spinofflive
rows of supermarket trolleys
Image: Archi Banal/Tina Tiller

BusinessMarch 9, 2022

New Zealand’s supermarket duopoly lives to profit another day

rows of supermarket trolleys
Image: Archi Banal/Tina Tiller

Yesterday’s massive Commerce Commission report into the state of our supermarkets shied away from slicing Foodstuffs and Woolworths into wholesale and retail arms, or the government helping a new entrant into the market. Bernard Hickey explains what it recommended instead.

This is an edited version of a post first published on Bernard Hickey’s newsletter The Kākā.

As I both feared and expected when its draft review was published last year, the Commerce Commission has backed away from recommending an arduous and complicated Telecom-style break-up of Foodstuffs and Woolworths NZ, or the government-assisted launch of a competitor.

Instead, in its final 609-page report released yesterday, the commission recommended that a grocery regulator be set up to police a mandatory code of conduct for the industry, along with industry practices on deals with suppliers, promotional pricing and loyalty schemes. It also wants to try tweaking planning and fair trading laws to encourage private competitors to enter the market, possibly with the help of one or more of the duopolies voluntarily offering to sell them goods on transparent wholesale terms.

Possibly the most compelling new detail in the report is the revelation that the duopolies have so far used a total of 190 land covenants and shopping-centre exclusivity clauses to stop competitors getting access to the juiciest locations. In 150 of those cases, the covenants and exclusivity clauses have protected Foodstuffs and Woolworths NZ for more than 20 years. The commission proposed prohibiting the use of these clauses.


Follow When the Facts Change, Bernard Hickey’s essential weekly guide to the intersection of economics, politics and business on Apple Podcasts, Spotify or your favourite podcast provider.


The power of the covenant

Reading about the bullying, the rent-seeking and the use of laws designed to protect the environment to instead add a layer of super-profit into the cost of everything we buy in supermarkets is a lot like finding out how the mortgage-fueled housing market works. Watching an official inquiry conclude not much can or should be done to rectify this was also eerily familiar.

Accidentally on purpose, Aotearoa has found itself held hostage by uncompetitive markets and dominant market players for two of the basics of life: food and shelter. A series of accidents of political history tied to a naive three-decade-long assumption that free markets would always provide the basics and the luxuries of life both efficiently and fairly has made our housing and groceries some of the most expensive in the world

That’s the conclusion I reached reading the Commerce Commission’s report. The same themes emerged time after time:

  • Foodstuffs (Pak’n’save, New World and Four Square) and Woolworths NZ (Countdown) have been using the Resource Management Act to lock in the profitability of the assets they own all over our major cities and to prevent new supply entering the market to drive down prices.
  • Their profits are at least twice as much as is normal for the international supermarket sector, in part because they have used “confusion marketing” to befuddle consumers, regulators and politicians into doing nothing for decades.
  • The major beneficiaries of these super profits have routinely spread the blame for high prices onto others in the economy other global forces.
  • Regulation is being recommended only as a last resort and only after the dominant market players have taken the piss for so long that the state of our supermarket sector has become not just embarrassing, but a threat to the nation’s wellbeing through ruinously high living costs, particularly for our poorest.

It’s a tragedy that profits on the supermarket sector’s $22b worth of sales each year are around double what they would be if the market was properly efficient and competitive. Our house prices are around double what they would be if we had an elastic and competitive market for serviced land and transport for housing. Our rents are as much as a third higher than what they should be relative to incomes if our market was competitive.

Our body politic is only now waking up to the economic and social pain of allowing markets to be consolidated and then dominated by a few players who capture the architecture of government to protect those superprofits. Here the United States are ahead of us, with president Joe Biden launching a widespread campaign against the abuse of market power, targeting industries as widespread as technology, meat-packing, airlines and pharmaceuticals.

Our supermarkets are some of the least affordable in the world. What can be done? (Photo: Getty Images)

So what did the Commerce Commission find?

Here’s a summary of the overall findings of the report:

  • “Competition is not working well for consumers” and the duopoly would face more pressures to improve prices, ranges and quality if there was more competition.
  • The intensity of competition between Foodstuffs and Woolworths is “muted and does not reflect workable competition”.
  • The commission sees little prospect of new or expanding rivals being able to grow to the scale and geographic breadth to compete effectively without any changes to the system.
  • Returns on capital employed by the sector ranged from 12.7% to 13.1% from 2015-2019, which was above the 5.5% the commission estimated as a normal rate of return for retailing.
  • Aotearoa had the fifth most expensive groceries in the OECD and households spent the fifth most per capita per week on groceries in 2017.
  • The two major supermarket groups use confusing promotions, price labelling and loyalty schemes to make it harder to properly compare prices across time and between the two.
  • Both use their buying power to shift costs and risks back onto suppliers, while also threatening to pull suppliers’ products and blocking them from supplying the other group.
  • The two groups had arranged 190 agreements with land owners and shopping centre owners, including covenants and exclusivity clauses that stopped those sites from being sold or rented to competitors, with 150 of those restricting the sites’ use for more than 20 years.

And the commission’s main recommendations:

  • That the use of the covenants and clauses detailed above be prohibited.
  • That planning law be changed to make more sites available, and to stop the use of the existing laws as blocks to new entrants.
  • The creation of a grocery industry regulator to write and police a mandatory code of conduct with suppliers and to monitor pricing, profitability and promotion practices, along with land banking by supermarkets.
  • That one or both of the groups volunteer to supply a competing retailer on transparent wholesale terms.
  • That the government review foreign investment and alcohol licensing rules to make it easier for competitors to set up.

Remarkably, the commission found there were so few choices at competitive prices for smaller grocery operators that they often simply bought their supplies at retail stores like any other consumer.

“We consider that the New Zealand market could sustainably accommodate at least one more large-scale rival, and that reducing current constraints on entry and expansion would help to facilitate this. In the long term, actual entry or expansion is likely to be the greatest driver of competition,” the Commerce Commission wrote.

“We consider that major grocery retailers offering wholesale supply to other retailers is likely to be the most successful long-term solution for improving access to groceries for resale.

However, “there is unlikely to be sufficient demand to support a viable independent wholesaler over the longer term. Large grocery retailers throughout the world typically source and distribute products to their own retail stores, rather than purchasing from a wholesaler. This is also true for New Zealand’s major grocery retailers, and some larger-scale potential entrants.”

Man shopping in supermarket
The commission found that the two major supermarket groups use confusing promotions, price labelling and loyalty schemes to make it harder to properly compare prices (Photo: Getty Images)

‘Why we don’t want to break them up’

The Commerce Commission said it considered a regulated wholesale access regime that would have enforced “vertical separation” of the two groups in a way that their wholesale and retail businesses were run separately.

But it decided against a break-up because:

“Introducing a regulated wholesale access regime for groceries would be very complex due to the wide range of products and dynamic nature of the sector.” Further, “there are significant efficiencies associated with integrated retail and wholesale grocery operations, and there would be a range of practical challenges and transaction costs associated with separation.”

It concluded:

“Therefore, we recommend that the major grocery retailers be given the opportunity to negotiate commercial wholesale supply arrangements with other retailers, with the regulatory oversight described above.”

It went on to recommend a mandatory grocery code of conduct based on the Australian code, enabling collective bargaining by some suppliers, and strengthening the unfair contract terms regime for “business-to-business” contracts.

It also recommended the whole industry be reviewed again after three years to see whether the tweaks had worked.

So what happens now?

The government will be happy it doesn’t have to spend years trying to disentangle the two giants and their suppliers, or have to splash out to build a new “KiwiMarket” competitor.

The commission also delivered a little kicker to its report, noting that it planned to open formal investigations to enforce compliance with existing legislation, without specifying who it would go after and over what.


Follow When the Facts Change, Bernard Hickey’s essential weekly guide to the intersection of economics, politics and business on Apple Podcasts, Spotify or your favourite podcast provider.

Keep going!
Honest Spirits co-founders Dave Lincoln and Luke Jones (Photo: Supplied; additional design: Tina Tiller)
Honest Spirits co-founders Dave Lincoln and Luke Jones (Photo: Supplied; additional design: Tina Tiller)

BusinessMarch 8, 2022

The roguish best friends crafting spiced rum in New Zealand

Honest Spirits co-founders Dave Lincoln and Luke Jones (Photo: Supplied; additional design: Tina Tiller)
Honest Spirits co-founders Dave Lincoln and Luke Jones (Photo: Supplied; additional design: Tina Tiller)

A ‘simple and boring’ decision by Honest Spirits co-founders Dave Lincoln and Luke Jones was all it took to start a spiced rum label from opposite time zones amid a global pandemic.

On February 28, 1990, the Royal New Zealand Navy issued its last daily ration of rum to sailors. The rum issue – quarter-pints taken twice a day – partly compensated sailors in the 17th century for working in dangerous conditions on the high seas and living off an unsteady, nutrient-deficient diet of salted meat, dirty water and “ship biscuits”. But that reasoning didn’t quite stack up 300 years later, especially in an operating environment with more complex naval technology. 

The hallowed navy tradition may date back to 1655 when a British Royal Navy fleet captured the island of Jamaica. but sailors weren’t the only rum drinkers. Pirates, buccaneers and freebooters have an infamous association with the liquor too, from raiding vessels for the plunder that fleets transported back to imperial Europe, to trading goods for sugar cane molasses with the Caribbean islands so they could produce more rum from its source ingredient.

“Although we never talk about the pirate connotations, it does lend itself to our personalities – we’re a little bit rogue, we’re probably not your conventional gin or vodka drinkers, we’re on the outside,” says Honest Spirits co-founder Luke Jones. That rascal spirit is writ large in the spirits company that he and Dave Lincoln launched at the tail end of 2020.

Jones, a digital designer in the UK when the pandemic hit in early 2020, was on his phone when he came across a liquor still, an apparatus used to distil liquid mixtures, for sale. He and Lincoln, friends since high school in Auckland, had worked various bar jobs while studying at university and gained insights into high-end spirits and the broader industry. So Jones texted his mate in Auckland asking if he was keen, to which Lincoln responded, “Yeah, why not?” A fortnight passed without much discussion before Lincoln sent a two-page message outlining the pair’s business plan and his thoughts on flavours and aromas. Says Lincoln: “We make it sound so simple and boring.”

Rum-making isn’t as saturated a market as gin. Lincoln notes there are about 180 gin labels nationwide compared with the eight businesses currently dedicated to rum-making. And rum is versatile – it lends itself to a greater variety of cocktails and can be an ingredient to cook and bake with. But for all its tropical glamour and swashbuckling history, manufacturing spirits doesn’t come cheap. Most New Zealand independent labels use distillers-for-hire, explains Jones, and the Honest co-founders paired up with one in Takapuna on Auckland’s North Shore after realising the upfront cost of investing in distilling equipment was too prohibitive for a startup.

At the same time, Jones was still in the UK while Lincoln was taste-testing their six-spiced rum. Six months of daily Zoom calls, fine-tuning and a stint in MIQ later, Jones’s first taste of freedom was literally rum. “That was my reintroduction to New Zealand – Saturday morning, 9am in a carpark by the airport,” he says.

Production began in November 2020 and Honest Spirits officially launched a month later. Everything the pair have made so far has been reinvested in the business so they can eventually commit full-time to reaching household-name status. More products and innovation will fuel their growth, including an upcoming limited-edition collaboration the pair are excited to launch, and when the time feels right they’ll tackle exports. But for now, Aotearoa is where they want to be, says Jones, making “crazy concoctions” that people will enjoy. I spoke with the co-founders some more about how their friendship underpins their business.

Honest Spirits produces ‘cantails’, or canned cocktails, of their six-spiced rum with ginger beer, mint and lime (Photo: Supplied)

Tell me more about your friendship. I understand you met in high school?

Dave Lincoln: We met almost 20 years ago, which makes you feel really old actually—

Luke Jones: We are old now.

Lincoln: —we’re 30-plus.

Jones: We met first year of high school and became really good friends in fourth form after a school camp. We got along and spent a whole ride home from, where was it?

Lincoln: Ohakune.

Jones: We spent the whole ride home, sharing headphones and listening to music—

Lincoln: —A bit of Eminem.

Jones: —some Eminem from back in the day and then we’ve been best mates ever since.

Had you guys drummed up business ideas in the past or was Honest Spirits more spur of the moment?

Lincoln: It was a very spur-of-the-moment thing. We always wanted to do something together and, separately, we wanted to run our own businesses because we wanted to work for ourselves. The opportunity just landed in [Jones’s] head and we went from there. But it’s never been like “We should start this business”.

Jones: Having a background and being in the industry through bartending, we knew it from different perspectives – sales, as consumers, managing and being glassies, and design – we were almost pinching ourselves at the start thinking, “Are we going ahead with this?” And then when we invested the first amount of money you realise “there’s no going back now”.

How has your friendship made doing business together easy? Or challenging?

Lincoln: We know each other inside out, we know each other’s families. Luke has his attributes, being in design and the creative world, and I’ve got mine so we do have different roles but also, we overlap quite a lot. You respect the other person’s opinion – it’s like “this is my field, I think we should go this way” and there’s agreement. If we do have a disagreement – it’s not so much an argument – he’s still your mate and you can hash it out quickly.

Jones: It’s like starting a business with your brother that you know can’t punch you—

Lincoln: That’s debatable [laughs].

Jones: —[laughing] it’s just hanging out with a mate whom you also happened to start a business with and you’re both extremely passionate about it. You talk about it all the time, you do work outside of work hours, not because you have to but because you want to. Apart from hanging out with family and friends, there’s nothing else that’s more exciting than this.

But wait there's more!