In this article we highlight the Government’s recent announcement about supermarket competition, and the Commerce Commission’s review of Auckland Airport’s profitability under its regulated industries regime.

All options on the table for supermarket sector reform

On Sunday, Finance Minister Nicola Willis announced that the Government is seeking information with a view to determining “the ideal market structure” in the grocery sector. The Government sent information requests to stakeholders in the grocery sector both inside and outside New Zealand, and commissioned external advisors to provide guidance on potential restructuring of the sector, including what regulatory and legislative changes would be required.

While the grocery retailers (Foodstuffs North and South Island, and Woolworths) have been put on notice several times by the current and former Governments, this announcement marks a significant step towards addressing competition in the grocery sector. Since established overseas operators (such as Lidl and Aldi) have not yet entered the New Zealand market, Minister Willis has put “all options on the table”. This means that forced structural separation is now a possibility, although it is unclear at this stage what shape this might take. 

Some possibilities include:

1. Imposing a market share cap, with the grocery retailers required to sell down sufficient stores to one or more third parties to fall within this cap.

2. Forced separation of one or more retail banners.

3. Forced separation of wholesale and retail operations. 

If structural separation were the chosen outcome, it would not be the first time this has occurred in New Zealand markets subject to limited competition - the separation of Telecom’s (now Spark’s) retail and fixed-line businesses in 2011 is a past example, with the fixed-line business becoming Chorus and the retail business becoming Spark. However - in that case, there were significant incentives for Telecom and Chorus, with Chorus taking on the build of the majority of New Zealand’s fibre broadband network.

Minister Willis made it clear in her announcement that, while actively encouraging entry by third parties (particularly established overseas operators), the Government will not be establishing a Government-owned grocery retailer.

Representatives of Foodstuffs North Island and Woolworths have publicly responded to the Government’s announcement, saying that they will be complying with the information request, but stressing that divestment is unlikely to lead to lower prices for customers. In fact, the loss of scale could result in higher prices, particularly in smaller stores and regional locations.

The information request is open for the next six weeks, with a recommendation to Cabinet due in mid-2025. Minister Willis said that she is determined to introduce any legislation necessary to implement the proposals by the end of the year, and pass it before the next election.

In light of the ongoing Government reviews into the Commerce Act and the operational structure of the Commerce Commission (which you can read about in more detail in our article here), fostering competition in key markets is clearly a key focus for the Government in the next 12 months.

Auckland Airport targeting excess profit

The Commerce Commission has just published its final report on Auckland Airport’s price setting for the 2022-2027 period. The report concludes that, while its planned investment is reasonable, Auckland Airport’s service charges (ie aircraft landing and passenger terminal user charges) are leading to consumers and businesses being overcharged by around $190 million.

The Commission’s report was issued under the regulated industries regime contained in the Commerce Act. This regime targets a number of essential industries in New Zealand where there is limited competition. The regime imposes a framework on industry participants to prevent activity that would generally occur without competition (such as high prices), and stimulate activity that would generally occur with competition (such as innovation and service focus), to ensure that the lack of competition does not result in consumer harm. 

One key aspect of the regime is the requirement to publicly disclose certain information on an ongoing basis, such as current and forecasted pricing, revenue and investment. The Commission will review this information and determine whether the relevant industry participant is overcharging, underinvesting and/or profiting excessively due to the lack of competition, using methods of assessment that are agreed with the industry participants. The Commission also provides an incentive structure, through which regulated industry participants may be allowed to raise revenue caps if they meet certain service quality standards or beneficial investment targets.

In the case of Auckland Airport, the Commission’s review of its pricing information across the relevant five-year period determined that its charges did not meet the Commission’s “estimated reasonable return”. While many of the charges in question were imposed on the airlines using Auckland Airport’s services, the Commission noted that they would ultimately be passed onto customers by way of higher prices for air travel.

This is not the first time a New Zealand airport has been in the spotlight for excessive profits - in 2013, the Commission’s analysis of Wellington Airport’s pricing information led to similar conclusions. After the High Court dismissed the appeal of the Commission’s decision, the airport chose to reduce its charges, with an estimated cost saving to consumers of around $30 million over three years.

Auckland Airport has already announced plans to adjust its pricing to align with the Commission’s “estimated reasonable return”. With several large-scale projects in the pipeline, including a new runway and domestic terminal, we will be closely monitoring how the Commission responds to Auckland Airport’s future pricing and investment strategies.

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