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OPINIONBusinessJuly 31, 2021

The supermarket duopoly is a disaster for consumers. But don’t bet on a break-up

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If you thought this week’s damning report on the state of our supermarkets would augur big changes in the sector, brace yourself for disappointment.

This column was first published on Bernard Hickey’s newsletter, The Kākā.

The Commerce Commission’s scathing draft review of the Foodstuffs/Woolworths duopoly suggests state intervention that could include a new ‘Kiwishop’ chain and/or a Telecom-style break-up. But don’t bet on either actually happening.

Telecom was a locally-listed and a former state-owned network monopoly that could be relatively easily broken in two with legislation, a share split and a couple of minor regulatory tweaks. The two supermarket chains, on the other hand, have ownership structures (two cooperatives with individually owned supermarkets, and an Australian-owned corporate) that mean they would both be fiendishly complicated to unravel.

Breaking up Foodstuffs and Woolworths and creating a state-owned ‘KiwiShop’ competitor – a sort of Vodafone vs Spark vs Two Degrees model – would be like trying to unravel a bundle of 2,000 phone charging cords after digging them up from the bottom of a landfill.

I’m tired just thinking about a separation

Just imagine having to disestablish Foodstuffs’ two cooperatives, which are owned by multiple family trusts in an opaque series of supply agreements, lease agreements, warehouses, logistics operations and stores that would be bone-achingly difficult to understand, let alone pick apart. Rebuilding the web of relationships between individual store owners and suppliers (because Foodstuffs allows store owners to deal direct with suppliers) would be a nightmare. Woolworths’ Countdown would be easier, given its more centralised structure, but it would require some sort of pseudo-nationalisation of a major foreign-owned asset. This would not please our Australian friends either.

That’s not to say there is no problem and we should all just move along and suck it up. The 517-page full report is a detailed, meticulous and cracking read. Even the 22-page (!) executive summary is well worth a look. For slackers, the media release is damning enough on its own.

What a successful duopoly looks like

Here are the charts from the report that tell you everything you need to know. The duopoly generates returns on average capital employed (ROACE) that are at least three times as high as supermarkets in other markets, three times their weighted average cost of capital (WACC) and twice as high as NZX-listed company returns, which is no mean feat, given the NZX list includes electricity companies, Z Energy and the retirement home groups.

 

On another measure, the earnings before interest and tax (EBIT), the supermarkets here have profit margins that are around double their international peers. Foodstuffs South Island’s profitability is particularly wonderful or egregious, depending on your point of view.

 

All that means New Zealanders spend the fourth-most per capita on groceries in the world, behind hyper-rich countries and luxury tax havens such as Luxembourg, Iceland, Switzerland and Norway. Add on the oligopolies of banking and electricity and the most expensive housing and rental markets in the world, and consumers and renters can feel particularly aggrieved.

 

So what should or could the government do?

The government could legitimately beef up the prosecution arms of the Commerce Commission and other regulators to crack down on the no doubt rife abuse of the Fair Trading Act and the Employment Relations Act. It could also serially harass the two chains, particularly Foodstuffs, into paying its workers better and stamping out any migrant abuse, along with exposing the “confusion marketing” implicit in their promotions and loyalty card schemes. This chart I call the “Who are they kidding” chart.

 

The government could also create vehicles for aggrieved suppliers to safely embarrass the hell out of the supermarket chains over the repeated bullying allegations.

Sadly, it will also be difficult to help a freer market solve this problem with regulatory tweaks and interventions. The Commerce Commission was able to force through number portability and slash termination rates in a way that unleashed real competition in the mobile phone sector. The National-led government was able to subsidise the mass rollout of broadband fibre to beef up Chorus’ publicly accessible (wholesale) backbone network to encourage a flowering of fixed-line competition. That is not as possible in the groceries markets, where thousands of different products are delivered and sold in thousands of different ways at even more thousands of different prices.

The government could help the likes of Costco (which is building one big store in West Auckland) and Aldi to establish bases in a couple of big cities, probably Auckland and Christchurch, to provide at least some competition. They may need accelerated RMA help for sites or overseas investment exemptions, which should be expedited. But establishing the sorts of deeply networked chains with hundreds of local presences would be too difficult, expensive and time consuming a task for the government to undertake.

Unfortunately, the interventions seen in fuel retailing after the first study will be difficult to replicate. In fuel retail there are relatively few product types, few distribution points (ship terminals and pipelines), and the potential for smaller competitors to make a big impact. Waitomo, Gull and NPD have kept the big fuel companies increasingly honest in the last couple of years as they finally got their automated sites up and running on the fringes of the big cities.

However, the challenges inherent in the supermarket sector shouldn’t stop the government considering this sort of “breakup and state-owned competition” strategy in other markets where the demarcation lines are much clearer. It has some big irons in the fire already: the power industry is one. Banking is another. The supermarkets duopoly may survive this increased scrutiny, but other industry players may not be so lucky.


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.

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Bernard Hickey in the Durie Hill Elevator tunnel with Anthonie Tonnon (Photo: Lynn Grieveson)
Bernard Hickey in the Durie Hill Elevator tunnel with Anthonie Tonnon (Photo: Lynn Grieveson)

BusinessJuly 30, 2021

The answer to NZ’s transport future lies down a long tunnel in Whanganui

Bernard Hickey in the Durie Hill Elevator tunnel with Anthonie Tonnon (Photo: Lynn Grieveson)
Bernard Hickey in the Durie Hill Elevator tunnel with Anthonie Tonnon (Photo: Lynn Grieveson)

Our provincial cities had thriving public transport systems until they were wrecked in the early 1990s. Bernard Hickey visits Whanganui’s extraordinary Durie Hill Elevator to find out how (and why) we should look to the past to get to carbon zero.


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I love to go exploring in places where I can lose myself in another world and time. It’s why I’m a sucker for a slow walk around a museum or a trip to an old-timey airshow. I especially like trains, planes and automobiles. It’s unfashionable I know, but I still have a soft spot for Motat.

So earlier this month I jumped at the opportunity to walk down a long white tunnel to see New Zealand’s only piece of public transport infrastructure that connects an entire suburb to the CBD of its city by an elevator. The 4,000-plus residents of Durie Hill and anyone else with a few minutes to kill can take the elevator and walk the tunnel to and from Whanganui’s city centre just across the bridge. In less than 10 minutes, anyone could walk from a very suburban suburb to a vibrant city centre, complete with galleries, cafes, shops and offices. No steps. No puffing. No clouds of black smoke.

Anthonie Tonnon, musician and Durie Hill Elevator guide (Photo: Lynn Grieveson)

My guide was a very Kiwi renaissance man. I’d never heard of Anthonie Tonnon until his songwriting partner and When the Facts Change podcast producer, Jonathan Pearce, told me the story of how his fellow muso had mobilised a group of fellow Whanganui residents to take over the running of the elevator. They wanted to avoid its natural fate of becoming an expensive and infrequently run tourist attraction and keep it going as a key piece of public transport. So they bid for the contract and got it. Now they run a roster to collect the fares and keep it running. Meanwhile, Tonnon’s latest album, Leave Love Out Of Thiswas number two on the NZ album charts this week.

The Durie Hill Elevator used to be an integral part of Whanganui’s public transport network of buses, trams, walking and cycling. It was built by the suburb’s developer in 1919 to attract customers for his version of a garden suburb who at that point weren’t able to buy or use cars to climb the escarpment to the stunning views out over the river and the city. It worked, and by 1948 it was a key part of Whanganui’s thriving public transport system and city, as shown in this guide book and timetable linking the buses and trams to the elevator.

Anyone could take in the views out to Mt Ruepehu from the elevator’s tower and then jump on a tram to visit the Castlecliff beach. Taking the toddlers in the pushchair was easy and free, as this 1974 schedule shows (Durie Hill Elevator/Whanganui collection)

Whanganui was not that unusual in those days in that people in provincial cities and towns mostly got around by foot, bicycle, bus or tram. This was a time when a Morris Minor or Vauxhall Victor imported from Britain required approval to buy foreign exchange worth several years of a regular worker’s pay. Even in the 1970s and 1980s, car ownership was relatively rare, difficult and expensive. They broke down, rusted, boiled over and weren’t that safe. As recently as the mid 1970s, New Zealand had fewer than 300 cars per 1,000 people.

1989 was the year everything changed

Then came year zero in Aotearoa’s political economy: 1989. The Public Finance Act and the Reserve Bank Act passed through parliament with broad bipartisan support in 1989. The driving force in these reforms was to reduce government debt, cut taxes and make users pay for as many public services as possible, including public transport. That same year massive reforms of councils and resource management legislation were launched, leading to the consolidation of 800 councils down to 87, with many seeing smaller cities and towns forced to give up control of their public transport to regional councils. Whanganui’s public transport was handed over to the Horizons Regional Council and NZTA, now known as Waka Kotahi, focused its fuel tax levies on road repair and construction. Buses and trains became services that poorer people had to use and pay for and investment in such public infrastructure dwindled. Inter-city buses were sold to private owners and Kiwi Rail stopped regular passenger train services.

The rest of the tax-paying population expected to drive everywhere, often in their newly cheap used Japanese imports. Where once a car cost multiples of annual incomes, they can now be bought for a month or two’s wages and run forever. By 2019 New Zealand had the fourth highest car ownership rate in the world, with nearly 840 cars per thousand people. Our fleet of used imports have an average age of 17 years. Nearly a million cars in our fleet of over four million cars are over 20 years old.

The broad assumption for the last 30 years was that everyone wanted to travel everywhere by car and could afford it. The public funding arrangements assumed bus and train travel was a fringe activity for a minority who should pay for the service and receive as small a public subsidy for equipment and infrastructure as possible. The contempt for public operation of public transport was soaked through the Public Transport Operating Model (PTOM) set up in 2010 by the then National government. It forced regional councils to tender out their bus and train contracts to private providers to improve the efficiency and reduce the cost to taxpayers.

It worked, but at the cost of pressing down on wages of drivers. That has backfired awfully in the last couple of years in Wellington in particular, where driver shortages have destroyed the frequency and reliability of services.

Only in the last decade have the attitudes and funding arrangements started to change, and then largely only in the biggest cities and Auckland in particular. The creation of the “Super City” that allowed better coordination helped, along with the very belated admission by the John Key-led National government that it needed to help fund the City Rail Link.

Bernard Hickey and Anthonie Tonnon in the Durie Hill Elevator tunnel (Photo: Lynn Grieveson)

Changing business as usual to shift modes

But we won’t get to carbon zero with the current business-as-usual funding arrangements for public transport, which are still heavily biased to cars and trucks on roads.

Now New Zealand has to try to recreate the public transport networks that used to be in place in the likes of Whanganui, Dunedin and Wellington right up until the 1990s. Tonnon wants to see regional public transport users receive much more than the one seventh of the public transport support given to those in larger cities such as Auckland.

I spoke to transport minister Michael Wood for the podcast and he outlined how a review of the PTOM model would look at how to improve public transport and prepare for the big switch away from cars to walking, cycling, buses and trains. It will require massive public investment in new electric buses, along with the reconfiguring of roads for cyclists and pedestrians.

It will be politically hard, but is the only way to get to carbon zero by 2050. It will require new ways to fund public transport, a shift in the share of funding from roads to rail and buses, and heavy investment in new capital in the form of fleets of buses, new stations and new cycling networks.

The NZTA and fuel tax levy model used at the moment won’t be sufficient. Neither will the current restrictions on council funding mechanisms to rates and the expectations that councils should pay at least half the subsidies for public transport. Essentially, a just transition to carbon zero will require old, richer and more suburban car drivers and home owners to subsidise younger, poorer, public-transport-using renters who live closer to the centres of towns in apartments rather than standalone homes.

It will be a new world that in many ways will be an echo of a very old world.


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.