Foodstuffs North Island fact checker
Last updated Friday, 19 November 2021
With 2.1 million customer visits in our stores and online every week, around 330 stores and 24,000 Foodies across the North Island, we play a big role in Kiwis' lives. That's why it matters to us that information about our business is accurate. Your local store is owned and operated by a family who is part of your community so getting the facts straight about their stores, people and customers is something they take seriously. We're up for an honest conversation but we think it's important it's based on facts.
That's why our team have developed this fact checker to check what's said about Foodstuffs North Island and to provide the facts, based on data and evidence.
It's another small but important step towards our goal of becoming one of the most customer driven retailers in the world.
These facts will be regularly updated to provide data and analysis on the issues that matter most to our people and customers.
Pricing, promotions, and loyalty programmes
"New Zealand prices are relatively high by international standards."
In reality, New Zealand grocery prices are fair by international standards when taking into account the purchasing power of the New Zealand dollar versus other currencies. According to the OECD, New Zealand grocery prices rank 21st (in the middle of the pack - see below graph) when using the Purchasing Power Parity comparison.
Source: HoustonKemp analysis of OECD and ICP data, 2017.
We commonly hear comparisons to countries such as the UK, US, Canada or Australia which have lower grocery prices. New Zealand is unique, and the cost of our groceries can be different for many reasons. Some of the reasons for this include:
- Our population is a lot smaller compared to countries such as the UK, US, or Australia. Supplying groceries to larger populations provides economies of scale, resulting in lower prices for customers.
- Our geographic isolation relative to other OECD countries increases the cost of transporting goods and input materials.
- We have a very comprehensive GST in NZ (for example Australia has GST rate of 10 percent, for which most of food and grocery items are exempt).
- Many of the countries outperforming NZ in the OECD ranking are members of the European Union, or otherwise enjoy free trade with the European Union, which New Zealand does not. The European Union also provides a farmer subsidy scheme to increase supply.
- The price of New Zealand goods is often influenced by the level of export demand. For example, 85% of NZ red meat is exported. These high-demand cuts are sold at a premium overseas which results in the pricing of meat sold domestically being strongly influenced by the price at which it is sold overseas.
- The cost of labour may be higher in New Zealand due to factors that affect the demand or supply of labour, e.g., many of the OECD countries with lower prices have a greater supply of labour than in New Zealand, including through immigration.
Sources: OECD, HoustonKemp, ICP, NZ Meat Industry Association, Foodstuffs North Island internal data.
"Supermarkets are driving up the price of food and groceries."
It is true that the price of food and groceries, like many consumer goods, has increased in recent years, however there are several factors that influence the price that customers pay for food and groceries. We explore some of those in a little more detail below.
Inflation represents a general increase in overall prices, and there are many contributing factors including the global price of key inputs (e.g. oil and labour), policy decisions and the supply of money circulating in the economy. A small amount of inflation is typically expected and since Sept 2002, the Reserve Bank of New Zealand’s inflation target has been in the range of 1-3% annually.
In the last four years (Sept 2017 - Sept 2021), inflation has averaged at 2.3% and 2.5% according to the Consumer Price Index (CPI) and Food Price Index (FPI). Most recently however (Sept 2020 - Sept 2021), inflation was 4.9% (CPI) and 4.0% (FPI), illustrating that inflation in the past year has been much higher than the last three years. It also tells us that general inflation has risen more than food price inflation in the last year. It’s not just the price of food that is suffering, but the average price of everything.
The figure below shows the change in prices, split by CPI (red line) and FPI (black line). It also shows the groupings of the FPI, represented by the five other lines. This highlights the relatively similar levels of inflation experienced in the CPI and FPI, as well as the high variability of the price of fruit and vegetables – which is very seasonal.
Source: Statistics New Zealand
Our grocery price inflation is also consistent with Australia. Australia has a larger number of grocery retailers than New Zealand and Aldi, one of the smaller retailers, has nearly doubled in size between 2011 and 2021. Despite that, the price of food has increased in Australia at a very similar rate to that in New Zealand. The figure below shows both rates of food price inflation.
Source: HoustonKemp International comparisons of grocery prices
For every dollar spent at our supermarkets, we are responsible for 19c which covers our wages and costs and provides our post-tax profit. The largest component of shelf prices is the price we pay suppliers for goods (68c in $1).
This component is currently coming under significant pressure, as our suppliers face rising operating costs under the current economic conditions. These pressures include global supply chain issues, COVID-19 and geographic factors. We looked at cost increase data and found that from January to September 2021, the average number of products with supplier price increases each month was 336 – a 20% increase compared to the monthly average for the same time period over the last 3 years. This trend has accelerated over the last 6 months (April-September), with an average monthly increase of 55% compared to the same period for the last 3 years.
Sources: Statistics NZ, HoustonKemp, Foodstuffs North Island internal data
“Prices are being misrepresented and manipulated.”
Pricing and the different types of promotions can be confusing, especially when retailers do things differently. We strive to provide the best possible value to our customers and have committed to simplifying our pricing and promotions.
Work is underway to reduce the different types of pricing tickets, and we are moving away from more frequent use of promotions to introducing more products at every day low pricing (EDLP).
We know from our own customer survey on our action plan (released as part of the response to the Commerce Commission's market study into the retail grocery sector) that 71% of customers say simplifying pricing and promotions is the action that will make the biggest difference to them and 67% say consistent use of unit pricing is next most important.
We also agree with the Commerce Commission’s recommendation that unit pricing should be used more widely and consistently – it helps consumers to make informed purchasing decisions. The actions outlined in our plan in relation to pricing and promotions will deliver value for customers by improving their ability to make informed shopping decisions.
“Foodstuffs North Island's profitability is excessive.”
The Commerce Commission calculated our Return on Average Capital Employed (ROACE or “return on capital”) – a measure commonly used to compare relative profitability of companies – to be around 24% for the retail part of our business.
What is important to note is that even though we are a vertically integrated grocery retailer (like all major grocery retailers) the Commerce Commission has attempted to separate our business in to two parts being retail stores and the Co-operative (supply chain, our support centre and all other parts of our business that are critical in running a vertically integrated grocery retail business), and in doing so made a number of material errors in their calculation.
The main errors were that it had incorrectly calculated the correct amount of capital funding to remove from the retail part of the business, and it had not allocated the retail land and buildings to the asset base. Although it is difficult to calculate (and in fact we have recommended to the Commerce Commission that the more appropriate way to calculate our returns is to look at the whole of business as we are a vertically integrated retailer), we have corrected these errors and shared our models with the Commerce Commission. This is shown in the bridge below. Correctly calculated, the return on capital for the retail part of our business alone is around 9-12%.
As noted, we have disagreed with the way that the Commerce Commission assessed only the returns for part of our business. Foodstuffs North Island is a vertically integrated business that includes retail, supply chain, property and IT infrastructure. Therefore, we believe that it is more appropriate to assess the returns over the whole of our business (not just part of it), the same way it has done for Woolworths and the same as the international competitors. If you calculate our returns to include the whole of business the correct calculation of FSNI’s Whole of Business returns is also between 9-12% as shown in the chart below.
We’ve compared our returns to international standards, and they’re consistent with what overseas supermarkets are earning.
Suppliers and products
"Foodstuffs is pursuing a ranging strategy to reduce the number of products and consumer choices."
Our customer driven range reviews are about ensuring we have the right products, at the right value and always available, for the 2.1m customers who purchase from us every week. These reviews are part of our customer driven business transformation journey, and it’s about making sure we are constantly modifying our range to suit changing customer preferences, based on what we know about the way customers are shopping.
Our range reviews are not driven solely by profit or margin but are guided by customer data and insights to help us understand customer needs, customer loyalty, and brand loyalty. Our goal is to make the customer experience better. We make sure that we have addressed all customer need states and shopping missions, and then look at which products don’t meet these needs, or which are highly substitutable and consistently second choice. This opens up space for the products which matter most, to ensure they are available and improve the customer experience.
Through all of this, we continue to range a very large number of products. We range 81,812 different products across all our brands (PAK’nSAVE, New World, Four Square and Gilmours). We also process a high volume of new product developments every year. For example, in 2020 we introduced a total of 9,014 new products across our stores and discontinued 3,845 – a net increase of 5,169 products.
Source: Foodstuffs North Island internal data.
"This reduction in products and consumer choices is to the detriment of local NZ suppliers."
As a 100% Kiwi-owned co-operative, we proudly support many local suppliers. A portion of the range in each store is left to the owner to tailor for their local community, allowing them to show off the local suppliers in their area. Our local NZ supplier base also provides a supply chain advantage, as there is generally less risk compared to importing products (especially given the supply chain issues we are seeing globally due to COVID-19).
As an example, following our recent frozen food category review there are 132 suppliers, and 93% of the suppliers manufacture in NZ or are NZ-owned businesses.
We also support NZ through our own brands: Pams and Value. Overall, about 70% of all our own brands' sales are from NZ suppliers. The next largest country of origin is Australia, making up about 8% of sales.
We are also proud supporters of FoodStarter, a competition for small FMCG and start-ups with an innovative product. We’re involved in providing winners of the competition with business and start-up support, so they can start-up or upscale to take their place on New World shelves.
Source: Foodstuffs North Island internal data.
"Private label only benefits retailers and provides no value to customers. It’s also unfair to suppliers."
Private label is just one choice among many on our shelves, and we are dedicated to making sure it’s a good choice for our customers. Our customer driven range reviews look at private label in the exact same way as supplier branded products. If there isn’t a clear customer need for it, you won’t find it on the shelf.
Compared with most overseas markets, we have a relatively low amount of private label products in our total range. This reflects the relatively strong supplier bargaining power and brand attachment of Kiwi consumers. According to Nielsen data, the weighted global average dollar share of private label is 16.5%, with many European countries enjoying dollar share between 22-45%. This compares to NZ’s average dollar share of just 14%.
Private label allows us to make a difference in the market by holding true to our social and ethical values because we choose how products are produced, sourced, and labelled. We work to ensure our private label products are responsibly sourced, we are working on improving the sustainability of our packaging in line with our 2025 commitments, and we are supporting healthier choices through clear and transparent labelling.
Our Co-Op 2025 Sustainability Leadership Measures and Targets cover:
- Reducing our carbon emissions
- Minimising our waste
- Improving our packaging sustainability
- Responsible and ethical sourcing
For more details, check out our Social Responsibility Report 2021 on our website.
Sources: Foodstuffs North Island internal data, Nielsen IQ, state-of-private-label-around-the-world-nov-2014.pdf (nielsen.com).
Competition in the retail grocery sector
"There have been no new grocery market entrants since 2004."
We have seen many new entrants into NZ over the past 20 years, with many being established in the past few years.
Some notable examples include:
- Farro (2006) – A high-end grocer that specialises in New Zealand-produced artisan food. It offers a wide range of local and internationally sourced ingredients. It is a New Zealand owned and operated business, currently operating six stores across Auckland.
- My Food Bag (2013) – A New Zealand meal-kit company, with an annual revenue of $190m in FY21. As part of its IPO in March 2021, My Food Bag signaled its intention to expand into grocery.
- WOOP (2015) – A New Zealand owned and operated meal-kit business which opened in 2015.
- The Source Bulk Foods (2016) – Provides a range of bulk wholefoods, healthy snacks and organic goods as well as sustainable personal and household products. Currently has six stores throughout New Zealand and is also available for online delivery.
- GoodFor (2017) – A refillery for pantry and household goods. Currently has 7 stores throughout New Zealand.
- HelloFresh (2018) – International meal-kit company based in Germany. NZ revenues of almost $194m in the 2020 financial year to December (compared to $75m the prior year).
- Circle K (2018) – American-based retailer with global revenues of over $50b. Circle K has opened four stores in Auckland and has confirmed plans to open more than 100 New Zealand outlets.
- Honest Grocer (2020) – An online grocery delivery service that sources and supplies New Zealand produce, direct from the farmers and growers.
- Supie (2021) – An online, membership-based supermarket which launched in Auckland in May 2021. Supie has intentions to expand to additional New Zealand regions.
- This Local Piggy (2021) – An online grocery provider which enables customers to order items from local retailers. The service is a way of connecting communities and keeping suburbs unique by supporting their independent stores.
- Four Candles (2021) – A new, premium grocery store which promises quality food, fresh produce and an excellent range of wines and beers that are “fairly priced”.
- Mackzan (2021) – An online grocery platform launching in Auckland.
- Geezy Go (2021) – An online supermarket which focuses on fast delivery to customers, plans to open in Auckland and subsequently Wellington. Geezy Go is already established in Australia.
In addition to these existing retailers, Costco is also in the process of constructing an Auckland store to open early in the first half of 2022, with a second location in Christchurch consented.
"The level of innovation in the sector is modest by international standards."
Given the smaller size of the New Zealand economy and population, it is inevitable that innovation will not progress at the same pace and scale as much larger countries – it’s simply not feasible due to cost, size, location, and demand.
Despite this, we’re really proud of the innovations we have developed. This year alone, we are investing $50 million into innovation. And for us this has been focused on improving the customer shopping experience:
- Online shopping (delivery, Click & Collect and drive-through offerings).
- Mobile checkouts and apps to connect to personal shoppers.
- New packing alternatives that improve freshness and reduce environmental impact.
- Technology improvements that speed-up checkout times.
- In-store experiences such as Zoom Trolley (which allows customers to scan and pack their groceries as they shop).
- Delivery of innovative store designs such as smaller store formats (Metros), cut-throughs in large stores to compete for quicker shopper missions, and self-service.
For supply chain, we invested over $100m into our new Landing Drive Distribution Centre to improve the supply of products to our stores. The Distribution Centre utilises robotics, voice-picking, has a 5 Green Star rating and houses New Zealand’s largest array of solar panels (2,915 solar panels covering about 6,000 sqm) to power the distribution centre.
Source: Foodstuffs North Island internal data.
"Most consumers regularly carry out a main shop from one supermarket."
Our internal data shows us that customer shopping behaviour has changed from the traditional ‘one big shop’ to ‘missions shopping’ (several small trips to different retailers to fill specific needs).
In addition, the survey data the Commerce Commission has published shows customers carry out several shops per week from a range of different stores each week:
- On average New Zealand customers complete 3.7 shops per week.
- Only 12% of customers carry out 1 shop each week.
- 24% of customers visit just one store per week.
- 40% of customers visit other retailers as well as the major retailers.
Note: This trend tends to reverse under COVID restrictions when we see a strong shift to shopping locally and shopping for one bubble. Customers spend more and buy more at individual stores and the number of transactions per customer decreases as customers shift to larger shops from a smaller number of retailers. We see this behaviour change back to normal again when restrictions ease, and ‘missions shopping’ emerges again.
Sources: HoustonKemp analysis of Commerce Commission’s cleaned survey data, Commerce Commission Consumer Survey, Foodstuffs North Island internal data, Ipsos consumer study report July 2021.