Hello Reader,

These days I’m not sure we could get 86% of kiwis to agree on many things. That Marmite is better than Vegemite? Unlikely. That the All Blacks are the world’s greatest rugby team? Doubtful. That Christchurch is the best city in New Zealand? Dubious.

But it’s the stat that the Green Party kicked off their Commerce (Excessive Pricing in Retail Grocery Industry)Amendment Bill draft with. According to their research, 86% of kiwis supported introducing a bill that is similar to the Australian anti-price-gouging law, and this is their answer to that.

Ignoring the framing for this was probably “would you like to pay more or less for groceries?” and the follow up question for “less” was “would you support legislation that made groceries cheaper?”, it’s genuinely hard to argue with. The ComCom says the grocery market is not working well for consumers. So kudos to The Greens for moving the conversation forward.

The draft text copies much of the Australian version verbatim. The core clause of the draft is “A regulated grocery retailer must not engage in excessive pricing in supplying, or offering to supply, groceries to consumers”, and most of the rest of the 5 pages are definitions and supporting structure (record keeping, requiring the ComCom to enforce, etc). “Excessive pricing” is the core prohibition of the draft, and it’s defined as selling “groceries if, in considering all relevant circumstances, the pricing for the supply is excessive when compared to the cost to the regulated grocery retailer of the supply, plus a reasonable margin”

The Australian version of this came into force in July. There’s no guidance on what a “reasonable margin” is, and it’s too early to have any precedent-setting prosecutions.

A few things jump out.

It would technically ban aggressive high/low pricing, since ‘offering to supply’ goods at an unreasonable margin is illegal, and there’s no carve-out in the draft for average price of goods.

One could argue that’s no real loss. High/Low pricing seems to be getting more aggressive, particularly in Woolworths who run 50% off in Australia and are doing more and more 40% off promos. If you need a specific product on a ‘high’ week, it’s very expensive.

On the other hand, if you’re able to plan and stockpile, deferring spending through time is going to be one of the best ways to save money on groceries - potentially more so than price shopping between stores. This requires a bunch of work from consumers, and being able to stockpile is a privilege not everyone has. I know a few software plays that are working to help with this, so ultimately losing aggressive high/low pricing would be a loss for some consumers.

The biggest problem with the draft, however, is that it would flatten margins across the store.

Although average grocery margin in NZ is around 33%, supermarkets don’t make the same margin on all products. Milk will be down around 1-3% margin. From what I understand, nappies are similar. Then there will be a significant portion of the store up at 40-60% margin.

Aside from operational differences, the main reason for this is that consumers can’t remember many prices. You’ve probably got a pretty good idea of what a ‘good’ price for eggs, milk, bread, yoghurt, Speights, and beef mince are, but beyond that it’ll get murky. We rely on a few prices to judge whether a store is cheap or expensive. So stores will compete hard on a subset of lines, known as KVIs (stands for either Key Value Item or Known Value Item depending on who you ask). This might be several hundred lines that they’ll keep as low as possible, both by working with suppliers and by accepting lower margins. The basket is won or lost on whether people feel like they’re getting good value.

KVIs will over index on necessities vs extras - because the basics that people eat are more consistent across the population than our preferences on extras. More people will mentally compare the price of a loaf of bread, than a specific brand and flavour of bonbons. A value-conscious shopper is likely to spend more on necessities (as a percentage of their basket,) than someone with more discretionary grocery spend. Their basket will have more lower-margin items in it and thus they’ll deliver a lower margin percentage to a retailers than customers with more discretionary spend.

Now, think about retailer behaviour if consistent enforcement happens. If guidance and court cases establish 28% margin as a ‘reasonable’ amount, the retailer will need to lower the prices of their higher margin items. They’ll still need to maximise their total margin, and since they’re constrained by the cap, the only lever they have is increasing the margin on their KVIs. Instead of paying 2% margin on milk and 55% margin on a speciality chocolate brand, consumers will be paying 28% on both.

Even margins across the entire store sounds like a fair idea in principle, but this would mean that all customers would now deliver the same margin percentage to retailers. This would mean that for value-conscious shoppers, their basket price would go up relative to other shoppers. This is objectively a bad thing for the cost of food for people that are already making tough calls in store.

This doesn’t even get into issues with ascertaining the operating cost of supermarkets. The current wording of the law allows for cost of goods + operating costs + a reasonable margin. But those operating costs are moveable over time. Head office salaries come out of operating costs. So do depreciation and debt servicing on store/logistics investment. In NZ, there’s already incentive to increase the asset base of supermarkets based on the ComCom’s measure of excess profitability. Investing in store/distribution moats fixes this problem, potentially increases the operating cost of the business, and also makes it more challenging for competitors to get established. It’s arguably already happening, and in a cost-plus environment, this is basically a guaranteed outcome (and it has a name).

This is the meat of the policy, but arguably their explanatory note is more interesting. They affirm business’s rights to set their own prices, and follow it immediately with “retailers also should not exploit a broken market structure to charge consumers unfairly high prices.” The note then goes on to say that this policy is a stopgap “while we await broader reforms”

I have many thoughts on this that rhyme with “if you’re part of the government and you think the market structure is broken, maybe just make the market structure…not broken”. My biggest concern is that this specific bill will be politically impossible to not support, and it’ll get rushed through, and then everyone will wash their hands and say “great, job done, lets forget about grocery for another couple of decades.” In fact, this tendency is captured in the aptly named Politicians Syllogism: “Something must be done. This is something. Therefore, this must be done.”

I’d like to believe, though, that there will be robust discussion on how well this might work, and so kudos to The Greens on working to move forward the conversation here. I’d largely agree with the symptoms they’ve identified. I don’t think this is the solution. But I’m sure we’ll get there.

What I'm reading

I've been flicking through my copy of Tony Balfour's The Maverick Manifesto. It's slated as a "set of tools to increase your effectiveness in the boardroom" (Tony is an experienced director, with a bunch of NZ companies over the past few decades, including The Warehouse), it's actually super thought provoking on things like launching new products, communicating well, and giving good feedback.

What I'm watching

This creator is channeling Anthony Bourdain into mundane dining experiences like Pizza Hut. He does a great job and it's hilarious, but it's also illuminating: the "run-of-the-mill" food experiences we have are genuinely a wonder. Cheap food, delivered quickly, is a marvel. So many innovations have gone into that whole supply chain, development, and experience. Even if it's gauche, debatably nutritious, and mockable.

That's all from me this week. If this has been thought provoking, please feel free to share with a colleague. They can subscribe to the weekly newsletter at https://www.reubenma.de/welcome

Reuben