Last year, the Commerce Commission’s market study raised concerns about the state of competition in the industry and recommended several actions to the Government. It found that Kiwis pay the sixth highest prices out of 35 OECD countries, and major retailers make NZD $1 million in excess profits every day. With widespread inflation across all markets and increasing interest rates, Kiwis are facing hard times ahead. 

In response, the Government promised reform in the sector. The Commerce Commission and Government are already vocal about reigning in wholesale grocery retailers in order to benefit consumers in New Zealand. Minister David Clark stated that ‘if [wholesale grocery retailers] fail to adequately open up their wholesale market voluntarily, Government will make it happen’.

We discussed the potential impacts of the market study from a consumer protection perspective in our previous article last year. In this article, we provide an update on the primary development that has taken place since then: the introduction of the Grocery Industry Competition Bill.

The Grocery Industry Competition Bill 

As the cost of living crisis continues, the Government’s natural response is to ramp up regulatory intervention and government action on the retail grocery industry. Consequently, on November 21st, the Government introduced the Grocery Industry Competition Bill. 

The Bill aims to:

• regulate the retail grocery industry in New Zealand;
• promote fairer outcomes for New Zealanders by providing a competitive advantage to smaller retailers and new players in the market, while also allowing existing retailers to expand their offerings;
• and ultimately, help Kiwis tackle the cost of living crisis by encouraging greater competition within the grocery industry.

The Bill is now at the Select Committee stage, and the Select Committee is expected to report on the Bill on the 23rd of March. Kiwis can likely look forward to the Bill becoming law in mid-2023. 

The proposed Bill would become effective 14 days after receiving Royal assent (except that compliance with the Grocery Supply Code would become effective on the earlier of the date to be set out in regulations for the Code, or 9 months after Royal assent).

Regulation of the retail grocery sector

The Bill targets four primary areas for regulation:

1. The lack of options and difficulties access to wholesale groceries for retail sale

• The Bill addresses a significant obstacle for new players in the retail grocery market and existing retailers seeking to grow: the limited availability of wholesale options. To endeavour to overcome this barrier, the Bill introduces a two-part regulatory framework for wholesale supply. 
• The first part sets out rules that major grocery retailers must follow to ensure that they can supply groceries to other businesses. It outlines the requirements for regulated grocery retailers (currently defined by the Bill to include Foodstuffs, Woolworths and their interconnected bodies such as franchisees and transacting shareholders) when a wholesale customer makes a request for wholesale supply of groceries:
  
  • The regulated grocery retailer must consider the request in good faith, establish rules and criteria for considering requests, develop and use standard terms and conditions for wholesale supply.
  • They must also notify the Commerce Commission of requests and the outcome of negotiations, use plain language in agreements, and have transparent pricing methods.
  • The retailer must have systems in place for ordering and billing and ensure that wholesale agreements do not prevent customers from developing direct relationships with suppliers.
  • The Commerce Commission can make additional determinations about how retailers should comply with these requirements, but must first consult with affected parties and provide a draft determination and statement of reasons.
• The second part establishes a further set of obligations that may be imposed on the major grocery retailers if their commercial supply offerings are not competitive enough, and if additional regulations are likely to benefit consumers in the long run. 

2. The imbalance of bargaining power created by the existing market

• The Bill introduces a Grocery Supply Code that will regulate the way regulated grocery retailers interact with their suppliers. The Code’s purpose is to promote fairness and transparency in their dealings and to prevent regulated grocery retailers from forcing suppliers to accept unfavourable terms. The Code will set out rules for conduct related to the supply of groceries, including requirements for the content and format of supply agreements. Regulated grocery retailers must comply with the Code, and if they don’t, enforcement action may include fines of up to $10 million. The Code will be reviewed by the Commerce Commission within two years and may be reviewed at any other time when required by the Minister.
• The Bill expands the coverage of the unfair contractual terms regime in the Fair Trading Act 1986 by amending the Act to include ‘standard form grocery supply contracts’ with an annual value threshold of up to $1 million, and aims to limit the power of regulated grocery retailers to shift costs and risks to their suppliers. 
• The Bill also empowers the Governor-General, with the recommendation of the Minister, to create rules that exempt certain suppliers from the restrictive trade practices of the Commerce Act 1986. This exemption would allow them to collectively negotiate terms and conditions of one or more supply agreements with one or more regulated grocery retailers. 

3. Lack of oversight on the industry as a whole

• The Bill would create a Grocery Commissioner within the Commerce Commission with broad functions, duties, and powers to monitor compliance with the regulatory regime, to enforce compliance (including through taking court action), and to report regularly on the state of competition in the grocery industry. The introduction of a Grocery Regulator takes a similar approach to that taken in the New Zealand electricity market, which is regulated by the Electricity Authority as an independent body.
• It is proposed that the Commerce Commission would have access to a range of enforcement tools in the event of non-compliance, including the ability to issue corrective notices and publicly disclose warnings. The Commerce Commission may also seek remedies from the Court for failures to comply with the Bill, such as pecuniary penalties (comprising 4 tiers of penalty levels, with penalties between NZD $300,000 and NZD $10 million depending on the severity of breaches), orders to vary or cancel contracts, and injunctions to stop certain conduct or require certain conduct to continue.

4. Independent dispute resolution scheme

• Finally, the Bill establishes a dispute resolution scheme to provide independent, prompt, and cost-effective resolution of any dispute that a grocery supplier or a wholesale customer may have with a regulated grocery retailer. According to the Bill’s explanatory note, any scheme must be accessible to grocery suppliers and wholesale customers, particularly smaller businesses.

Submissions on the Bill

While the Bill is a very important aspect of the widely publicised issue, it seems to have received a limited number of submissions due to the limited submission timeframe. 

There is support among the submissions for regulating the retail grocery industry, introducing a wholesale supply regulatory regime, Grocery Supply Code, and establishing a dispute resolution scheme, but whether the Bill, in its current state provides effective mechanisms to fulfil its purpose is also questioned by some of the submitters, such as Woolworths and New Zealand Law Society. 

It is unclear at this stage whether any recommendations in the submissions will be adopted by the Select Committee. However, we expect the Bill to go through changes (and some may be significant) to address the industry’s concerns, and provide further clarity of the parameters and operation of the regulatory regime. 

What does this mean for you? 

All players in New Zealand’s grocery industry, including retailers and suppliers, whether large or small, should conduct due diligence on their conduct, business practices and their existing and standard form supply contracts in light of the upcoming regulation to understand their regulatory exposure and plan ahead for compliance. 

Our specialists are on hand to provide you practical advice on the potential impacts of the Bill on you or your business and help you navigate the rough regulatory waters ahead. Get in touch with Hayley Miller or David Campbell.

This article was written by Gunes Haksever, a senior associate, and Francesco Geldard, a law graduate, in our commercial, technology and privacy team.