Building materials: Competition for supply 'not working as well as it could', difficult to get new products accepted

A market study into residential building supplies in New Zealand has found competition "is not working as well as it could" in the sector with it "too slow, costly and uncertain" to get new products accepted for use.

The Commerce Commission released its draft report on Thursday morning, which includes recommending "introducing competition as an objective to be promoted in the building regulatory system", and making it easier for builders to adopt new supplies.

Chair Anna Rawlings says "tried and tested" products have "become embedded in home-building practice" and are favoured over alternative materials.

"While innovation is recognised as important to achieving these objectives, our preliminary view is that the regulatory system has a number of features that prevent competition from working well," she said.

"Despite flexibility to use new products being available in the system, it is too slow, costly and uncertain to get them accepted for general use,” she says.

Rebates paid by some established suppliers to merchants have compounded these issues. 

"These rebate structures reward merchants for purchasing greater volumes through a single supplier and can deter merchants from stocking competing products in their stores," Rawlings says. "This appears to be reinforcing challenges to distributing new, innovative or competing products in some product markets."

"It is widely accepted that rebates are not all bad either. They can deliver benefits – for example, providing a way for suppliers to pass through lower costs per unit from supplying greater volumes. However, when quantity-forcing rebates are used by a supplier with a large share of a market, they can harm competition by reducing the ability of smaller competitors or new entrants to compete." 

The Building Code and associate systems are complex, the commission says, and competition isn't an "express objective" of the Building Act. Like with its market studies in the fuel and grocery markets, the commission has found merchants are benefiting from restrictive covenants on land and entering into exclusive leases with landlords, which has the potential to impact competition.

The draft report, which can be found here, will be consulted upon before a final report is released in December.