Competitive dynamics in grocery retailing - case Finland & New Zealand
Photo by Randy Fath on Unsplash
Market power and dynamics in the grocery industry have been discussed heatedly in Finland during the last week, again. This is a topic that crops up to discussion every once in a while.
The discussion is usually related to the dire situation of the agricultural sector. The high profitability of the major grocery retailers are seen as a direct reason for the plight of the farmers.
There is much less discussion around the ways to spur competition in the grocery industry.
The discussion is often led by interest groups. One group that is less often involved in the discussion are the competition authorities.
Concentration in Finland
It is true that grocery retailing in Finland is concentrated, in fact Finland is the only Nordic country with over 80% of market share for two biggest retailers. I set out to find other markets with similar levels of concentration.
There were no markets to be found in Europe or North America. I had a hunch that Australia and New Zealand could be as concentrated as Finland.
Turned out that Australia is not at all as concentrated. According to finder.com.au report, the two biggest grocery retailers in Australia have a combined market share of only 65,8%.
The only market in the world that is as concentrated as Finland is New Zealand.
There seems to be some kind of small correlation between the population size and population density to the concentration of the grocery market. This applies only to developed markets in the western countries.
Sources: Savolahti et al(1), Stats NZ
Like Finland, New Zealand is…
Described as duopoly
Population is rather similar sized (5M vs 5,5M)
population densities also are rather similar with 18 inhabitants per km2 in both countries and concentrated into small urban regions
Concentration enabled by the competition authorities
One common argument in the discussion is that the concentration is a result of good strategic choices from the grocery chains that have become dominant.
Thus, the major retailers are not to blame for concentration.
One could note that Mark Zuckerberg has also been one of the most adept business leaders of our time. Time magazine even named him the business person of the year in 2010. His visionary decisions (such as acquiring Instagram when everybody doubted him) have shaped Facebook into one of the most powerful companies of our time.
Zuckerberg’s brilliant strategic foresight is still no reason to leave Facebook unregulated.
It is entirely true that concentration is partly due to good management by the chains that are left to compete. One has to remember that dominance in grocery retailing is partly built as a result of great strategic decisions and partly built with help from the competition authorities and other public authorities.
For example the concentration of the industry in Finland has been enabled by the Competition Authorities who have allowed both of the big retailers to acquire smaller companies multiple times. Public sector also influences heavily the competitive dynamics of grocery retailing via planning.
Therefore it was very interesting when I came across a report written by the Commerce Commission of New Zealand.
The report from the Commerce Commission of New Zealand
The report set out to explore the concentrated nature of the grocery retailing sector and provide measures to increase competition in New Zealand.
With this article my intention is not take stand with regards to needed actions in Finland or in New Zealand. I found the report very interesting and having many similarities to the Finnish grocery retail industry.
The report provides basis to a public discussion that has not happened in Finland.
In the report the Commerce Commission analysed the following five aspects of competition in the grocery sector:
Structure of the industry
Conditions of entry and expansion
Consumer preferences
How retailers compete
Issues related to wholesale purchasing from suppliers
Barriers to competition
Authors of the report consider it unlikely that under the current market conditions there would arise significant competition, especially in the bricks and mortar channel. They state that the entry of Costco to Auckland later in 2022 or a pure online player would have a somewhat niche impact to the overall grocery industry.
New Zealand grocery retailers are said to be highly profitable in the international scale. This resonates to the discussion about grocery retailing in Finland.
The report identifies two important barriers that inhibit the growth of competition:
1. there is a lack of competitively priced wholesale supply for a full range of grocery products
2. there is a lack of suitable sites for store development. The authors especially note the use of covenants and landbanking as examples of bad practices to weaken the competition.
These are important recommendations to initiating more competition in grocery retailing.
Grocery retailing is fundamentally a business sector where both high volumes and best locations matter.
One cannot really grow to a significant size without competitively priced products to sell or a sufficient network of good store locations (online can circumvent this). With good sourcing one can compete on price, which is one of the most important decision criteria for customers when selecting the main grocery store. The other main criteria is the location of the store. People tend to go to the closest grocery store.
When these are in place, the sales (and volumes) start to grow. This again feeds into better sourcing terms and further into more competitive prices. This dynamic cannot start if there is no competitive wholesaler to sell the products with competitive prices in the first place.
In Finland this third competitive wholesaler was demolished when Tuko closed down after Suomen Lähikauppa was acquired by Kesko.
Recommendations to increase competition
Most interesting part of the report are recommendations that the authors propose for increasing competition in the grocery retailing in New Zealand. The authors see it as a prerequisite that the actions increase the number of retailers that compete directly with the two big grocers.
The recommendations range from voluntary to very tough measures. Some of them would be used only as a last resort. The authors outline four potential ways to increase competition.
1. Making it easier to enter the grocery market. Existing retailers could sell their competitors with groceries on “fair and non-discriminatory terms”.
2. If the voluntary approach does not work, a regulatory action would be needed to achieve the same outcome. The grocery retailers could be forced to operationally separate their wholesale and retail operations within the same organisation.
3. Third option would be to support an entry of an independent wholesaler through a competitive tender process. This would create a third viable grocery wholesaler to the country.
4. If any of these options would not work, the most severe action would be to structurally separate the wholesale and retail parts of the major grocery retailers. They could even be sold to a third party. This resembles the discussion in the US with regards to splitting Amazon up into retail operation and the AWS.
1. Image source: Residential Wood Combustion in Finland: PM2.5 Emissions and Health Impacts with and without Abatement Measures - Scientific Figure on ResearchGate. Available from: https://www.researchgate.net/figure/Population-density-in-Finland-at-1-km-resolution_fig1_335176903