Has New Zealand’s supermarket duopoly created higher prices?

The supermarket sector has become an election issue, and political parties are suggesting everything from government-run supermarkets to breaking up Foodstuffs in an attempt to create more competition.New Zealand has high levels of concentration in the grocery sector. The two main supermarket chains hold 82 percent of the market, down only slightly from 84 percent in 2020 despite ongoing attention.The Commerce Commission has highlighted that New Zealand supermarkets also appear to have high margins compared to those in other countries.In its most recent grocery report, it noted Foodstuffs North and South Islands had EBIT margins of more than 6 percent, second-highest in its global comparison and ahead of Coles, Walmart, Tesco, Sainsbury and Carrefour.Woolworths had a margin of 1 percent and features low on the table, although that includes recent substantial investment made by the supermarket chain in rebranding.The current duopoly situation, in which New Zealand co-operatives Foodstuffs North Island and South Island compete with Woolworths, has been in place since the early 2000s, when the Commerce Commission gave clearance for Progressive Enterprises' acquisition of Woolworths.OECD data shows no clear impact on the pace of increase in food prices before or after this amalgamation.Supplied /Shamubeel EaqubSupplied / Shamubeel EaqubSupplied / Shamubeel EaqubWestpac chief economist Kelly Eckhold said New Zealand's food prices had been rising at a rate that put them somewhere in the middle of the range of countries we might normally compare ourselves to.He said the problem was likely that incomes in New Zealand had not risen as quickly. "So that's where people are feeling the pinch."Simplicity chief economist Shamubeel Eaqub said there were periods where New Zealand's rate of food inflation had increased sharply. "Sometimes that is related to weather conditions because a lot of the fresh food will be local."Because we're in the Southern Hemisphere we get slightly different weather patterns and impacts on foods…but overall food prices in New Zealand versus advanced economies seem to go on kind of the same [track]. It doesn't mean we're not all being gouged but we can't see it in the data."University of Auckland senior lecturer in marketing Drew Franklin said while inflation might not have run ahead of the rest of the world, it did not mean the lack of competition had not affected prices."Any two countries can see their prices rise at exactly the same rate while one of them pays considerably more than the other the whole time. It's also worth noting that any comparison with Australia is a comparison with another highly concentrated market, dominated by Coles and Woolworths, so it's perhaps not a fair benchmark for what a competitive market would look like."When the Commerce Commission compared actual price levels and profits in its 2022 market study, it found New Zealand was the fifth most expensive grocery market in the OECD in 2017 and that between 2015 and 2019 the major supermarkets earned returns on capital more than double its central estimate of a normal return in a competitive market. Its latest annual grocery report found little change since then in market concentration or supermarket margins."Eckhold said there was unlikely to be any reform that was a silver bullet to make food more affordable."It's important to understand that most of this debt is about a more marginal impact on prices. If you did make the market more competitive and if margins in supermarkets declined… you might be looking at reducing the profits by half in the sector but that's a small proportion of the total price that you'd pay at the supermarket."Eckhold said it could be possible to create slightly cheaper prices or a wider product offering but it would take time. "Restructuring is quite disruptive for the industry, would have considerable costs for the industry and could actually result in higher prices for consumers for a while because competition might not appreciably change for a while."I think people are hunting for an answer to the cost-of-living problem but I don't think supermarket reform is the answer."He said it was desirable to promote more competition in any part of the economy."But what problem are we really trying to address here? If it' the cost of living, I'm not confident that what's being discussed here is really going to substantially shift that very much."Sign up for Money with Susan Edmunds, a weekly newsletter covering all the things that affect how we make and spend money.