It would be fair to say that the Commerce Commission's recent market study into the supermarkets left the commentariat distinctly underwhelmed: Bryce Edwards' Political Roundup had a useful summary of the immediate reactions and its title - 'Supermarkets win in the end' - captured the general drift (there are some follow-up reactions in his next few days' Roundups, here and here).
That's partly the Commission's own doing. Its draft report had canvassed some radical proposals - potentially extending to "the structural separation of the major grocery retailers’ wholesale and retail businesses" (at 9.35.2) and "the facilitation of entry by an independent grocery wholesaler" (at 9.35.3), maybe even a government-owned or government-supported one (at 9.68). These were always unlikely to survive as final recommendations: the Commission had said (of structural separation) that it (and, I'd suggest, the other radical options) "would only be considered if other options were not feasible, had proved ineffective, or did not appear likely to improve competition within the desired timeframe" (at 9.64).
But despite the implausibility of a KiwiShop anytime soon, in the meantime some people's hopes had got raised, and as a process issue the Commission might usefully have a think about giving a clearer steer in its draft reports on where it is thinking of landing along the final recommendation spectrum. It does no good to get a reputation for Crying Wolf.
All that said, I don't go along with the apparently prevalent perception that the Commission's recommendations were not proportionate to the issues involved. They correctly seized on the main point: the first best solution to inadequate competition is new entry - think 2Degrees shaking up Telecom (as was) and Vodafone, or Jetstar giving Air New Zealand the hurry-up - and they identified a range of obstacles (planning laws, restrictive covenants, the overseas investment regime, the alcohol licensing regime) that could and should be cleared to make entry feasible. Good faith wholesaling to a new entrant is a useful starting point (I'd expected a bit more on access to a wholesale market, after seeing where the petrol market study had landed), and a code of conduct was always a certainty, following Australia's lead, to help address duopsony market power against suppliers.
That package, and the threat of something heavier duty at a three year review if the shape of competition isn't looking better, looked to me to be an adequate policy combo. And I don't share the general pearl-clutching about its supposed timidity, for two reasons.
One is that I'm not convinced that there was such an enormous problem to start with. For all the jumping up and down about extortionate profits by the New Zealand supermarkets, the rate of return on the average level of capital employed in the New Zealand supermarket trade is not that different to the rate of return on the capital employed in the overseas supermarket game, as Figure 3.4 (below) of the market study showed. To explain this away, you either have to say an average is meaningless (no it isn't), or that all the overseas supermarket markets are rorts, too (no they aren't).
Return on capital employed is the best measure of potentially ineffective competition, but for what it's worth other measures of profitability (canvassed on pp60-64 of the report) showed the same thing: "Our analysis shows that profit margins for New Zealand’s major grocery retailers are broadly consistent with the sample of overseas grocery retailers" (p60).
The international price comparisons paint a darker picture, but even then it is not as black as the comparisons with the rest of the OECD would suggest. I like the general approach of benchmark comparators - countries that in some rough and ready way are 'like us' - and when the Commission did that exercise, it found (in Figure 3.13, shown below) that we still looked a bit on the expensive side, but not as obviously out of step as the whole-of-the-OECD comparison showed.
