Foodstuffs North Island CEO Chris Quin’s summary comments at Commerce Commission Conference
Tuesday, 2 November 2021
Kia ora. E ngā mana, e ngā reo, e rau rangatira mā. Tēnā koutou, tēnā koutou, tēnā koutou katoa.
We are optimistic that the significant investment in this conference will assist the Commission’s final report. As you know, Foodstuffs North Island has taken up the challenge presented in the draft report for the grocery industry to do better for customers. We have presented, and begun to implement, an action plan to remove barriers to market entry that are within our control, and deliver better competition for the benefit of New Zealanders.
We consider that the action plan we have started implementing, addresses the changes that are warranted. We know from our own customer survey on our plan that 71% of our customers say simplifying pricing and promotions is the action that will make the biggest difference to them and 67% saying consistent use of unit pricing was next most important.
We’re a customer driven business and innovation is one of the key ways we can enhance our customers’ experience, and ensure our supply chain is efficient and resilient. We’re investing $50 million annually in innovation, and already have or are planning to implement all of the international innovation cited in the draft report, with the exception of Amazon Go and grocery robots. In addition, we invest in new regional stores, such as Flaxmere, Taumarunui, Mangawhai, Te Kauwhata, Putaruru stores.
The Commission has committed to take submissions as read, so I will focus my closing remarks on the last few days: we committed not to use this time to address a number of factual inaccuracies from other parties but will do that in cross submission or confidential sessions to respect the Commission’s time.
First, we welcome the Commission’s acknowledgement that we are constrained by existing competitors for the many missions that customers choose to shop, in addition to the direct national competition we face from Woolworths. We look forward to discussing market share scope further in the confidential sessions, we welcome the challenge of competition, it makes us better.
Second, we frequently see new entry with respect to all different missions. This entry constrains our prices, and keeps us on our toes with innovation, and with our quality, range and service. Supie developed an online main shop offering in 18 months, and Costco, Circle K and the new Geezy Go are material entrants, both with very different business models to ours. These unlikely to look like us – and they demonstrate that barriers to entry are surmountable. Nevertheless, we appreciate that restrictive land covenants and exclusivity provisions in leases are in our control, and we have started the process of removing them.
Third, we have presented additional information, with support from expert economists, to demonstrate that our returns are approximately half of the Commission’s draft calculations. We discussed a lot of economic theory in the profitability section of this conference about leases, but this is less relevant to Foodstuffs North Island as we own most of our retail land and buildings. We are simply asking that you include these assets when determining our return on capital employed. In our case the draft report omitted more than $2b in retail land and buildings and that does not seem right to us. If you add these the correct calculation is between 9-12% which is normal compared to the Commissions international comparator set. These are audited.
Fourth, we are cautious about drawing conclusions about the strength of competition from international price comparisons. But the work of our economists shows that New Zealand’s prices fall in the mid-range of the OECD countries. By far the largest component (approximately 68%) of customer shelf price is the cost paid to suppliers.
Fifth, we deliver for our customers in partnership with suppliers. We have positive relationships with the vast majority our suppliers, and we value those relationships. We agree that a well-designed mandatory code of conduct could have benefits for retailers, suppliers and most importantly customers. Importantly, it would require a fact and evidence base for issues to be raised and resolved. We look forward to the continued constructive engagement on this. We will keep working with the Commerce Commission and FGC and the invites will keep getting extended.
Finally, we work hard to deliver value to our customers through our promotions, our Clubcard programme, and use of data. And we are committed to improvement of terms and conditions. We are working closely with the Commission to ensure we have the right input to ensure we deal with any issues that have been identified.
Based on the development of the Commission’s findings suggested by both our submission and the discussion over the last few days, no further changes are warranted. This is consistent with our understanding that the final report will be likely to provide more targeted recommendations.
But we have also done a lot of work on, and engaged with, the Commission’s other draft recommendations, so I will briefly address those:
1. Options to improve access to wholesale supply of grocery products. The key points we have made in the conference are to identify that access seekers all have different wants to improve their business’s, some of which are simply lower prices from suppliers. It has also drawn attention to the fact that a number of competitors – Costco, Farro Fresh, and Circle K – are not present at this conference and seem not to feel they need anything more to compete. And, it has been validated that there are no elements of our supply chain that have essential facility characteristics. Indeed, all elements of our supply chain have been replicated by market participants. Supie for example, developed supplier relationships and established distribution capability for a main shop offering in 18 months. In the sessions, we presented on commercial wholesale access, which we believe is achievable subject to building appropriate capability and resolving a number of issues, including supplier trade marketing costs.
2. Options to directly improve retail competition. It’s important to recognise that options that involve forced divestment or separation of existing market participants are unprecedented in our economic history. So, to be justified, the competition problem these remedies would be designed to solve would need to be of unprecedented severity, and could only be turned to when other, lesser remedies have been tried. We’ve already explained why we are nowhere near that threshold. Confiscation of private property rights from individual family owners in New Zealand communities, without prior warning about the type of conduct that would give rise to this outcome – without any suggestion we have breached the law – would be an alarming message to business owners and investors.
We want to keep delivering for customers, and we want to make sure the market study does for the future. We are optimistic that the conference has been valuable in developing the final report and we look forward to continuing to engage with the Commission during the confidential sessions and our final submissions. It’s really important the recommendations focus on the future of retail, the customer needs and the efficiency and agility this industry needs.
We have customer promises by brand that we measure monthly for every store, and they focus on value experience and solutions, we are committed to becoming one of the most customer driven retailers in the world, we are not there yet but are committed to this.
In Foodstuffs North Island this week 2.1mil shopping missions were safely completed with the best value, experience and solutions we could offer. Each week we work to improve on those metrics for our customers. I’d like to finish by reiterating that we are up for the challenge and are committed to delivering better value for customers, improving outcomes for suppliers and removing competition barriers within our control.
Nga mihi mahana