcon, Voyager, Now and Slingshot, along with Vodafone, Spark and 2degrees offering both mobile and fixed line services;
• the regulation of mobile number portability and mobile termination fees made it much easier for consumers to move to other mobile networks and not lose their numbers or family and friend group discounts; and,
• the government granted access to spectrum to iwi, which in turn was used in partnership with 2degrees to foster competition.

Yesterday, commerce minister David Clark announced more detailed proposals for a single grocery commissioner to regulate the supermarket duopoly of Foodstuffs (Pak’nSave, New World and Four Square) and Countdown (Woolworths) from within the Commerce Commission, similar to the way the telecommunications commissioner operated.

Clark announced the moves in a joint news conference with Consumer NZ CEO Jon Duffy. I attended and asked about the parallels with the telecoms sector. Clark was hopeful some of that success could be repeated:

“This will ensure that longer term we have one person who is responsible for overseeing the whole sector. And we’ve seen that work with the telecommunications commissioner, which is an identified person that both the sector knows it has to answer to, but also consumers know they can go to for help.”

I challenged Clark on whether that telecoms success could be repeated in groceries, given the massively larger web of relationships, products, supply terms, logistics chains, rebates, discounts, promotional tools and local markets than in the relatively vanilla and more easily broken up telco market. He acknowledged the differences, but said there were still ways to achieve similar results:

“There are different complexities in the in the supermarket sector than there were in the telecommunication sector when Telecom was split. Absolutely, except that it’s not necessarily completely off the cards and there are different forms that that could take.”

Thousands of product lines, opaque pricing and conflicted players

There are massive differences between telecommunications and groceries that will make achieving a 2degrees effect much more difficult, including:

• Foodstuffs is actually two store-owned buying cooperatives, rather than a single corporate like Woolworths NZ Ltd, where prices and terms between suppliers, the cooperatives and the stores vary widely and are opaque, often including or excluding profits disguised as rebates, discounts disguised as promotions and a wide variety of agreements about where labour, promotional and transport costs are borne in the supply chain;
• the products in groceries range variously from chilled to frozen and boxed, each with its own supply chains, pricing complexities and sources of supply;
• Foodstuffs has a variety of wholesaling methods, with some bigger store owners having their own arrangements with suppliers independent of the buying cooperatives, which can include exclusive deals and rebates;
• Woolworths operates a more conventionally run centrally planned, priced and sourced retailing operation with a single corporate owner; and,
• the variety of retailing outlets and locations mean terms and conditions for the same product line can be vastly different for good reasons, depending on the length and quality of the supply chain, along with the nature of the store.

That multiplicity of product lines, ownership types, physical supply chains, retail outlets and brands (ie Pak’n Save vs New World vs Countdown vs Four Square vs Night and Day vs countless dairies vs major service station chains) contrasts with the single ownership of a single product (Telecom’s copper wires giving landline phone service) and two owners of two products (Telecom and Vodafone owning mobile towers with voice calls and texts).

When the government was looking to break up the Telecom and Vodafone duopoly, there were only two points of access for most services. The copper network was clearly able to be split in a vanilla wholesale/retail way and there were only two sets of mobile termination charges to be regulated.

Clark wants to create the backstop of a mandatory wholesale access regime within Foodstuffs and Woolworths, but he and the regulator will have to contend with Foodstuffs’ stores and cooperatives having literally millions of different terms, conditions, prices, rebates and contractual arrangements with suppliers and stores, while Woolworths can also rely on its own transfer-pricing arrangements with its Australian parent to create opacity in the space between wholesale and retail.

The regulator’s job will be to create a clear membrane between wholesalers and retailers for a process of commercial osmosis can occur. That was much, much easier to do in telecommunications than in groceries.

Spitballing on what mandatory access could look like

Both Foodstuffs and Woolworths have made nice noises about opening up their wholesale platforms to competitors, but suppliers and competitors such as Night and Day and dairies are wary. Some can already use Foodstuffs’ wholesale operation Gilmours, but somewhat surprisingly, prices are actually cheaper for many in simple terms at Pak’nSave. That’s why you often see dairy owners trundling around Pak’nSave with trolleys filled to the brim with dozens of bottles of Coke and packs of chips.

For example, let’s say Foodstuffs’ wholesale operation offers the same price to Pak’nSave store owners as to Night and Day, then those store owners will ask for separate rebates, which are the mechanism they get as the return on their investments in the wholesale operations. A regulator would have to work out, line by line, location by location, what is a fair cost of capital and what is price gouging.

The government is holding out the threat of actual breakups in reserve to force Foodstuffs and Woolworths to the table, but even breakups are fiendishly complicated and much more difficult than the split of Telecom into Chorus and Spark. Firstly, there was one set of Telecom shareholders able to receive fair sets of shares in two companies. Foodstuffs would have to somehow restructure the relationships between stores and the cooperative in a way that separates ownership from supply lines. It would be like forcing Fonterra to break up and realising that the Fonterra company’s equity is actually buried in various ways among 10,000 individually owned farm structures that include owner-operators, trusts, corporates and share-milking arrangements. My head hurts just thinking about what fair and simple separation might mean.

For example, the government could choose to “force” Foodstuffs to break out New World or Four Square into chains with new owners. That would actually mean store-by-store negotiations with owners with different capital structures, different supply arrangements with Foodstuffs “central”, and decades worth of equity, assets and value buried in myriad contractual arrangements, many of which may not be on paper.

So what now?

Replicating the 2degrees effect will be a monumental task that will barely be scratched upon in the next year to 18 months before the general election. The duopoly can happily offer to cooperate in a leisurely manner while the legislation is passed and the grocery commissioner appointed (not likely before late 2023), and then wait for nothing much to happen when the regulator and the MBIE contractors spending $11m realise how complicated such a wholesale access regime would be. Meanwhile, they will make dozens of PR announcements about price freezes and donations to food banks and the fundamentally high profit margins will stay, often buried in transfer pricing up and down supply chains and across the Tasman.

This isn’t our first rodeo

Anyone looking for a preview of how this might play out should look to the Electricity Price Review from 2018. The government talked a good game about elbowing the gentailers into line and helping consumers. MBIE also managed that review and the response. Only now, five years later, has a chair been appointed to the Consumer Advocacy Council designed to push gentailers hard. The Energy Hardship Panel created out of the review gave this report in June.

Here’s what the chair, Keri Brown, wrote last month after a year’s work:

“I’m looking forward to collaborating with others through workshops and other means over the next few months. These discussions, along with further research and analysis, will help us mature and develop our understanding of the problem and consider possible solutions, and feed into our discussion paper that will go out for public consultation later this year. We will draw on this consultation to develop final recommendations for minister of energy and resources Megan Woods and her ministerial colleagues around mid-2023.”

So five years after the review was started, a panel created out of the review will be making recommendations to the minister, who would then have to start industry consultation and a legislative process. Something might happen by 2025, if Labour remained in government. That’s longer than it took to start and end the second world war.

Yeah… nah

My fear is a similarly easy-to-game and stall process has now started in groceries in the same way it did in electricity. My fear is the creation of the regulator, the threats of a mandatory wholesale access regime and the even-more-remote threats of forced asset sales will dribble away into the sand after the $11m worth of reports have been invoiced and the government has changed, possibly as soon as November next year.

Meanwhile, the best option for consumers is to support truly independent and non-duopoly competitors (The Warehouse and Costco), particularly the ones starting to operate mostly online and starting to receive tentative investments (ie Supie). For suppliers, they would be best served blowing the whistle as often and loudly as possible on the duopoly’s practices and margins.

The task for us in the media is to hold the government and the duopoly to their words, where it can be done while fighting the state sector PR-industrial complex wielding the Official Information Act to deflect, deny, delay and obfuscate.

How could it have been (or be) different?

Monopolies and duopolies are much easier to create than unravel. Progressive’s (now Woolworths NZ Ltd) purchase of 83 Woolworths-branded stores from Hong Kong-based Dairy International in 2002 should never have been permitted. The government should not have stood by in 2006 while The Warehouse was bullied out of the market when it tried to launch a competing chain of grocery stores.

But now that the original sins have been committed, the best any government or regulator can do is to expose, harass and niggle away at the duopoly to keep them as honest as possible.

In my view, the grocery commissioner will be doing a good job by simply obtaining clean, comparable and transparent sets of accounts from Woolworths and Foodstuffs that show the true levels of gross profit margins, and how they compare to truly competitive grocery markets in similar-sized countries such as Denmark or Ireland. That would be success in its own right.

Meanwhile, the recently passed ban on oppressive shopping centre lease clauses and land covenants is a useful thing that might (and only might) allow a smidgen of competition to nudge its way into the least-unattractive bits of the country.

There is some hope, albeit of small and slow change

As we’ve seen in the retail fuel market, eventually the drip-drip-drip of harassment, exposure and regulatory tweaks can make a difference, particularly if new technology and types of products can be launched in oblique attacks on the giants. For example, it has taken more than a decade, but the likes of Waitomo, Gull, NPD and Challenge have finally managed to get hold of a few sites to put their unmanned pumps in to provide some competition to the Z Energy, BP/Mobil duopoly. But it has been trench warfare and has taken new technology with the use of card payments and automated stations to get there.

The great hope is actually in the recent Section 36 reforms to the Commerce Act that may give the Commerce Commission some extra legal muscle when it comes to stopping new mergers. There is also chance a new Commerce Commission chair will approach the task with a much more sceptical and aggressive approach to the creation and use of market power.

For 30 years, the Commerce Commission and MBIE saw their roles as enabling the creation of scale businesses and believing regulation was always bad for market freedom, rather than acknowledging capitalists are actually interested in creating super-profit-generating market power, rather than competing fairly in open markets. Changing that culture will not be fast or easy, and this latest move to create a new commissioner is just another skirmish in a multi-decade conflict that has really only just started.

The 2degrees effect was more of a remarkable exception, than the rule or the example that can followed.

Bernard Hickey’s writing here is supported by thousands of individual subscribers to The Kākā, his subscription email newsletter and podcast. You can support his writing by subscribing, for free or as a paid subscriber.