Tuesday, 24 May 2022

When there's a will ...

You don't often see competition reform feature in the Budget, but we did last week.

"We are ... committed to boosting competition in the New Zealand’s grocery sector to ensure people pay fair prices for food and other basics", Grant Robertson said in the Budget speech. "Today, we are introducing legislation that will remove barriers to new retailers entering the market. Specifically, this will prohibit the restrictive covenants on land that major grocery retailers use to limit site availability for competitors. Such covenants will be prohibited immediately once the Bill comes into effect, and I anticipate that competitors can begin to consider new sites shortly thereafter".

The Commerce (Grocery Sector Covenants) Amendment Bill is here. It defines Foodstuffs North Island Limited, Foodstuffs South Island Limited, and Woolworths New Zealand Limited as 'designated grocery retailers', and creates a new s28A of the Commerce Act whereby "Certain grocery-related covenants are treated as prohibited and unenforceable" by deeming them as "having the purpose, or as having or being likely to have the effect, of substantially lessening competition in the relevant market", and so pinging them under the existing s27 and s28 of the Act. s27 we all know and love - contracts, arrangements and understandings substantially lessening competition - and s28 is its equivalent for anti-competitive covenants.

In its grocery market study (summary here, whole shebang here), the Commerce Commission had identified "more than 90 restrictive covenants entered into by the major grocery retailers, the majority of which are still active" (6.77) and "over 100 exclusivity covenants in leases entered into by the major grocery retailers, the majority of which are still active" (6.80). Clearly, this isn't a small issue, and it may be rather bigger than the Commission thought. On its helpfully proactive 'Market study reporting dashboard', Foodstuffs North Island says that it alone has removed restrictive covenants from 78 out of 135 affected properties (the outstanding ones are on land it doesn't own any more, and they are approaching the current owners to bop those off, too).

So it's good news that the government has moved quickly to implement the Commission's recommendations 2A, 'Prohibit restrictive covenants that relate to the development of retail grocery stores' (discussed at 9.68 - 9.72) and 2B, 'Prohibit exclusive covenants in leases that relate to the operation of retail grocery stores' (9.73 - 9.79). Their impact may be overstated - my guess is that planning laws restricting the supply of land available for supermarkets may be more important, as may planners' inclination to protect competitors rather than to protect the competitive process (hence the Commission's 'Recommendation 1F: Retail grocery store development should not be able to be declined on the basis of adverse retail distribution effects on existing commercial centres') - and the supermarkets look to have been dismantling them anyway, but it's progress. 

It's helpful that the political pressure to 'do something' about rising prices in the shops - a key focus of the Budget - helped bring about a quick competition policy response, and you'll excuse me if I snarkily add, 'for once', given the tortuous processes in getting s36 reformed, cartels criminalised, and indeed setting up the market study regime itself. When there's a will, there's a way, as they say. Moving this quickly, incidentally, means that you've only got a very brief window for submissions: Friday, in fact. The submission link is here.

But I hope that the "it's the supermarkets wot done it" line about inflation doesn't get taken much further. In April the Commerce Minister, Dr David Clark, commented on the 7.6% rise in New Zealand food prices over the year to March, and said that "The March increase is above general inflation figures and highlights the role the grocery sector is playing in driving up prices. Rising food prices is a global issue. Omicron, ongoing disruptions to global supply chains and Russia’s invasion of Ukraine is putting pressure on prices in every country, but that is exacerbated here by the lack of competition at the checkout".

Hmmm. In the US, annual food price inflation was 8.8% in March; in Canada it was 9.7%; in the UK it was 6.7% in April. Overwhelmingly, inflation is not a matter of grocery industry structure, but a result of those other global factors that the Minister mentioned: he might have thrown in monetary policy, here and overseas, being left too stimulatory for too long after the initial Covid hit. Blaming the supermarkets, if only in part, for current food price inflation may play well to the galleries, but it's not a strong argument. If, as he said at the time, he had "not ruled out going further than the options that the Commission tabled in its final report", fair enough: quite a few folks (but not me) reckon the Commission didn't go far enough. But I wouldn't take that step on the back of a not very convincing line of attack on inflation.

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