Supermarket shake-ups won’t solve cost-of-living crisis

The Consumer Price Index has increased 38 percent over the past decade. That is, the total retail cost of a standard basket of goods and services costs 38 percent more in 2026 than it did in 2016.

But there are two sides to this inflation coin. Higher prices become higher incomes for the people selling those goods and services. Over the same decade, measures of wage and earnings growth report average increases above 40 percent, implying that net affordability has improved slightly.

So why do the opinion polls now consistently find that the cost of living is currently the number one cause for concern among the voting public?

This is understandable. The headline price increases running ahead of overall CPI inflation have been on everyday items such as milk, cheese, butter, meat, bread, and petrol. These are hard to ‘substitute away from’ as economists say – that is, substitute with a cheaper alternative – whereas lower prices on such items as IT and consumer electronics are classed as ‘nice-to-haves’, rather than staples of everyday existence.

Who or what is to blame? Blame America’s war on Iran for petrol prices. Blame strong export market prices for meat and dairy, which of course are good news for the farmers.

Looking for more vulnerable villains, many blame our supermarket duopoly. More than $4 of every $5 spent on groceries in New Zealand goes to the Foodstuffs cooperative of independently owned Pak’nSave, New World and Four Square stores, or to the Australian giant Woolworths.  

The claim is that these big players use their market dominance to inflate their markups from wholesale cost to retail price, a gripe that has taken hold in the parties’ election manifestos.

National would move to split up the Foodstuffs co-operatives, setting Pak’nSave in competition with New World. NZ First claims National stole this idea from them. Labour perhaps wishes it had thought of it but have come up with some fixes based on separating wholesale distributors from supermarket retailers, plus stern threats to deal with ‘price gouging’.

The Greens would set up a network of 120 “Kiwimarts” instructed to shave retail margins at the expense of profitability. Act says the free market is as good as it gets, so don’t upset things by meddling with firms’ legitimate property rights. Notably, no one is brave enough to take on the Australian-owned Woolworths.

I have argued for splitting up the duopoly, which might shave a few percent off grocery prices. But oligopolists in mature and predictable consumer product industries such as groceries are very experienced at developing unspoken (because speaking to each other about prices is illegal ‘conspiracy’) “live-and-let-live” arrangements to soften the edge of competition. I would expect such behaviour to survive a structural reform.

This is why I suspect a split up of Foodstuffs’ New World and Pak’nSave chains would have a limited effect, noting that the two brands offer different pricing to different consumer markets. The smaller New World supermarkets are more localised and thus convenient, which justifies some price premium. Pak’nSave by contrast caters to “let’s fill the boot” shopping expeditions by customers willing to go far in search of the lowest total at the check-out till.

What about direct government intervention? I am not against this in principle, but bellicose threats to confront ‘price gouging’ directly suffer at once from the difficulty in defining what gouging is.

Ok, it means too-high markups of retail prices over wholesale costs. But markups now vary enormously for legitimate reasons, such as perishability, stock turnover, weight and volume of products. This makes it very tricky to confidently isolate untoward gouging – where does commercial practice end and unjustified profiteering begin? Perhaps it would be more realistic to just assume there actually is some gouging, because of a lack of competition, and hope that the structural break-up would have an overall impact on this.

I do also see the promise of putting serious new low-price competition out there on the ground, which the Green’s Kiwimarts would do, given that no large foreign operator, such as Aldi, is likely to come to our rescue.

So, socialism? So what? We already have many partially ‘socialist’ industries (with degrees of public ownership and regulation) in many parts of the economy: in energy, banking, air and ground transport. Our most important industries – education and healthcare – are built on this model. The question is not whether an initiative is “socialist”, but what delivers better outcomes for consumers.

But we are still missing something very important. The increases in dairy product prices noted above are not because of increased exercise of market power by our supermarkets. They are because most of our dairy products are exported, and world prices for those exports have been strong recently.

But why should good news for dairy farmers automatically be bad news for all other New Zealanders? Instead, might the ‘fat of the land’ be spread around a little more equally? After all, you could surely argue that the temperate rain that makes our grass-fed dairy cows so productive really belongs to all of us. At the least, I suggest that the shibboleth that domestic dairy prices must rigidly follow world prices up (and down) is due for a rethink.

Why not give it all a try? We can always go back to the bad old ways if more competition somehow fails to put a serious dent in the cost-of-living crisis.