Price check: how a public grocery chain would disrupt NZ’s supermarket duopoly

It’s roughly a month since the government announced new supermarkets would qualify for fast-track approval in an effort to inject real competition into the sector. Too soon to see progress, perhaps, but not too soon to question the likely success of that approach.

While fast-tracking may address the problems of commercial zoning, slow consenting and regulation that have frustrated would-be competitors, there is no guarantee a major player will emerge.

Meanwhile, consumers will continue to pay the price for what is effectively a supermarket duopoly between Foodstuffs and Woolworths.

It’s unlikely, too, that the Commerce Commission’s proposed changes to the Grocery Supply Code will cure the underlying malaise. These are primarily aimed at rebalancing bargaining power between suppliers and major supermarkets, not substantial price reductions for consumers.

The Commerce Commission is also conducting an inquiry into how well the wholesale market is operating, given concerns about how big supermarkets are restricting smaller retailers’ access to benefits such as supplier rebates, discounts and promotional payments.

While reform on this front could be effective, the tendency of smaller retailers to align their pricing strategies with dominant supermarket chains – known as “price leadership dynamics” – may undermine any downward pressure on retail prices.

In essence, any slight reshuffling will recalibrate the balance of power between suppliers, wholesalers and retailers. But consumers may see little direct benefit.

A genuine competitor

One solution that might work, however, is a publicly owned grocery chain, tasked explicitly with stimulating genuine competition. For the sake of argument let’s call it a “community provisioning enterprise”.

This could be designed as a conglomerate of wholesale centres, distribution networks and retail outlets. By leveraging state-of-the-art logistics and retail technologies, it could achieve significant efficiency gains.

Potentially, that could see gross profit margins driven down into the 4–7% range, compared with margins of 55% or more on individual items enjoyed by major retailers.

The main priority of such an enterprise would be to move commodities efficiently from producers to consumers. It would have a competitive edge because of operational efficiency, minimal marketing spend, streamlined supplier contracts and capped executive salaries.

The basic idea is hardly new. Governments have routinely intervened in markets where private enterprise has failed, often to avert systemic risk or unacceptable social costs.

Examples include bailouts of the Bank of New Zealand in the 1990s and Air New Zealand in 2002. The Tiwai Point aluminium smelter enjoys preferential energy prices to keep it running. Under the government’s retail deposit guarantee scheme (2008–2011), investors in nine failed finance companies were repaid close to NZ$2 billion.

But the supermarket sector logic is sharper. Our community provisioning enterprise would not be a monopoly or state-owned shop doling out rations. It would be a “no frills”, disciplined market participant with a single mandate: to force prices down and secure affordable access to everyday goods.

Unlike the existing supermarket chains, it would not compete on branding or loyalty schemes. Its focus would be generic products, staples and low-cost commodities – the categories stretched households need.

By operating a market system as a public good, it would leave ample space for other firms to innovate and differentiate. In effect, it would anchor the market by setting a floor of affordability while still encouraging private players to compete above it.

The market as public good

There are clear precedents for this already operating in the centre of global market capitalism, the United States.

The Healthy Food Financing Initiative was set up in 2014 to support public grocery store projects to improve food security in “food deserts” (areas with limited access to fresh and affordable produce). Since then, it has channelled US$320 million in grants and $1 billion in financing to some 1,000 grocery and food-retail projects across 48 states.

The state of Illinois went further in 2024, passing the Grocery Initiative Act to fund new public supermarkets. The small town of Venice in the state has already secured $2.4m to build one.

And in New York, popular mayoral candidate Zohran Mamdani wants to curb rising food costs with city-owned grocery stores. These would pay no rent or property taxes, trade at wholesale prices through central warehouses, and partner with local vendors to keep prices down.

To work in New Zealand, a community provisioning enterprise would need to be designed as:

• a born-to-compete enterprise, big enough to exploit economies of scale from the outset

• an operator in both the retail and wholesale sectors

• a state-of-the-art logistics hub deploying the latest distribution and retailing technologies

• a public entity with legislative support, able to survive in a hostile market

• a community “anchor” that works with stakeholders (councils, volunteer groups) to sustain trust and participation.

The role of the state

Capitalism is meant to thrive on what economists call “workable competition”. In any given sector, that involves at least seven to nine major firms and many smaller ones, with the biggest firm’s market share not exceeding 10%.

Where such conditions are absent, state intervention is justified, including through the establishment of a publicly-owned enterprise to stimulate real competition.

In recent years, governments have increasingly been reasserting their role in the economy to protect consumer welfare. From 2000 to 2023, the number of state-owned enterprises among the world’s 500 largest firms grew from 34 to 126, controlling US$53.5 trillion in assets and generating over $12 trillion in revenue.

New Zealand’s grocery sector would surely benefit from a market system that prioritises consumers by using the resources of the state to encourage real, workable competition.