competition

The best thing to have in business, South Island hotels entrepreneur Earl Hagaman once mused, is a monopoly. At the time he was intent on buying the Christchurch Casino because of its protected monopoly status. Compared with owning and running hotels in a highly competitive market, owning a monopoly like the casino was a business dream, Mr Hagaman reasoned.

By that logic, the next best thing must be a duopoly, where two big players have the market sewn up. This is the case in the New Zealand grocery market, where home-grown co-operative Foodstuffs and Australian-owned Progressive Enterprises dominate. Figures from the Organisation for Economic Co-operation and Development (OECD) show the giants are enjoying a very happy duopoly.

According to the OECD, grocery prices have risen 42 per cent in New Zealand in the past decade, while those in Australia, which also has a market dominated by two players, have risen 41 per cent. By comparison countries with more competition – Britain and the United States – have experienced more moderate rates of grocery price rises.

On the face of it there appears to be no shortage of competition between our big two. Both advertise extensively, constantly refreshing their offerings and rethinking their approach. The owner of Timaru's New World, under the Foodstuffs banner, has spent a small fortune redeveloping the Highfield supermarket and its mall and is taking on another 75 staff. You don't do that if you're not sitting pretty in a comfortable duopoly.

Likewise Progressive is spending up large to rebrand its Woolworths stores and its Church Street supermarket has just had a makeover.

While the big two argue their competition is cut-throat the suspicion is that it's become more of a handbags-at-dawn affair than a pitched battle. Critics believe they are going through the routine while protecting established positions which see the consumer lose out.

That is what the Australian Government believes and there has been a lot of jumping up and down about the OECD figures, and talk of bringing the "blowtorch" of competition to the incumbents.

In New Zealand The Warehouse had a crack at the duopoly and failed miserably. Supermarkets do have competition in the form of alternative meat and fruit and vegetable outlets, but there is precious little competition in terms of groceries.

In Timaru consumers have the option of a farmers' market. If the success of the first one, last weekend, is anything to go by, the supermarkets' traditional market is being nibbled around the edges. But until The Warehouse gets its act together, or someone else arrives, there seems precious little consumers or the Government can do.

Waikato supermarket owners are "blown away" by figures showing a 42.5 per cent rise in food prices since 2000.

The news has prompted Labour consumer spokeswoman Carol Beaumont to call for the Government to encourage more competition in the supermarket sector.

New Zealand grocery prices have risen 42.5 per cent between 2000 and 2009, followed by Australia which pays 41.3 per cent more, Britain's prices rose 32.9 per cent and America's were up 28.4 per cent, according to a study out yesterday.

Pak `n Save Mill St owner Glenn Miller said he was trying to obtain a grocery bill from nine years ago as he and his staff doubted the cost of many grocery items had risen to that extent.

He said a can of spaghetti cost 90c in 2000 and now customers would pay $1.09 for the same can. "At Pak n Save the margin we enjoy is lower than many other countries in the world and we think we are still very competitive given manufacturing cost and we try and keep our overheads down," said Mr Miller, who believes Pak `n Save is extremely competitive.

Vege King owner Swaran Singh said prices at his Fairfield fruit and vegetable shop would have risen by up to 10 per cent at the most. In some cases prices had not changed. He said the price tag on asparagus had stayed at $3.99 since 2000.

Progressive Enterprises, which owns Countdown, Woolworths and Foodtown, blamed international events such as drought as the main drivers of food inflation. Progressive spokesman Bill Moore said the group was consistently striving to offer the best prices and its profitability had remained at between 3 and 4 per cent since Australian-owned Woolworths Limited purchased Progressive four years ago. The group said there was plenty of competition between supermarkets, delis, butchers, green grocers and bakeries.

But Ms Beaumont has questioned why New Zealand is not following the example of Australia's Competition Minister, Craig Emerson, whose government was taking "hard measures" and lowering the barriers to other retailers competing with Coles and Woolworths on that side of the Tasman.

She was critical of Consumer Affairs Minister Heather Roy's suggestion that New Zealanders "shop around" to combat some of the fastest-rising food prices in the developed world, saying it had attracted widespread criticism. It was "poor advice" to families struggling with soaring food bills, Ms Beaumont said.

Public comments on news websites and on talkback radio produced a stream of consumers critical of grocery pricing, with many calling for overseas chains such as Aldi and Costco to compete against New Zealand's Foodstuffs (which owns Pak `n Save and New World) and Progressive Enterprises.

Hamish Wilson, of Consumer New Zealand, said there had been some attempts by other companies, such as The Warehouse, to break into the supermarket sector "but it's pretty difficult". The controversy arose in the wake of the Australian study which says the price of food in New Zealand has risen faster than in any other OECD country other than Korea.

- With NZPA

The wallet has been a bit lighter over the past 10 years if new figures are anything to go by with food prices both in New Zealand and Australia rocketing up more than 40%.

And experts say it's because New Zealand has only got two major supermarket chains, with a stranglehold on prices.

Statistics prove the cost of food in New Zealand has increased more than almost anywhere else in the 30 countries that make up the developed world.

The OECD figures show Korea had the biggest grocery price hikes over the past decade, 48%. In New Zealand, they went up 42% and Australia was close behind on 41%, all significantly higher than the OECD average of 33%.

A competition expert at the University of New South Wales, Frank Zumbo, says it's not fair on consumers on both sides of the Tasman. "We're paying more than competitor countries and the reality is consumers are being ripped off," he says.

He says consumers are being ripped off because both in New Zealand and Australia two supermarket heavyweights have a stranglehold on shoppers' wallets. Zumbo says Coles and Woolworths control 80% of the Australian grocery market.

In New Zealand, Foodstuffs owns Pak 'n' Save and New World, and Progressive Enterprises runs Foodtown, Countdown and Woolworths.

Hamish Wilson of Consumer New Zealand says this does lead to a lack of competition. "There've been some attempts by people like The Warehouse to try and break into it but it's pretty difficult," he says.

And it seems the increases are not going all the way down the food chain. Ken Robertson of Horticulture New Zealand says vegetable and fruit growers probably have not seen any real price increases in the past 10 years.

ONE News approached both chains. Progressive would not appear on camera but says consumers are getting a fair deal. Foodstuffs agrees. "It is an intensely competitive industry. We certainly don't meet with Progressive and agree price increases or nothing like that," says Tony Carter of Foodstuffs.

In Australia, the government says it's going to take its "competition blowtorch" to the industry. Until that happens in New Zealand, the advice to consumers is to shop around.

Consumer Affairs Minister Heather Roy says the Australians have their blowtorch and National and the Act Party have their regulations bonfire. She says she wants more competition and they are working on taking out some of the red tape and compliance costs to encourage more competition for New Zealanders' dollars.

Zumbo is advocating a marketplace similar to Britain's where four or five big players share about 60% of the market. He says letting rivals such as Aldi have a greater market share is the only way consumers will get a fair go.

The Commerce Commission is sticking by its view that The Warehouse can make a success of its "Extra" supercentre format and says it is not for the court to conclude that the concept will fail.

In his opening submission for the commission in the High Court at Wellington yesterday, Stephen Kos, QC, said based on overseas experience it could take several years for the supercentre concept to be successful here.  "It should be no surprise that the first year for Extra has been a hard one."

Woolworths and Foodstuffs are appealing against the commission's June decision to block either of them from taking The Warehouse over.  The court can overturn the commission's decision.

The launch of the Extra stores, of which there are now three, was the main reason for the commission turning down the supermarket companies' takeover clearance applications.  The Warehouse originally talked about having 15 of the stores in five years.  When making its ruling, the commission said New Zealand's supermarket retail market was already highly concentrated, and a reduction of players from three to two would substantially reduce competition, to the detriment of consumers.

Last month The Warehouse said the performance of the Extra concept had been below expectations, and more of the stores would only be opened when the economic potential of the model was proven.

But Mr Kos said the commission had been aware that The Warehouse was planning to "pause" the roll-out of Extra when it reached its decision in June.  "Extra's success is not assured, but is in the commission's view a plausible prospect."  However, the supermarket companies had been "publishing Extra's obituary".

Woolworths had misrepresented a planned March 2008 review by The Warehouse board of the format as being held with a view to abandoning the strategy, he said.  This was not the case.  "It is not for the commission to reach a conclusion that the board of The Warehouse has not reached and may not reach. Until the owner of the enterprise says 'this is not something we are going to continue', we must assume there is a reasonable chance it will keep going."  Mr Kos said a defining feature of Woolworths and Foodstuffs' submissions to the court had been "their distorted view of the key facts and legal elements of the appeal".

He challenged many aspects of their points, including their suggestions that they could be more successful at running the Extra stores than The Warehouse.  "Either incumbent, if cleared to acquire The Warehouse would resist cannibalising sales from its existing stores."

Mr Kos also questioned the extent to which there was intense competition in supermarket retailing, as portrayed by Foodstuffs and Woolworths.  "The commission does not subscribe to that."  The supermarket sector was not intensely competitive either in pricing or service, and there was very little innovation in either service or product range till the advent of Extra, he said.

The case, being heard by Justice Mallon and Australian academic Stephen King, finishes on November 2.  Confidential evidence was to be heard in a non-public hearing today from The Warehouse's chief executive Ian Morrice, and managing director of Woolworths' subsidiary Progressive Enterprises, Peter Smith.

Supermarket giants Woolworths and Foodstuffs have a fair chance of overturning a Commerce Commission decision blocking them from taking over The Warehouse, market observers believe.  Golden Sachs JBWere analyst Rodney Deacon said both supermarket operators would make a "compelling case" in their appeals against the decision, starting on October 23.

Buddle Findlay competition partner Tony Dellow said yesterday that there was every chance the decision could be overturned.  "I think the decision is appealable."

The commission issued its written reasons for turning down the supermarket companies last Friday.  Essentially, it gave the thumbs down because it believed that The Warehouse, left alone, could add competition in the supermarket sector through its new Warehouse Extra hypermarket format, which has a fresh grocery offering.  Taking away Extra would return the sector to a "duopoly" with potential loss of competition.

There are just two Warehouse Extra stores, at Sylvia Park in Auckland and in Whangarei.  Mr Dellow said it was debatable whether customers would be worse off if the number of supermarket operators was cut again to two.  And he said there was a lot of evidence to suggest the two big players already competed strongly.

Mr Deacon said the commission was "placing a significant weight" on The Warehouse continuing its Extra stores.  "We think that in framing their decision in such a way, the commission appears to have assumed that (The Warehouse's) management will continue to pursue the rollout of its Extra store format.  "In our view, there is real risk this may not happen, or at least may not happen to the extent to which the commission currently expects." 

ABN Amro analyst Carolyn Holmes said the commission report "was not evenly balanced".  It had dismissed the failure of hypermarkets in Australia, and also the likelihood of a new supermarket entrant here - even though one supermarket group, Aldi, had already registered its trademarks in New Zealand.  Ms Holmes believed the success or failure of the companies' appeals may come down to pricing behaviour at Sylvia Park.  She agreed with the commission that the presence of the Extra store at Sylvia Park was the reason Woolworths' Foodtown at the same location was a lot cheaper than a Foodtown in nearby Pakuranga.

So, what will they decide? Will they decide? The people at the Commerce Commission have till tomorrow to make or defer a decision on whether either Foodstuffs or Woolworths can bid to take over The Warehouse. The commission has been considering the issue for more than four months and has extended its deadline twice.

There are three potential outcomes this week: The commission says yes. It says no. It further delays a decision.

A "yes" will see both of the supermarket operators separately trying to cut a deal with The Warehouse's founder Stephen Tindall over the 52 per cent of the company he controls. The biggest cheque could win.  A "no" will see both Foodstuffs and Woolworths immediately appeal against the decision and the matter will head off to court – which could take months.

A further delay by the commission in making a decision will probably be construed by both Foodstuffs and Woolworths as a bad sign. What another deadline extension might indicate is that the commission has decided it will turn the applications down, but it wants to give itself the extra time to gather its evidence well to fight the inevitable appeal.

This decision is important for consumers, and while the delays may be frustrating in some regards, it is only right that the commission takes the time it needs to reach the right decision.  In essence, the commission has to decide if a purchase of The Warehouse by either of the companies will result in increased dominance and less competition in the marketplace.

The Warehouse has begun moves into supermarket retailing. The key question is the extent to which the commission believes that The Warehouse – if left independent – could provide more competition in future in that sector.  Legal experts have always been confident the commission will give both supermarket companies the green light.

I'm not so sure. I have had a gut feeling from the outset that the commission might say no. There are recent, very similar, cases in which the commission turned down applications. Last year Infratil subsidiary NZ Bus, which runs Wellington city's bus services, was declined permission to buy suburban bus operator Mana. In 2005 Fletcher Building was turned down when it attempted to buy W Stephenson & Sons. Essentially, both applications were refused because the commission thought that in the hands of another buyer those businesses would compete in the relevant sector. So there are precedents.

Whatever the commission's final decision, both of the supermarket companies will remain determined to snare The Warehouse.  Nobody is sure where this will end up, but it certainly won't be dull.

Briscoes boss Rod Duke may be about to rue the day he passed on buying the Stirling Sports franchise.  Duke looked at adding the management company behind the successful 29-store chain to his Rebel Sports business last year when it was up for grabs in a fire sale sparked by the financial troubles of its then owner, Mark Taylor.

Analysts thought at the time that Stirling looked like a good way of expanding the Rebel empire but Duke passed on the deal. 

Stirling Sports was snapped up by Christchurch's Anderson family who have been busy reorganising it.  The family have been overseeing a revamp of the franchise stores but the real test comes next month when Stirling opens a "big box" format store at Tower Junction in Christchurch which is at least twice the size of existing stores.  The Anderson family already has a big foot in the sporting goods camp. It also owns Lane Walker Rudkin, the world's largest rugby jersey manufacturer and home of the Union brand.

Mark Anderson said the aim was to open 12 mega centres around the country and build its chain of smaller mall stores up to 40 over the next three years.  While the big stores were heading towards Rebel Sport territory, Anderson said the offering would be different.  "We don't want to go head-to-head with Rebel Sport. We want to be much more service-orientated."

New branding is also on its way and the plan is to refurbish as many stores as possible.  All the big clothing and footwear brands would be included such as Adidas, Nike and Puma, and the stores would also sell "hard items" such as cricket bats and running machines.  But the aim was to move away from slow moving items such as snooker cues and golfing equipment.  He said the stores would be staffed by "mad keen" sports people who would give specialist advice.

There are 29 Stirling Sports stores around the country run by owner operators.  The chain was founded by franchise retailing legend Colin Taylor, who opened his first specialist sporting goods store in Auckland in 1964.  The franchise management business was sold in the aftermath of the collapse of his son Mark Taylor's retail empire which was built around the Building Depot chain.  Taylor over-extended himself by buying the Building Depot which was put into liquidation with debts of $8.4 million. Mark Taylor was made bankrupt.

Rod Duke could not be reached for comment on the Stirling plans.
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CAPTION:
New venture: Stirling Sports is to open a "big box" format store at Tower Junction in Christchurch next month. Photo: Kirk Hargreaves Opportunity missed Rod Duke