The Government is establishing a Grocery Commissioner tasked with "keeping the supermarket duopoly honest" and "blowing the whistle where it suspects there is a problem".
Minister of Commerce and Consumer Affairs Dr David Clark says the watchdog, which will be based within the Commerce Commission, will have the ability to issue warnings and fines.
It follows the Commerce Commission's market study of the grocery sector which found it currently isn't "working well for New Zealand consumers" with smaller retailers unable to compete with the two major players -Woolworths NZ and Foodstuffs.
Establishing a regulator was one of the commission's recommendations as was introducing a mandatory code of conduct between retailers and suppliers.
However, officials have warned that while international evidence shows a code of conduct could improve competition over the long term, it could also lead to a possible price increase for consumers due to compliance costs.
Dr Clark said on Wednesday that the Grocery Commissioner will hold the sector to account and ramp up competition. They will also provide annual "state-of-competition reviews".
"The Grocery Commissioner will be a referee of the sector, keeping the supermarket duopoly honest and blowing the whistle where it suspects there is a problem," Dr Clark said.
"They will maintain a close eye on how Government’s reforms for the sector are implemented and ensure Kiwis are getting a fair deal at the checkout.
"By placing this role in the Commerce Commission it will have access to a wealth of information when it comes to economic and competition regulation, fair trading, consumer protection and the grocery sector itself."
The minister said legislation establishing the role is expected to be introduced later in the year with the first Grocery Commissioner then appointed following the Bill passing.
A mandatory code of conduct between major retailers and suppliers is also being released on Wednesday for consultation. It's been developed with input from an advisory group including representatives from the retailers as well as groups representing both suppliers and consumers.
"The purpose of the code is to ensure suppliers get a fair deal. Historically, there has been an imbalance in the bargaining power major grocery retailers have over their suppliers," Dr Clark said.
"The Grocery Code of Conduct will address this by preventing the major retailers from using their power to push costs and risks onto those suppliers. It will ensure that this relationship is conducted fairly."
This is important for "small, artisan brands and the emerging start-ups", Dr Clark said.
Speaking at a media conference, the minister said the Grocery Commissioner will have the power to issue warnings and fines if code of conduct breaches are identified.
"That may well be yet a percentage of turnover which would certaintly keep larger players focused I think," Dr Clark said. "They will be able to go to the courts as well and seek that contracts be overruled."
"There are a range of other trade remedies that are available to them, but they will have quite substantial powers."
A Regulatory Impact Statement on the Government's response to the Commerce Commission's market study was published by the Ministry of Business, Innovation and Employment on Tuesday.
When looking at the experience of Australia and the UK, which both have a form of grocery sector code of conduct, the ministry said such a code will likely "improve competition in the long-run by rebalancing the negotiating relationships between retailers and suppliers".
"Overall, this option could provide consumers with a broader range of products at good prices if it results in improved food production productivity and growth.
"In the UK, suppliers experiencing Code-related issues has decreased from 79% in 2014 to 29% in 2021, while in Australia, suppliers are reporting that they are always or mostly treated fairly and respectfully by retailers between 75-95% of the time."
Benefits for suppliers include "some distribution benefits as suppliers are more able to negotiate with retailers, and also some dynamic efficiency benefits as suppliers have a greater profit incentive to invest and innovate".
However, officials also said: "The risks associated with this approach are a possible increase in prices for consumers due to compliance costs on retailers and if the Code reduces the ability of retailers to bargain for competitive prices from suppliers".
Considering the UK model, the cost to the Government of implementing the regulatory functions associated with a code of conduct could be roughly $1.5 million per year. Compliance costs for retailers and suppliers are estimated to be around $750,000 to $800,000 per annum. That includes costs associated with disputes, complaints and queries from the regulator.
Dr Clark said currently major retailers are making $1 million a day in excess profits.
"If there is a cost incurred, it will be trivial compared to the amount that can potentially be saved in the sector on behalf of consumers."
The two actions announced on Wednesday follow legislation passing in Parliament that bans major supermarkets from implementing restrictive covenants on land and dictating terms of leases to stop opposition retailers from setting up new stores.
ACT's deputy leader Brooke van Velden said the Government was missing "the point of why Kiwis are paying too much food - rampant domestic inflation fuelled by Government spending".
"There's no doubt that Kiwis are being squeezed at the supermarket – but the Government who ordered this report now needs to admit that it’s the inflation it caused that’s hurting Kiwi battlers.
"It's little wonder there is not more competition in New Zealand, entering the market is nearly impossible considering the regulatory barriers faced in New Zealand. If it’s too hard to build a house, imagine a supermarket.
"We should make it easier to develop property, easier to get foreign direct investment into the country, and easier to employ people."
Inflation hit 6.9 percent in the year to March, the highest since 1990. The Budget Economic and Fiscal Update (BEFU) in May said that was the result of strong domestic demand, as well as global factors like supply chain issues and the war in Ukraine. BEFU showed inflation would remain outside of the Reserve Bank's targeted range until 2025.
Following the release of the Commerce Commission's final report in March, Dr Clark said the Government would "immediately progress work" to advance its recommendations. He also didn't rule out looking at other options the commission considered while developing its report.
In a draft report, the commission toyed with the idea of creating another major retailer by forcing the duopoly to sell some of their stores. That idea was dumped though, with the commission saying the benefits of divestment didn't outweigh the costs and complexities involved.
