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The Commerce Commission Exercising New Powers

John Polkinghorne
pump

Petrol prices have been a hot topic in the last year, and there’s been plenty of posturing from politicians. National blame Labour for hiking fuel taxes – glossing over the fact that they’d raised the nationwide taxes themselves to pay for their expensive RoNS schemes, and that they hadn’t figured out a way to pay for Auckland’s future transport infrastructure. And Labour have been talking tough on climate change but not doing much about it, while also pointing the finger at fuel companies.

The result is that the Government has given the Commerce Commission new powers, to undertake “market studies” even when there isn’t a merger or an acquisition taking place. Much like the process followed by the Productivity Commission, the CommComm will do its own investigations, talk to the companies and other stakeholders, and come up with a report that makes non-binding recommendations. It’s then up to the Government to decide what to do.

And as directed by the Government, the first study the Commission will do will be on the fuel retailing market. Again, the politicians will talk tough, but the Commission will do a good job of being fair and transparent, and put out a balanced report.

Although this study will be the first to use the Commission’s new powers, it’s hardly the first study of petrol stations. In fact, the Commerce Commission looked at them just three years ago, when it approved Z Energy’s 2016 acquisition of Caltex (reducing the number of big fuel retailers from four to three). The previous government also paid NZIER to do a study in 2017. So this is fairly well-trodden ground.

But there are other parts of the retail industry that haven’t been studied in many years, such as the supermarket industry. The Commerce Commission looked at this closely back in the early 2000s, when Progressive Enterprises wanted to buy the Woolworths supermarket chain.

The Commission approved the purchase, turning our supermarket industry into a duopoly. There was also an interesting time in the mid-2000's, when The Warehouse that it would open up hypermarkets called The Warehouse Extra – remember those? – and Foodstuffs and Progressive promptly bought 10% of The Warehouse each. In this case, the Commerce Commission ruled that the supermarket companies would not be allowed to buy the overall The Warehouse company.

And supermarket retailing has remained a duopoly ever since, despite some new contenders (Farro, Nosh, Asian supermarkets, My Food Bag…). That’s not to say that it’s not a competitive market. There’s no love lost between Foodstuffs and Progressive, and the battles are often fought in a property sphere rather than on the supermarket shelves. The companies fight to acquire the best sites, or to pull the rug out from under each other (e.g. buying their competitors’ buildings!).

Hardware retailing is an interesting one, too. Although not quite a duopoly, the Mitre 10/ Bunnings brands dominate the market. Some of their tactics can also be ‘red flags’ for competition authorities – e.g. the 15% ‘price beating’ promises. The reason why those can be red flags probably isn’t very interesting to anyone except economists, but suffice to say that competition analyses can get pretty technical. And competition isn’t just about price – it’s about locations, convenience to consumers, product ranges and innovation.

So, fuel retailing is a funny place for the Commission to start exercising its new powers. After all, tax makes up around half the price of petrol – so the retailers are only competing over what’s left – and this is an industry which still has three ‘big’ companies as well as a number of smaller ones. Plus, the “barriers to entry” are probably lower for fuel retailing – petrol stations can set up on quite small pieces of land, whereas supermarkets need much bigger chunks. Plus, fuel retailing is a $7 billion industry whereas food is a $20 billion industry – a much bigger share of consumer wallets.

Overall, we welcome the wider role for the Commerce Commission. The Commission does a great job, and will be able to shine a light on parts of our small New Zealand economy that aren’t as competitive as they should be. However, it’s a pity that governments are telling the Commission where to look, rather than letting the Commission figure out its own priorities.

 

In the Press

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