Another supermarket chain might not fix our problems, NZIER says

Adding another brand to New Zealand's grocery market may not necessarily reduce grocery prices, NZIER says.

It has released a new report that argues that there are other factors that could be holding back competition.

The supermarket sector has become a key election issue, with National proposing to break up Foodstuffs, Labour wanting vertical separation and the Green Party proposing to buy supermarkets.

NZIER senior economist Susie McKenzie said the debate about the sector often treated high grocery prices and weak competition as the same problem.

"High grocery prices are a real concern for households, but they reflect more than just the level of competition between supermarkets. Production, transport, distribution and other underlying costs all contribute to what consumers pay."

She said there were some barriers to competition that policy could help address, including limited wholesale access, purchasing advantages for established supermarket groups, and difficulties in securing suitable retail sites.

"We need to tackle the barriers to competition not just focus on the number of supermarkets."

But she said there were underlying structural constraints that arose from New Zealand's relatively small market, geography and economies of scale.

"Improving wholesale access could make it easier for smaller retailers to compete without having to establish their own expensive distribution networks," she said. "But it won't necessarily overcome the other challenges of operating in a small and geographically dispersed market.

"There seems to be evidence about wholesale access being a problem. Smaller retailers need to be able to obtain groceries at competitive prices and without that they can't really establish distribution networks of their own, it's not really competitive for them to do so."

She said Commerce Commission reforms that introduced a regulated wholesale access regime requiring the major supermarket groups to supply competitors had little result.

"It sounds like under 0.03 percent of sales have actually gone through that regime, so there's more room to look into why it hasn't been delivering the intended outcomes and what more could be done in that space.

"It's an important, unresolved barrier. We need to understand why those existing arrangements aren't delivering competitive supply for smaller retailers."

Other direct interventions such as separating existing supermarket businesses or wholesale and retail operations could increase competitive pressure but could also involve significant costs, she said.

"At the heart of the supermarket puzzle lies a tension between economies of scale and competition," McKenzie said.

"Large supermarket groups can operate more efficiently by spreading their costs across extensive networks. But those same advantages can make it difficult for smaller competitors to enter and expand. The challenge is to strengthen competition without unnecessarily sacrificing those efficiencies."

She said it was common for other small economies to have highly concentrated grocery markets.

"More supermarket chains won't necessarily mean cheaper groceries. What matters is whether competition becomes more effective, and whether the benefits of intervention outweigh the costs. Ultimately, success should be measured by better outcomes for consumers, not simply by the number of supermarket chains."

She said voters needed to know that there were no simple fixes.

"All the different proposals come with some benefits, some trade-offs. At the end of the day, we want stronger competition. The Commerce Commission has said that competition isn't sufficient and it's not working well for consumers. But we also don't want to lose the efficiencies that we currently have in the supermarket industry that are also benefiting consumers. So it's a fine line there."

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