The Commerce Commission has published its first Annual Grocery Report (the Report) under the Grocery Industry Competition Act 2023 (GICA) on the state of competition in the grocery industry. The Report outlines the Commission’s findings regarding the lack of competition in the sector and sets out a number of regulatory actions that the Commission intends to take to drive competition and improve outcomes for consumers.

What are the key findings?

The Commission reviewed relevant data and information from 2019 to 2023 and concluded that overall there has been no meaningful improvement in the state of competition since the Commission published its grocery market study report in March 2022. In particular, the Commission concluded:

• The major retailers do not face strong competition: According to the Commission, the regulated grocery retailers (Foodstuffs North Island, Foodstuffs South Island and Woolworths New Zealand) continue to maintain high market shares and high levels of profitability which are higher than what the Commission would expect in a competitive market. No significant challenger has emerged to the major retailers at a national level and while there has been some increase in competition at a regional level and in specific parts of the industry (e.g., Costco and The Warehouse), there have also been some regional exits (such as Supie, The Honest Grocer, and Huckleberry).
• Barriers remain for new entrants: The grocery industry remains a challenging industry in which to enter and expand, and despite regulatory and legislative changes to reduce barriers to entry/expansion there remain a mix of difficult structural conditions to entry/expansion. These conditions include the significant scale advantages that established major grocery retailers have over their rivals and New Zealand’s small market size and geographically spread population make nationwide or retail entry-at-scale challenging.
• Further action is needed to drive competition and better consumer outcomes: The Commission considers that, despite legislative and regulatory actions to date, further action is needed to drive competition and better consumer outcomes in the grocery sector.

What further action will the Commission take?

The Report summarises the Commission’s current grocery work programme and the following regulatory steps it intends to take to drive competition in the grocery sector.

Commission to conduct wholesale inquiry

GICA established a wholesale supply regime under which smaller retailers could request wholesale supply through the regulated grocery retailers. The Commission concludes that there are fundamental issues with the current form of the wholesale regime which suggests it is unlikely to improve competition even with the passage of time. The Commission has therefore announced that it will conduct a wholesale inquiry under s 55 of GICA to address issues regarding wholesale supply. The terms of reference of the inquiry were published at the same time as the Report was released. The Commission has indicated it intends to release an issues paper for consultation in October with submissions likely due in November, a draft report to be released in the first quarter of 2025 and the final report planned to be published by the second quarter of 2025.

The Commission has indicated that, if necessary to address the issues raised in the Report, it will take steps to implement a wholesale industry participation code (Wholesale Code). Before introducing a Wholesale Code, the Commission is required (under section 67 of GICA) to publish a draft determination, publish a statement of its reasons for proposing to make a determination and consult with parties the Commission considers will be substantially affected by the determination. The Commission is likely to consider whether to implement a Wholesale Code as part of its wholesale supply inquiry but has indicated it may introduce a Wholesale Code prior to the completion of the inquiry. The indicative timeline for the wholesale inquiry on the Commission’s website suggests a Wholesale Code may be implemented at the time the draft inquiry report is completed (31 March 2025).

Commission to review the Grocery Supply Code

The Commission notes in its Report that it has brought forward its first review of the Grocery Supply Code (Supply Code) as it considers the Supply Code is not addressing the power imbalances between the major retailers and suppliers. The Report records that concerns have been raised indicating that the Supply Code does not offer sufficient protection to suppliers which has prompted the Commission to seek feedback on the operation and effectiveness of the Supply Code (see our previous alert for more information on the review of the Supply Code). Following the consultation process, the Commission will, if necessary, update the Supply Code to enhance its efficacy. The Report also notes the Commission “will take enforcement action against anyone placing pressure on suppliers in respect of their dealings with other parties”.

Commission to introduce disclosure standard for regulated retailers

The Commission has announced in the Report that it will “shortly” be introducing Disclosure Standards under section 191 of GICA requiring the major supermarkets to report on margins and consumer complaints to improve transparency of the market concentration and power imbalances.

Commission to engage with potential new entrants and consider how to remove barriers to entry/expansion

The Commission intends to engage with potential new entrants and investors to better understand their view on how the Commission can remove remaining barriers to entry/expansion which would enable the establishment of a third nationwide supermarket. In particular, the Commission also plans to further investigate the impact of “land banking” by major grocery retailers where land is being held without any specific plans for its use or development to reduce the number of suitable sites available to other retailers looking to enter or expand.

Commission supports review of Fair Trading Act and Commerce Act

The Report notes the Commission is working with the Ministry of Business, Innovation and Employment on potential legislative amendments to the Fair Trading Act 1986 and Commerce Act 1986 with the aim of enhancing the Commission’s ability to promote competition and protect consumers in both the grocery sector and other sectors. While we consider it is too early to specify changes which may emerge from this process, the Commission is particularly focussed on ensuring the penalties available under the competition and consumer laws deter larger market participants from breaching them. The Commission's media release stated that "[l]egislative change to the Fair Trading Act could lead to significantly higher penalties with 'more sting' and a deterrent effect for breaches by retailers".

What next?

The Report contains a wealth of information regarding the grocery sector and announces a significant grocery work programme for the Commission. The Commission is, as noted above, currently consulting on the operation and effectiveness of the Supply Code with submissions due by 16 September 2024, and intends to release its issues paper in relation to it wholesale inquiry in October 2024. We expect the next Annual Grocery Report (due to be published in mid-2025) will assess the progress and efficacy of these further regulatory actions.

We will continue to monitor regulatory progress in this area and provide further updates on significant developments. If you have any questions regarding the Report, or any aspect of the Commission’s current grocery work programme, please contact one of our experts.

This article was co-authored by Soomin Yang, a Solicitor in our Competition team.