Analysis: With ongoing cost-of-living pressures, the Australian and New Zealand supermarket sectors are attracting renewed political attention on both sides of the Tasman, writes Griffith University’s Richard Meade.
The Government has announced that “all options” are on the table to address a lack of competition in the sector, including the possible breakup of existing players. In Australia, allegations of price gouging have become a political issue in the ongoing federal election.
But it is not clear that breaking up the supermarkets or other government interventions will improve the sector for shoppers and suppliers.
In 2022, I co-authored a government-commissioned analysis looking at whether New Zealand’s two main supermarket groups should be forced to sell some of their stores to create a third competing chain.
The Finance Minister is seeking to drive competition. (Source: 1News)
We found it was possible under some scenarios that a breakup could benefit consumers.
But key uncertainties and implementation risks meant consumers could lose overall.
A lot hinged on whether breakup causes supermarkets’ input costs to rise or product variety to fall. Even in more positive scenarios, at least some consumers could be left worse off.
Watchdog concerns
Competition authorities – NZ’s Commerce Commission and the Australian Competition and Consumer Commission (ACCC) – have conducted supermarket sector studies.
They each expressed concern at significant barriers to entry and expansion in the sector and supermarkets’ resulting high levels of profitability.
This year, the ACCC concluded margins earned by Australia’s main supermarkets were among the highest of supermarket businesses in comparable countries.
Economic Growth Minister Nicola Wills aims to remove “unnecessary regulatory hurdles” that discourage new entrants. (Source: 1News)
Similarly, in 2022 the Commerce Commission found New Zealand’s supermarkets were earning excess profits of around NZ$430m a year.
While high profits might mean that market power is being abused, it could also mean managers are doing a good job. Or have had a great run of luck. Alternative explanations for high profits would need to be ruled out before putting fingers on regulatory triggers.
Barriers to entry
The starting point was to acknowledge that high profits and prices go hand-in-hand with barriers to entry and challenges in achieving economies of scale.
In other words, some sectors were less competitive than others simply because a lack of demand or high costs made it unprofitable for additional competitors to either enter or remain in the market.
Countries like Australia and New Zealand, with low population densities and large service areas, faced high costs of nationwide supply.
Competition in the grocery sector has not improved and the consumer watchdog says it’s planning to ramp up regulation and enforcement, and recommending stiff penalties. (Source: 1News)
They also faced significant shipping distances from other countries. This limited the ability of overseas entrants using their existing buying and supply infrastructures.
That said, some barriers to entry might be artificial or caused by existing firms stifling new competitors.
Existing supermarkets in both countries have gained controlling stakes in the land needed to set up new supermarkets – something regulatory settings could prevent.
Another challenge for new chains was the process of getting planning and land use consents – something policymakers could address.
This points to key elements of a test for whether supermarkets were charging too much.
One was a recognition that there could be natural reasons for limited competition, and unless technologies or consumer preferences change that would remain the case.
Another was a focus on the things that could be changed – whether at the firm or policy level – in a way that benefited consumers and suppliers. Finally, policymakers needed to consider whether the benefits of implementing them outweighed the costs.
Testing the market
Building on work developed by Nobel economist Oliver Williamson, a “three-limb test” was used in the 2017 government-commissioned assessment of fuel pricing in New Zealand that I co-authored. The same could be used to assess the supermarket sector.
That three-limb test asks
- Are there features of the existing industry structure and conduct giving cause for concern
- Can those causes for concern be remedied
- Would the benefits of remedying those concerns outweigh the costs of doing so?
If the answer to all three limbs was yes, that suggested suppliers were charging too much (or delivering too little) since there were practical ways to improve on the status quo.
A virtue of such a test wa that it could be applied in any sector where there were high firm concentration, barriers to entry and high profit margins.
Importantly, the test looked beyond just what firms were (or were not) doing and asked whether policy and regulatory settings were ripe for improvements too.
The test was also pragmatic – it shouldn’t trigger changes unless they were clearly expected to do more good than harm. This was important if interventions were risky, costly or irreversible, especially in sectors that were important to all of us.
Politicians on both sides of the Tasman were floating the possibility of a supermarket breakup, among other possible interventions.
The three-limb test helped to identify whether any proposed interventions were a good idea and whether supermarket prices were higher than they need to be.
— Richard Meade, Adjunct Associate Professor, Centre for Applied Energy Economics and Policy Research, Griffith University
This article is republished from The Conversation under a Creative Commons license.
