Splitting up Foodstuffs: Would it actually drive down grocery prices?

National wants to split Foodstuffs in two in a bid to drive down grocery prices - but would it work?

By Susan Edmunds of RNZ

It announced the proposal on Wednesday, which would require a Commerce Commission review to determine whether it would leave shoppers better off.

Foodstuffs – made up of two co-operatives – currently manages all New World, Pak'nSave and Four Square stores.

National's plan would split them up, leaving the country with three nationwide supermarket chains: Pak'nSave, New World/Four Square and Woolworths.

University of Auckland senior marketing lecturer Drew Franklin said it was a step in the right direction.

"Structural separation or intervention that's seeking to structurally reform the sector has been shown to work overseas because it lowers the concentration of the market so there are more players in the game."

National's modelling estimated 3.5% lower prices after a year and 5% lower after six years with Foodstuffs split in two.

Nicola Willis, speaking as the party's finance spokesperson, said it could eventually save households up to $1320 a year.

"The short answer is time will tell," Franklin said. "That sort of structural separation putting downward pressure on prices isn't going to happen in a hurry."

Jon Duffy, chief executive of Consumer, welcomed the idea.

"The debate has really moved forward from where we were even six weeks ago, where we were still debating whether some form of intervention was needed beyond the pretty lukewarm measures that have been implemented since the Commerce Commission's study - pretty much all the major parties with the exception of ACT have some form of structural reform or measure to address price gouging, that sort of thing, in their election manifestos. This is a step forward for New Zealand."

He said it was positive that National's plan was to require that the Commerce Commission first consider what it would mean for customers with what was effectively a reverse merger assessment.

"The commission is very skilled at doing this type of analysis. So it's saying instead of hypothesising what a market would look like if two entities merge, hypothesise what they will look like if they demerge, and work out whether there's a net benefit to consumers."

He said National's plan seemed intended to treat the "disease", while Labour's announcement on anti-price gouging measures was addressing the symptoms of a lack of competition.

The savings being talked about showed how badly the market was treating consumers, he said.

"It's strange territory for the National Party but that's how bad the problem is."

BusinessNZ director of advocacy Catherine Beard said it was a concerning proposal that could undermine New Zealand's reputation for regulatory stability, respect for property rights and predictable policy settings.

"This is a very concerning move by the National Party and sends a chilling signal to businesses across New Zealand that the government can break up businesses. It also sends the wrong signal to foreign investors looking to invest in New Zealand."

She said the Government needed to be clear on what the problem was that it wanted to fix.

"Because one of the important bits of information that Commerce Commission's not really gotten to the bottom of is how does our basket of groceries stack up in New Zealand versus international comparators when a lot of other countries don't put GST on their food and New Zealand does? And I think the Commerce Commission acknowledged in their last report that that is an area that needs further work."

She said there could be a scenario where prices rose when the business was split because it lost efficiencies of scale.

Franklin said it was strong intervention and BusinessNZ was right to demand strong evidence and safeguards but it would only be overreach in the absence of a demonstrated problem.

"We've done our own research here at the University of Auckland that has identified that the concentration problem is well documented.

"And so, that's the problem that the structural separation is seeking to fix effectively. It's not the government setting grocery prices or running supermarkets or co-opting supermarkets like some of the other policies that we've heard to date."

He said the Commerce Commission needed more teeth and a much more legitimate role in trying to respond most appropriately to entrenched market power.

"I think it's a step in the right direction."

It would also be important to consider supply arrangements and what a split would mean in areas that were only served by one supermarket brand, he added.

Westpac chief economist Kelly Eckhold said New Zealand's food price increases over the last 20 years had been in about the middle of OECD countries.

"The increase in food prices and cost of living pressures has been a global phenomenon and it's hard to point at New Zealand-specific factors to suggest our prices are dramatically different to what's happened with the global trend, which has been to higher prices."

He said splitting Foodstuffs was unlikely to be a silver bullet to fix the cost-of-living crisis.

Foodstuffs has been approached for comment.