Section 2: Background information

2.1 Market study into New Zealand’s retail grocery sector

• In November 2020, the Minister of Commerce and Consumer Affairs directed the New Zealand Commerce Commission (the Commission) to undertake a study into any factors that may affect competition for the supply or acquisition of groceries by retailers in New Zealand (the market study).
• On 8 March 2022, the Commission released its final report on the market study[1]. The Commission’s overall finding is that competition is not working well for consumers in the retail grocery sector, and if competition was more effective, retailers would face stronger pressures to deliver the right prices, quality and range to satisfy a diverse range of consumer preferences.
• The Commission noted that competition in the retail grocery sector is muted because the sector is dominated by 2 major operators of nationwide supermarket chains – Woolworths New Zealand Limited (Woolworth NZ) and Foodstuffs (together referred to by the Commission as the “major grocery retailers”) – which operate as a duopoly.
• Groceries are an essential purchase as well as a major expense for most households. In the year to March 2023, nearly $25 billion was spent at supermarkets and grocery stores. [2] In the year to 2019, food was the second largest expenditure item for New Zealand households, with households spending an average of $234 a week on it.[3]
• The Commission identified several issues in the grocery industry related to why competition is not working well in the industry. It made 14 recommendations to improve competition and produce better long-term markets outcomes for consumers in terms of grocery prices, quality, range and services. 2 of the recommendations are to:
  • require the major grocery retailers to consider requests for wholesale supply in good faith, and meet associated disclosure obligations
  • introduce a mandatory grocery code of conduct to govern relationships between the major grocery retailers and their suppliers.

• In relation to both these recommendations, the Commission recommended that a dispute resolution scheme be established.

Wholesale access and dispute resolution

• The Commission considered that competition would be enhanced by one or more of the major grocery retailers offering wholesale supply of groceries to other retailers via a voluntary wholesale access regime. Facilitated wholesale supply at prices that promote competition should enable potential rival grocery retailers to enter the retail grocery sector or other grocery retailers to expand their existing operations.
• The Commission recommended that a dispute resolution mechanism should be provided in relation to the wholesale access regime to deal with disputes between major grocery retailers and other grocery retailers receiving wholesale supply, or seeking wholesale supply, from major grocery retailers.

Mandatory grocery code of conduct and dispute resolution

• The Commission also considered that a mandatory grocery code of conduct is needed to address imbalances in bargaining power between the major grocery retailers and their suppliers.
• The imbalances in bargaining power have arisen because most suppliers have few options to sell their goods outside of the major grocery retailers. The impact is that the major grocery retailers can use their buying power to shift costs and risks onto suppliers, and create uncertainty around the terms of supply. This includes the threat of suppliers having their products removed from supermarket shelves if they do not agree with the major grocery retailer, for example, on contract terms, margins or pricing.
• To support the grocery code of conduct, the Commission recommended that suppliers should be able to access a dispute resolution process (which is independent, affordable, timely, confidential and informed by specialist expertise) if they have a dispute with a major grocery retailer in relation to the code requirements.

2.2 Grocery industry overview

• As noted above, the major grocery retailers, operating nationwide supermarket chains, act as a duopoly with little competive constraint provided by other grocery retailers.
• Woolworths NZ operates and supplies more than 180 Countdown stores throughout New Zealand. It also owns Wholesale Distributors Limited, the franchisor to 71 locally-owned and operated SuperValue and FreshChoice stores, which mainly operate in smaller centres.
• Foodstuffs operates as two separate co-operatives independent of each other: Foodstuffs North Island Limited and Foodstuffs South Island Limited. The 2 co-operatives do not compete in each others geographic market, thus creating a supermarket duopoly with Woolworths NZ in each of the North Island and the South Island. There are more than 400 Foodstuffs retail stores nationwide operating under the New World, PAK’nSAVE, and Four Square banners, as well as Raeward Fresh and On the Spot stores in the South Island.
• Woolworths NZ, Foodstuffs North Island and Foodstuffs South Island have integrated buying and distribution functions to supply their retail stores and franchisees.
• Suppliers to the retail grocery sector include farmers, growers, manufacturers, and processors of grocery products.

2.3 Grocery Industry Competition Act

In preparing applications, the most important parts of the Grocery Industry Competition Act 2023 (the Act)[4] to understand are:

• In relation to the grocery supply code, Part 2.
• In relation to the wholesale supply of groceries regime, Part 3.
  • Subpart 2 of Part 3 imposes requirements for facilitating commercial agreements for wholesale supply of groceries.
  • Subparts 4 to 8 provide for a backstop wholesale supply regime, in case additional regulation is needed.

• In relation to the dispute resolution scheme, Subpart 5 of Part 4 and Schedule 2.
  • Subpart 5 of Part 4 sets out the general framework for dispute resolution
  • Schedule 2 contains provisions in relation to a dispute resolution scheme, including the process for establishing a scheme.

• More generally, the Act responds to some of the recommendations from the market study. It aims to improve competition and efficiency in the grocery industry for the long-term benefit of consumers in New Zealand, and to contribute to a trading environment in which businesses can participate confidently.

The Act provides for:

• The Commerce Commission, including the appointment of a Grocery Commissioner within the Commission, as the grocery industry regulator. The range of the Commission’s functions, duties and powers under the Act is broad to enable the Commission to monitor and investigate the grocery industry and enforce the regulatory provisions in the Act. For instance:
  • monitoring, and reporting on, competition and efficiency in the grocery industry, including for the purposes of understanding and reporting on current and future trends in the grocery industry and improving transparency in the industry
  • monitoring compliance with and enforcing the Act, including taking appropriate action in respect of persons that have contravened the Act (this includes compliance with and contraventions of the grocery supply code and the wholesale access regime requirements)
  • reporting on a variety of things, including the grocery supply code, wholesale access framework, and annual state of competition in the grocery industry.

• A wholesale supply of groceries regime. This means that access to wholesale “groceries” (as defined in the Act) supplied by a “regulated grocery retailer”[5] will be available to more grocery retailers (“wholesale customers”, as defined in the Act) on competitive terms to encourage entry and expansion in the retail grocery sector and offer a wider selection of products to consumers at competitive prices.The Act creates a 2 part wholesale supply regulatory regime:
  • The first part imposes requirements on regulated grocery retailers to facilitate commercial supply of groceries to wholesale customers.
  • The second part establishes the wholesale regulatory backstop, which creates a range of additional wholesale supply obligations that may be imposed on regulated grocery retailers if the regulated grocery retailers’ facilitated commercial offerings are not what would be expected in a workably competitive market and additional regulation is likely to benefit consumers in the long term.

• A grocery supply code [6] to regulate the relationship between a regulated grocery retailer and its suppliers.
  • Regulated grocery retailers will be required to comply with the grocery supply code (as secondary legislation) to constrain their ability to use their bargaining power advantage to force suppliers to accept unfavourable terms of supply that may involve them taking on costs and risks that are better addressed by the regulated grocery retailers.

• A dispute resolution scheme to provide independent, prompt, and cost-effective resolution of any dispute that a grocery supplier (in relation to requirements under the grocery supply code) or a wholesale customer (in relation to requirements under the wholesale supply of groceries regime) may have with a regulated grocery retailer.
  • The Act provides for the Minister of Commerce and Consumer Affairs to approve a dispute resolution scheme (“approved scheme”, as defined in Schedule 2 of the Act) and the scheme’s rules.
  • The dispute resolution scheme will only cover disputes up to a claimed amount not exceeding $5 million.
  • Every regulated grocery retailer must comply with the outcome of the dispute resolution process, and only a supplier or wholesale customer (not a regulated grocery retailer) may refer a dispute to the scheme.

Footnotes

[1] New Zealand Commerce Commission, Market study into the retail grocery sector: Final report, 8 March 2022, available at:

Market study into retail grocery sector(external link) — Commerce Commission

Two further documents complementing the final report are available at the same location: the Executive Summary and the Summary of Findings.

[2] Statistics NZ, Retail trade survey: March 2023 quarter, at Table 1, excludes GST, available at:

Retail trade survey March 2023 quarter [XLSX, 107KB](external link)

[3] Statistics NZ, Household expenditure statistics: Year ended June 2019, includes GST, available at:

Household expenditure statistics: Year ended June 2019(external link) — Stats NZ

Note this includes spend on restaurant and ready-to-eat food, and excludes alcoholic beverages and tobacco. Due to disruption caused by COVID-19, this is the latest available information collected on New Zealand households’ expenditure.

[4] The Grocery Industry Competition Act 2023 was passed by Parliament on 21 June 2023 and received Royal assent on 26 June 2023. It comes into force on 10 July 2023. The Act is available on the New Zealand Legislation website at:

Grocery Industry Competition Act 2023 No 31, Public Act Contents(external link) — New Zealand Legislation

[5] The term “regulated grocery retailer” in the Act currently comprises 3 grocery retailers: Foodstuffs North Island Limited, Foodstuffs South Island Limited and Woolworths New Zealand Limited (and their interconnected bodies corporate, successors, franchisees, and transacting shareholders). The Act provides for an Order in Council to designate other persons as a regulated grocery retailer.

[6] An exposure draft of the grocery supply code (the Grocery Industry Competition (Grocery Supply Code) Regulations 2023) consulted on by MBIE is available at:

Draft Grocery Supply Code of Conduct