Dismantling The Grocery Duopoly: The Case For Prohibiting Grocery Covenants Via Enforcement Action

Abstract

New Zealand’s retail grocery sector is dominated by a duopoly that impedes opportunities for new entry by lodging restrictive and exclusive covenants on strategic sites. This enables the duopoly to limit competition and artificially raise prices. In response, the government has recently passed legislation prohibiting the duopoly’s grocery covenants. This article applauds action against anti-competitive grocery covenants. However, enforcement action, rather than legislation, would have been the more appropriate avenue. Establishing that the grocery covenants breach existing competition laws (i.e. that they are anti-competitive) would have provided a well-founded legal and economic basis for rendering them unenforceable. This is important as the new legislation allows major retailers to apply for an exemption so that certain covenants remain in force, the outcome of which can be appealed. Therefore, cases concerning grocery covenants will likely appear before our courts anyway. Further, enforcement action would have captured a key distinction that the new legislation overlooks. That is, while the duopoly’s restrictive covenants are overwhelmingly anti-competitive and should all be unenforceable, in limited circumstances exclusive covenants are arguably net pro-competitive and should remain in force. This article also rejects the government's proposition that litigation is inefficient as each covenant must be individually analysed. It proposes that ANZCO v AFFCO leaves the door open for courts to find that the grocery covenants collectively substantially lessen competition under s 28 and/or constitute an output limitation cartel under s 30 of the existing Commerce Act 1986. Parts II and III discuss the reasons why competition in the grocery sector is muted and the Commerce Commission’s recommendations to address these issues. Parts IV and V establish that all of the duopoly's restrictive covenants and the great majority of their exclusive covenants breach existing competition laws, namely ss 28 and 30 of the Commerce Act.