Foodstuffs Commissioned Review Claims Supermarket Split Modelling Is Economically Implausible
Foodstuffs has released an independent review criticizing government-backed modelling that suggests splitting its retail brands from its wholesale operations would lower grocery prices for shoppers. The critique, prepared by independent economists HoustonKemp, argues that the projected benefits of structural separation are economically implausible and would result in industry-wide losses.
National and Industry Proposals for Structural Separation
National intends to ask the Commerce Commission to review whether severing PAK’nSAVE from New World and Four Square would benefit consumers, and should the findings prove this to be the case, National would introduce legislation to enforce the split. Last month, Nicola Willis, the spokesperson for economic growth and finance for National, stated that the policy was based on two peer-reviews she ordered as finance minister and a detailed cost-benefit analysis produced by Sense Partners for the Ministry of Business, Innovation, and Employment. According to modelling by Sense Partners, average prices would drop by approximately 3.5 percent during the first year of the split, with further improvements as the separate chains became established. Depending on the family type and income, the yearly household benefit was estimated to be between $200 and $1320 by 2035, resulting in a total net economic gain of $2.9 billion over a 20-year period.
HoustonKemp Critique of Sense Partners Modelling
Foodstuffs commissioned independent economists HoustonKemp to undertake a preliminary peer review of that modelling. Founding partner Greg Houston concluded that the projected net benefits seemed unrealistic, arguing that the combination of increased costs and lower prices would lead to losses across the industry for the next 20 years. HoustonKemp’s five-page review noted that supermarket net profits were presently 2.3 percent of sales, but Sense Partners’ modelling reported profit reduction equivalent to 3.5 percent of sales. The report questioned how Sense Partners could arrive at such a result, given that no economic sector can survive continuous negative profits. HoustonKemp further asserted that the assumptions regarding cost increases had not been verified with industry participants and that the Sense Partners modelling assumed no competition existed between different Foodstuffs brands or stores. The review stated there is no basis for this assumption, pointing out that Foodstuffs stores are owned individually and have strong incentives to compete, and that PAK’nSave stores currently compete for and win customers from Woolworths and New World stores, and vice versa.
Prior Peer Review and Alternative Party Policies
The analysis from Sense Partners was previously peer-reviewed by John Davies, the former chief economist of the UK Competition Commission, who called it an impressive piece of work. As with any economic modelling, a lot of assumptions and simplifications of reality are required, Davies wrote, adding that the modelling choices and assumptions made seemed sensible and similar to those made when competition authorities model mergers. Willis noted that Sense Partners’ analysis had also been peer-reviewed by research organisation Motu, while acknowledging that economists can always have different views. Meanwhile, NZ First is campaigning on separating PAK’nSave from New World and Four Square without waiting for a Commerce Commission review. Labour proposes to force Foodstuffs and Woolworths to run their wholesale arms independently from their retail arms, while the Greens want to force both companies to sell off stores in order to create a state-owned KiwiMart. The ACT party is avoiding structural separation entirely, instead wanting to create a one-stop shop for new supermarket consents. Foodstuffs owns the Four Square, New World, and PAK’nSAVE brands.
Supermarket Market Structure Questions
What does National propose to do regarding Foodstuffs?
National is proposing to direct the Commerce Commission to assess whether severing PAK’nSAVE from New World and Four Square would benefit shoppers. If the Commerce Commission concludes it would, National intends to legislate the separation.
What did the Sense Partners modeling predict for households?
Sense Partners estimated that prices would be about 3.5 percent lower on average in the first year of separation. By 2035, the estimated annual household benefit was projected to range from $200 to $1320 depending on income and family type, with a total net gain to the economy of $2.9 billion over 20 years.
How did HoustonKemp evaluate the profit projections?
HoustonKemp found that while supermarket net profits currently sit at 2.3 percent of sales, the Sense Partners modelling reported a profit reduction equivalent to 3.5 percent of sales. The review concluded that no sector of the economy can sustain ongoing negative profits.
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