One Question Quiz
Image: Archi Banal
Image: Archi Banal

OPINIONBusinessFebruary 27, 2023

Why it’s worth being suspicious of the Grocery Suppliers Cost Index

Image: Archi Banal
Image: Archi Banal

How to properly read news articles about supermarkets, when it’s supermarkets themselves that are supplying the stories.

Remember when fossil fuel corporations funded climate change think tanks? And when BP invented the “carbon footprint” to individualise accountability for global warming? Despite just 20 corporations emitting a third of all greenhouse gas in the modern era?

Well, it sounds like our supermarkets have got hold of a similar playbook.

Big claim, sure. But a recent report from Mediawatch has eerie echoes. It focuses on the Grocery Suppliers Cost Index, a monthly report that has recently set off a few interrelated red flags.

This index is well covered each month by New Zealand’s major media outlets. But in the resultant stories, it’s rarely mentioned that while the index is issued by Infometrics, it’s paid for by… Foodstuffs.

And there’s another elephant in the room: supermarkets’ massive advertising spends with many of these major media outlets. With this in mind, those stories start to feel a little less independent, just like the index itself.

From supermarkets to suppliers, from suspicious data to shoplifters, there’s a lot to keep track of here. So, how should we be reading supermarket stories? With a craving for context and one number in mind: 430 million.

It’s suppliers who are driving up prices, the supermarkets claim. But is it really that simple?

What does the index actually do?

The Grocery Suppliers Cost Index shows two things: the cost Foodstuffs pays to suppliers for groceries and the price at which Foodstuffs sells those groceries to shoppers.

Each month, the index indicates that the first metric is going up faster than the second. Supermarkets, it suggests, are taking the hit at the checkout.

Why is this data suspicious?

In short, it seems these two prices can’t be so easily compared.

As Dita De Boni, senior journalist at NBR, explained on Mediawatch: “Having spoken to many suppliers and having done many stories about the way supermarkets pitch themselves in this environment of price inflation, what I believe is that the prices they are giving (Infometrics’) Brad Olsen to look at are not the actual prices.”

What are the actual prices?

It’s hard to know. Suppliers, De Boni said, have to pay all sorts of costs to the supermarkets in order to sell their products there. Suppliers must pay for shelf space, warehouses, specials, displays, and more. And none of those costs, which vary hugely across stores and regions, appear to be included in the index. The index, therefore, doesn’t seem to be a true reflection of how much money is actually flowing between these two parties.

Remember remember the 430 million number. (Photo: Getty Images)

Even so, are suppliers driving up grocery bills?

As the index shows, the price suppliers charge supermarkets has gone up, sure. But this is where context and that all important number kick in.

I remember – 430 million. What’s up with that?

It’s the estimated excess profit our supermarkets make each year. Emphasis on the word “excess”. Their profits are over double what they would be if the market was actually competitive.

So yes, suppliers are raising their prices in this inflationary environment. Fair enough. But 430 mil in excess profits in a market where 40% of households experience food insecurity? Not fair enough. Holding prices down a bit at the checkout, while small suppliers raise prices to stay alive, seems like the least supermarkets could do with their gigantic cushion.

430 mil sure is a lot of money.

And according to one NZ market expert, it may be a conservative estimate by the Commerce Commission. Ernie Newman, one of the key players who helped break up Telecom, notes that the supermarkets’ business models and accounting structures are incredibly complex. Pinning down true excess profit or the real flow of money between Foodstuffs and suppliers nationwide would be an incredibly slippery task.

Newman feels the supermarkets are really hanging their hat on this index. It’s constantly being quoted and used to tell a story that “supplier cost still driving supermarket prices” as one headline puts it – suggesting the strategy working.

What’s happening with shoplifters?

Shoplifters are also being blamed for rising prices. There’s little hard data on how much they actually cost supermarkets and shoppers, but there are a lot of stories that make it feel like heaps. These stories rarely mention how food insecure our communities are, or the fact that we’ve got some of the highest retail grocery prices in the OECD.

In a case of carbon-footprint fallacy, individual actors seem highly unlikely to make a dent in $430 million.

It’s also worth noting that in parallel to the shoplifting stories were stories about a recent police investigation into supermarkets’ illegal discounting of alcohol. In one case, booze was cheaper than water.

But aren’t supermarkets doing some good right now?

Yes. Foodstuffs donated $140k worth of kai to food banks after the Auckland floods.

Context, or rather scale, is also worth considering here. As Sam Stubbs pointed out, ANZ donated $5 million to flood relief – or just 19 hours’ of ANZ’s profit last year. Big donation or bare minimum? Depends on how ya look at it.

What’s being done about all this?

Some change is coming on the back of the Commerce Commission investigation. But much of it, Newman noted, might be too soft. The commission stopped short of recommending the government dismantle the duopoly as it did Telecom. Too messy.

Instead things like a grocery commissioner and mandatory unit pricing, which make it easier to cost compare in-store, are coming into play. These should help protect suppliers and get consumers a better price. But 12 months since ComCom released its report, a grocery commissioner is yet to be appointed. And it will take years to unpick the impact of mandatory unit pricing.

Is this the same as the Telecom situation?

No. But a recent opinion piece by Newman provides some helpful context for the far-reaching impacts this scenario could have. Before Telecom was broken up, we were on par with Mexico in terms of having the developed world’s most expensive communications. Had a new way forward not been forged, Aotearoa would’ve hugely lagged behind other global economies.

If we wait to see how this soft supermarket approach plays out, we’re gambling with a lot of lives, families, communities. Actually, we already are. Nineteen per cent of children here live in food-insecure households.

What can we do?

It’s not all doom and gloom, Newman thinks. Consumers can still vote with their dollars. Get a veg box, go to the greengrocer, or a farmers market – they’re often actually cheaper than the supo. Or even head to The Warehouse, which has recently announced that they’re getting into the fresh fruit and veg game. A positive signal for increasing competition.

Consumers can also get loud. In the Telecom situation, Newman noted, businesses had a vested interest in the breakup. In this situation, it’s the individual consumer. And their voice is getting lost in the conversation. But we can make sure it isn’t. We can talk about this, educate our friends and our communities.

At the very least, we can take supermarket stories with a grain of salt, a kilo of context, and with that important number in mind: 430 million.

Keep going!