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Countdown claims fail truth test

COMMENT

Good politics is seldom sound economics. And so it was with Shane Jones’ attack on supermarket chain Countdown. 

He was long on rhetoric, short on facts and calculated to inflict maximum damage. 

He told us repeatedly Countdown was an Australian corporate with a corrupt, feral culture. He told us Countdown’s suppliers, who are good, God-fearing Kiwis (I am not making this up), “live in fear, in a climate of threat, intimidation and menace.” Moreover, Countdown is guilty of monopolistic menace, blackmail, extortion and racketeering, “verging on corruption.”  

Mr Jones is a senior MP. The allegations are serious. Who would have thought the food and grocery sector was home to organised crime?

But Mr Jones provides only the briefest snippet in evidence. Countdown allegedly didn’t make sufficient profit last year. The Aussie shareholders were unhappy. Suppliers were told to write backdated cheques to cover Countdown’s shortfall or lose Countdown’s business.

Backdated cheques? To cover a shortfall? How does that work? 

Mr Jones never explains how the backdated cheques pump up Countdown profits from a year ago. 

No evidence, no explanation but that didn’t stop the New Zealand Herald’s John Armstrong declaring the attack a “virtuoso solo performance” that was “carefully conceived, astutely timed and precisely targeted.”

But was it true? And was it economically literate? Or doesn’t that matter? Perhaps for politics it’s enough that it sounds right and is sufficiently jingoistic and bombastic.

For Mr Jones, it was an easy rhetorical leap from backdated payments to fascism, blackmail, extortion and racketeering. It sounded good. It moved the crowd. Jones was on a roll.

But now it’s a week on. The excitement has worn off. And now it seems quite the leap. All we have, stripped of the rhetoric, is a claim that an unnamed manager asked for a backdated cheque from an unnamed supplier for a purpose that doesn’t add up. That’s it. 

And the economics? Countdown owns its shelf space. It’s valuable real estate. That’s because Countdown ensures its shelves are always well-stocked with quality produce at good prices. That’s why we shop there.

Suppliers want their produce on the Countdown shelves, in the best possible spot. Supermarkets are quite within their rights to charge for the use of their shelves.

And, of course, supermarkets drive a hard bargain. That’s precisely what we shoppers want them to do. They act as our agents, gathering up produce into one convenient location at prices we can afford. I don’t see too many shoppers busting to pay more for their tomatoes. Supermarkets are tough on suppliers because we shoppers are tough in hunting out bargains.

The supermarkets are big because they are good at their business. That doesn’t make them monopolies. There’s no requirement for any supplier to supply them. They can sell at their gate, the local farmers’ market or open their own store. There is nothing stopping them. 

The free market has been wonderful keeping us fed and the shelves well-stocked. The poorest among us can push a cart down the aisles buying an array of produce unavailable to kings and queens just a few generations ago.

And what’s Jonesy’s alternative? To have the government regulating prices paid to suppliers? Really? That’s the trouble with the political rhetoric. It sounds good. And it can move the people. But built on bad economics – as it inevitably always is – it quickly takes us to a place where none of us actually wants to go.

Comments and questions
22

How have you assessed the evidence?

Have you seen the complaints suppliers have emailed to Shane Jones, or those Katherine Rich says have been made by NZ Grocery Council members? (the NZ Grocery Council being a conservative, pro-business organisation).

Do you think it's okay for an organisation to demand retrospective payments? That's not the free market in operation. That's ignoring the sanctity of business contracts, which undermines the free market.

The point as I see it is that the tactics employed are 'unkiwi' just as those over the ditch would say unAustralian. It ain't a fair go.

Some builders I know bemoan that so many new New Zealanders employ them on agreed terms and then when the job is finished to exact specification they then make a demand for a discount. Some of the less controlled flip out and want to undo their good work then and there with a crowbar.

Maybe I'm too old school, but I think a deal is a deal and retrospective demands after the event just ain't cricket. Hard negotiation for the next deal is of course perfectly acceptable.

It hasn't been established or indeed claimed that the demands were retrospective. It seems what Jones is saying is that the new deal is tougher because of past performance. But we don't know that detail. And, nor it seems, does Jones.

Either way it's a long way from being unkiwi to being a criminal organisation as Jones claimed in Parliament.

Rodney

No, I have not. But nothing in Shane Jones's speech or letter of complaint supports his claims of criminal behaviour.

His only specific complaint in his speech was one of backdated cheques being demanded. He didn't include that complaint in his letter to the Commerce Commission.

The demand for retrospective payments remains cloudy. Jones says that the payment was for future shelf space based on past poor sales. What on earth is wrong with setting a future price based on past performance?

Jones has produced no evidence or even made a claim of contracts being broken, let alone blackmail, extortion, racketeering, corruption, etc.

These are serious allegations demanding a high threshold of proof.

If true, they would be a matter for the police or Serious Fraud Office.

I note that Jones himself is saying that it is now time he stop the hyperbole.

Hyperbole may make good politics. But it's not appropriate when making serious allegations of criminal behaviour against a business that employs thousands.

I suspect Jones has used his position as a senior MP to get caught up in a commercial stoush. Why he would think that's appropriate beats me.

best

Rodney

As you well know Rodney, you simply cannot reveal very much at all in saga's like this, it would be political suicide, you yourself got involved in enough of them, but enough will come out in due course, I am not a Socialist supporter/voter but I do applaud the former minister of "Erections/Housing" for going public on this, as we have heard complaints for years about it, the only trouble is that NZ'S Foodstuffs is just as guilty!!!
Now it's Panel Beaters!!!! it should also include tradesmen who work for HNZC, the tactic there with HNZC was that they would release such a little amount of work, tradesmen used to kill each other to get their hands on it, and send each other broke.

The assumption that is, I think, implicit in your piece is that there is a constraining level of competition between Countdown and Progressives. If that were the case, then lower prices to suppliers would be passed on as lower prices to consumers.

What evidence is there to support that? Given the high entry barriers to building a new network of supermarkets and distribution - thanks again RMA - there is little fear of a new entrant coming in. Two firms with similar businesses and costs, and little fear of entry. A cosy duopoly seems the more likely outcome.

Now I'm not suggesting "kiwi-shop" as a new entrant. But a new entrant is what is needed, not regulation.

Jones allegations are the opposite of a claim of a cosy duolopy. In a cosy duopoly the duopolists could afford to.cut some.fat with suppliers. Jones' point was that they are being tough to the point of organised crime. I hasten to.add there is no evidence of any criminal behaviour.

Rodney

What evidence do you have that the supermarkets aren't passing on cheaper prices to the consumer? This is starting to sound like just another kiwi witch-hunt.

Rodney Hide's pro-business position seems so extreme that even bad business practice is to be defended against any type of challenge.

Please.explain what the bad practice is. All we have had so far is unsubstantiated claims from Jones of serious criminal.behaviour.

The demanding of retrospective payments from suppliers? Most of the other commenters here don't seem to have a problem in understanding that.

But Jones' letter of complaint doesn't make the claim of retrospective payments. Only his parliamentary speech did which Jones himself now says was hyperbole.

Shane Jones didn't assess the evidence then decide to investigate, the Commerce Commission did.

I don't support constant investigations and specious accusations, either, but it does seem like there's a decent body of evidence from suppliers, suggesting something could be foul. So it's worth investigating. There are important points at stake. Can Aussie businesses push NZ businesses around? Do commercial contracts mean anything?

But if a commercial contract is not honoured the recourse is the courts not Comm Comm.

I haven't seen anyone claim contracts weren't honoured although Jones in a hamfisted way implied that in his speech but not in his letter of complaint.

Rodney

Rodney, you're not rubbishing Shane Jones, you're rubbishing the NZ companies who came forward and complained - that's what started this, and that's why the Commerce Commission is investigating.

But all I have to go on is Jones' allegations. He said the companies were all too afraid to complain.

He said that initially, but then obviously the Commerce Commission offered anonymity and obviously it was convince enough by the claims made by suppliers to mount a formal investigation. Events have moved on from the Shane Jones' speech you're banging on about.

The supermarkets are big because they are good at their business. That doesn’t make them monopolies. There’s no requirement for any supplier to supply them. They can sell at their gate, the local farmers’ market or open their own store. There is nothing stopping them.

the writer knows better than I about perfect competition (commodity producers being pricetakers) and monopsony (single buyers for agricultural products). Farmers make investment decisions and take risks based on market conditions and supply contracts - too much risk and too little return will destroy the goose that lays the golden egg.

By branding your product, providing services, focusing on selected markets, etc., you can create a differentiated product. This is something that is almost impossible to do in agriculture’s traditional broad commodity markets. http://www.agmrc.org/business_development/getting_prepared/business_and_economic_concepts_and_principles/commodites-versus-differentiated-products/
- how is a farmer going to do this? and reap the benefit? - only through scale, productivity, reliable supply contracts, cooperatives, vertical integration ...
- the middleman - transport and distribution are a fundamental issue for farmers

Look at the prices in supermarkets overseas, all NZ supermarkets are ripping us off.
Do none of you people travel?

Can any one explain why a basket of food is substantially cheaper in France, USA and Australia than it is in NZ. I believe it is because of high supermarket margins in NZ

N

Or it's because of a smaller market, or because kiwi costs are higher (too much regulation?) or for a thousand and one other possible reasons. Why can it only be high margins? And if it is high margins by those evil australians, why doesnt foodstuffs just drop their margins and take all the business? Methinks it is not as simplistic as you would make it.

What's the point of having a dominant position in the market if you can't translate this in to profits?? Off course larger businesses will use their dominant position to their advantage but that doesn't mean this is always right.
In an environment where it is just too easy for the one or two market leaders to extract a "bonus" from all their suppliers, the need for some sort of regulatory control to ensure negotiations are conducted with good faith would seem to be obvious.
Ideally of course this would not be necessary and the market would ensure a level playing field but unfortunately this is not always the case in real life situations.
The onus in this case is very much on the larger party to show that they did not use their stronger position to extract the excessive premium that is being alleged.