Supermarkets

January 15th, 2012 at 11:00 am by David Farrar

The SST report:

Woolworths New Zealand’s underlying profit margins have increased much faster than the cost of food for the past three years.

Australian-owned Woolworths, which operates Countdown locally, said the results were due to improved efficiency, but the Green Party said an investigation into supermarket pricing is overdue and the industry is in need of tighter regulation.

What a bizarre comparison. It is a good thing that profits have increased faster than the cost of food.

Are the saying that if profits had stayed the same, and had increased more (hence decreasing the gap), that would be good for NZers?

Are they saying that if profits had stayed the same, and food prices had dropped (hence increasing the gap), that would be bad for NZers?

The comparison is absolutely nonsensical. What the Greens are really saying is that just don’t like companies making profits.

Calculations by the Sunday Star-Times show that once unusual costs and income are stripped out of Woolworths NZ’s accounts – items such as losses on the company’s investment in The Warehouse and the impact of the Christchurch earthquakes – the business posted year-on-year increases in earnings before interest and tax of 14.3%, 19.3% and 9.6% over the period.

Recorded food inflation over the same time-frame was 7%, -0.7% and 7.5%, according to Statistics New Zealand.

Again, so what? Take the middle year – EBIT increased 19.3% and food prices dropped by 0.7%. Great.

If you want to make the case the supermarkets are making excessive profits, then you need to be looking at profits compared to capital and dividends compared to share price etc.

The supermarket operator’s latest financial statements show that it earned gross revenue of $22.33 for each $100 of sales shoppers put through its tills in the year to the end of June 2011. That was up from $21.95 in 2010 and $21.61 the year before.

That’s higher than UK chains Tesco and Sainsburys, which earned gross revenue of 8.30 and 5.50 respectively for every 100 that went through their tills.

Gross margins mean little, especially when comparing just four companies in two countries. What about economy of scale, what about underlying costs?

Green MP Mojo Mathers said the country needs to act on food prices, and promote “genuine” competition.

“We are overdue for an investigation into supermarket pricing practices,” she told the Sunday Star-Times. “We need a supermarket code of conduct and a supermarket ombudsman set up to enforce the code.”

Such measures, now established in the UK and being considered in Australia, will help create a level playing field for consumers and producers, Mathers said.

I fail to understand what is needed beyond the current provisions of the Commerce Act and Fair Trading Act. I suspect the Green call for an Ombudsman is so the Greens can achieve their long held desire to ban foods they don’t approve of, such as large easter eggs which Sue Kedgley used to campaign against.

However, Woolworths said its margin and earnings improvements are the result of investment in efficient systems that have delivered food price increases below the rate of inflation.

“We think there is a really great business story in our results over the past three years, which, in the main, is due to the significant investment Woolworths has been making in Progressive Enterprises and our brand Countdown,” said Dave Chambers, the managing director of Woolworths’ subsidiary Progressive Enterprises.

“This investment in new systems, new warehouses, and new and refurbished stores is now well in excess of $1 billion and has meant our Countdown stores are more appealing to customers, as evidenced by our sales growing ahead of the market,” he said.

As a result, the company has reduced wastage, stock losses and trimmed stock in the supply chain.

Sounds good to me.

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38 Responses to “Supermarkets”

  1. The Scorned (719 comments) says:

    Aside from issues of force and fraud just what fucking business is it of politicians what profits or losses private company’s are making in the market? NZ a “free market” economy you say…..? Oh please fuck off.

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  2. Scott Chris (5,675 comments) says:

    David Farrar says:- “What a bizarre comparison”

    Not really. It is one way to monitor monopolistic, or in this case duopolistic behaviour. Fact is, there isn’t enough competition in the Supermarket sector with only two major players. But of course the Greens don’t want to be seen as advocates of a free market so this is their way of expressing themselves. (silly Greens)

    We all remember the price fixing perpetrated by Shell, BP, Mobil and Caltex don’t we?

    That’s why I always use Gull.

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  3. thedavincimode (6,102 comments) says:

    I wouldn’t mind betting that once adjusted by removing wages and salaries, electricity, freight and rent, this blatant profiteering would be revealed as being even more outrageous.

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  4. Brian Smaller (3,915 comments) says:

    Supermarkets provide ready access to a vast array fo incredibly safe and affordable foodstuffs – let alone the cleaning and hygiene products that most of us use to ensure we have healthy safe homes (poor people in state houses who never clean walls and ceilings or open windows excepted of course). Shouldn’t these stupid Greens be encouraging people to grow their own produce on their sections, or to form urban co-ops to go to the vege markets and actually buy their own produce to take out the middle man (i.e. the supermarket). Leave the supermarkets alone – they employ thousands and if they make money – then good on them.

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  5. thedavincimode (6,102 comments) says:

    That’s why I always use Gull.

    That’s the great thing about your diesel Skoda Scott. Those old tractor engines are pretty well indifferent to inconsistent fuel quality. They just keep purring on at 1,200 rpm regardless.

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  6. Other_Andy (2,079 comments) says:

    “That’s why I always use Gull.”

    Whaaaat?!
    You use those evil hydocarbons that warm our planet?
    “Et tu, Brute?”

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  7. Paulus (2,291 comments) says:

    Why do I feel that Greenpeace Party have got the MSM highjacked.
    All I read is from Greenpeace.
    Even Janette Fitzsimons is now back getting printspace taking over the Southland anti lignite party.
    I know that Labour no longer exist, but the MSM are obviously well into the Greenpeace Party.
    Grant – get your party real please. Get your party on board.

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  8. Elaycee (4,058 comments) says:

    One thing is patently obvious: The Gweens have a tactic of pushing as much hot air and bluster into the media as possible – at the moment we have the moron Gareth Hughes suggesting that a NZ vessel goes to the Southern Ocean to protect the illegal activities of the protesters / we have the same moron Hughes calling for a Royal Commission on the grounding of the Rena (in addition to the various maritime enquiries already commissioned) and now we have Holly Walker bleating about Supermarket profitability.

    Each one a total WOFTAM. But lapped up eagerly by a compliant, lapdog, left wing media.

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  9. Scott Chris (5,675 comments) says:

    Other_Andy says:- “You use those evil hydocarbons that warm our planet?”

    Absolutely. Which is offset many many times over by the carbon my 30,000 pruned and thinned pine trees sequester. I think it’s generally termed ‘exercising personal responsibility’.

    Secondly, hydrocarbons are wonderful things. It’s our profligate use of them that concerns me.

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  10. Peter (1,468 comments) says:

    Given their “talent”, I’m surprised the Greens and their “legions” of supporters don’t start their own co-op chain. Control everything it sells. Reward their organic growers and suppliers. If there really is a great margin to be had in food supply, then surely they’ll prosper.

    Unless, of course, they’re full of shit.

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  11. wat dabney (3,423 comments) says:

    There’s clearly an opportunity for Green Party members to enter the market and grab some of that money they claim to have identified as being retained through absence of real competition, whilst at the same time helping consumers.

    Or are they just a bunch of cynical, bandstanding thugs who prefer ordering people around under state compulsion?

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  12. wat dabney (3,423 comments) says:

    Scott,

    Which is offset many many times over by the carbon my 30,000 pruned and thinned pine trees sequester. I think it’s generally termed ‘exercising personal responsibility’.

    Didn’t we already go over this and conclude that either you will claim credits for these trees or the state will claim them on your behalf? In either case, you could no longer claim the trees as your offsets.

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  13. Other_Andy (2,079 comments) says:

    “Absolutely.”

    Are you one of those brainless twats that drive around with those “No drilling” bumper stickers?

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  14. Scott Chris (5,675 comments) says:

    No wat, I bought the property in 1996 when there wasn’t even a hint of any carbon trading scheme, and thus far, I haven’t claimed the carbon credits. As it happens, I may well do so because if I don’t the government will claim them on my behalf.

    Apart from which, part of the property is fenced pest free regenerating native bush for which I cannot claim credits, so there’s plenty of carbon being sequestered there, even if pine can do it four times faster.

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  15. Scott Chris (5,675 comments) says:

    Other_Andy says:- “Are you one of those brainless twats…”

    Don’t be a dickhead. I’m all for oil exploration and drilling. Didn’t I just say hydrocarbons are wonderful if used in moderation?

    Anyway, this is the supermarket thread, so if you want to argue about it, post on GD.

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  16. slijmbal (1,133 comments) says:

    difficult to respond to some of this without breaking confidentiality as I’ve seen the numbers of many of our largest corporates courtesy of the sort of work I do but happy to state what is in the public arena.

    Supermarkets are a mature business and make much less profit on their capital compared to many other businesses. They spend an enormous amount of time and effort in driving costs out of the supply chain. The formula is pretty simple as people buy predominantly on price and location, which is why Pak & Save (part of the NZ owned co-operative) was kicking other supermarket vendors’ a****es for years. They kept taking market share. I haven’t looked at most recent figures but the vendors’ net returns were in line with international benchmarks. Dry goods such as tins, pasta etc don’t make money and the biggest margins are in the fresh goods, ‘vices’ (wine, fags etc), spontaneous purchases (thus the huge effort put in to influencing purchases by promotions, position etc) and ‘luxury’ brands (eg pricey bread). In recent years the contribution through in house brands has become more significant as these tend to be more profitable than branded products. Often the in house brand is the same or equivalent quality product as the one priced 10-30% more next to it on the shelf and so they save the consumer a lot of money.

    As margins in supermarketing are so low then the sensitivity of profitability to reduced costs or the ability to charge more is high. During my involvement in supermarketing all efforts were put in to reducing costs either by systems and processes or squeezing the supplier. The ‘activity’ costs e.g. storage, transport, sales staff are a large proportion of the total costs and driving these down is the nirvana. Transport and storage is more important in NZ as we have to move goods a lot further in much smaller amounts than in most other 1st world countries. When Progressive took over Woolies one of the 1st things they did was to squeeze a number of local distributors many of whom basically re-sold internationally sourced product. The suppliers drove a lot of high end mercs and similar and were obviously doing fine at the time so I am guessing they had some fat to remove.

    A surprising volume of products come from a small number of international comglomerates such as Unilever and they tend to have significant price setting influence. They really do not like in house brands.

    Historically Australian supermarketing with what one would expect to be a more competitive regime with bigger markets actually made bigger margins than NZ.

    The comparison with the UK is partially relevant. Competition in supermarkets in the UK has been ferocious compared to almost every other mature market and so one would expect that margins are reduced. This leads me to the biggest issue in that with only 2 chains we have reduced competition. Historically, I can categorically state that the supermarkets have a monomaniacal focus on cost reduction and fight each other with a will. They spend millions trying to gain .5% market share movements. It was dog eat dog. I have not been involved in recent years but don’t really see that changing overnight as it’s so fundamental to supermarket culture the world over. I believe it was a mistake when the takeover of the woolies group allowed the reduction in chains from 3 to 2.

    Do I believe that the supermarkets behave in any sort of cartel like behaviour? Absolutely not. Would we benefit from having 3 or 4 chains? Of course. We cannot legislate price reasonably as they can easily demonstrate that they use a cost plus approach to pricing and their focus on driving out costs and competition. This is standard green (marxist) anti capitalism cant.

    So endeth the lecture ….

    Mobile companies though …. that’s another story we have historically been pretty much bent over there.. I’ll save that for another time.

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  17. Other_Andy (2,079 comments) says:

    Aren’t we touchy today Scott….
    Hangover?
    Don’t use aspirin.
    These days it is entirely synthesized from petroleum by-products.
    Then again, you can plant another tree….

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  18. Pauleastbay (5,030 comments) says:

    A fuckwit is a fuckwit wether they have all their bits working or not.

    First effort by the previously lauded Ms. Mathers – fail

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  19. St Hubbins (26 comments) says:

    slijmbal

    Thanks for your informative post – good to hear from someone you obviously knows the ins and outs of this issue.

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  20. gump (1,228 comments) says:

    As an aside, approximately 30% of all Australian retail spending passes through a Woolworth’s owned till (it isn’t widely known, but Woolworths has massive interests in non-supermarket retail operations such as tyre shops and liquor retailers).

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  21. gump (1,228 comments) says:

    Apologies – that last post should have read approximately 20%.

    In case this number seems hard to believe, Woolworth’s group turnover in Australia is approximately $50 billion p.a. and the Australian retail sector collectively turns over around $240 billion p.a.

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  22. Viking2 (10,695 comments) says:

    gump, you can add an equivilant amount for Westfarmers with Coles Bunnings etc.

    slijmbal (424) Says:
    January 15th, 2012 at 12:20 pm
    Do I believe that the supermarkets behave in any sort of cartel like behaviour? Absolutely not.

    Like you I haven’t fortunately had to put up with the crap buyers dish out for a while now but I can say when I did that they may not have been a cartel but I can tell you the industry was incestuous as anything. Wife worked for on and husband worked for the other. Many many relationships like that and there was certainly pillow talk and pub lunches etc.
    It was a challange to screw the buyers for their behavoir and many were held with considerable contempt especially by some of the big companies.

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  23. GPT1 (2,042 comments) says:

    It’s a bit selective to take out the largest losses of the group (EQ and Warehouse) and then use what’s left as a profit comparison. Isn’t that the point of diversification and making efficiencies – to protect the return to investors?

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  24. tristanb (1,133 comments) says:

    As far as I’m aware, no-one is forcing anyone in the Green Party to use a particular supermarket. If they don’t like a supermarket making a profit, then they’re free to shop elsewhere. There’s plenty of choice – why not buy stuff at your local dairy?

    I remember over 10 years ago some employee left a stock list of a NW supermarket in an aisle. I only glanced at it, but was shocked how tiny the mark-ups were for most items. I happen to like supermarkets, so will continue to shop at them.

    More importantly, what kind of a name is Mojo?

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  25. slijmbal (1,133 comments) says:

    @viking – confusion

    do you mean buyers = shoppers? As buyers generally meant those who source the product and make the deals when I was in the industry.

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  26. DJP6-25 (1,228 comments) says:

    Paulus 11:28 am. It could be that the’journalists’ think Labour is irrelevant. So they are transferring their allegience to the other socialist party, the ‘Greens”.

    cheers

    David Prosser

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  27. DJP6-25 (1,228 comments) says:

    slimbjal 12:20 pm. Thanks for the informative post. Such a thing is quite beyond the trolls that infest this site.

    cheers

    David Prosser

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  28. Viking2 (10,695 comments) says:

    slijmbal (425) Says:
    January 15th, 2012 at 3:35 pm

    @viking – confusion

    do you mean buyers = shoppers? As buyers generally meant those who source the product and make the deals when I was in the industry.

    THE COMPANY BUYERS and ohter company people.

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  29. Steve (4,314 comments) says:

    Well if the minimium wage is to increase the money has to come from somewhere. If a Company profit does not increase with inflation they can not afford any increase in wages.
    Simple really, the cost of food will always increase and if the profit margin is static the Company will go bust

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  30. orewa1 (425 comments) says:

    I believe strongly that our duopoly supermarket environment is a key reason for the disproportionately-high cost of living by world standards, and the increasing hardship, in New Zealand today.

    Any pragmatic economist will confirm that three is the minimum number of competitors required for a market to function properly. With two, they just pillow fight. We are captive to a greedy duopoly.

    The failure to stop the amalgamation of Progressive with Woolworths was the greastest failure of a Commerce Commission which otherwise, has done a pretty good job for New Zealanders over the past decade.

    Yes – we need an enquiry. Some questions:

    1 Why are our groceries, incluiding meat and produce, so much dearer than in Australia?

    2 Why is it common to find a NZ-made grocery food product on sale in the northern hemisphere materially cheaper than in NZ?

    3 Why are both the manufacturers and the consumers complaining about supermarkert prices – where are the margins going?

    4 What is the role of the supermarket chains in grossly inflating the prices of meat, milk, vegetables and other staples?

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  31. TM (78 comments) says:

    I agree Orewa. Is it a coincidence that the two countries with a supermarket duopoly (NZ and Oz) also have some of the highest prices in the world? The UK, US, and most of Europe have far lower average prices. Maybe it is a coincidence, but the commerce commission better be scrutinising them for any price collusion. And I wish a another competitor would enter the market. Come on Lidl or Aldi!

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  32. Kimble (4,092 comments) says:

    And I wish a another competitor would enter the market.

    Why arent they? If the 2 that are here are making an absolute killing then why couldnt someone else swan in and get some of that sweet, sweet margin?

    1. Economies of scale
    2. Economies of scale, currency quirks, and different margins.
    3. Consumers and manufacturers always complain about price.
    4. Same question as 1. & 2.

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  33. slijmbal (1,133 comments) says:

    @orewa & TM – our meat and fish are substantially cheaper than European countries I have friends or relatives in, which isn’t what TM said. Our visiting friends go out and buy meat and fish exactly because of that. That’s UK, NL and Germany. We’re pretty decent in cost goods compared to SA as well (I have in-laws there and visit). We do worse on dry goods compared to Europe.

    Not sure where one gets the most expensive in the world statement from – some stats or personal experience here would be nice and make us think you’re not just making this up.

    what part of ‘activity’ costs is difficult to understand? NZ has one of the highest transport and storage costs in the world for many goods that we cannot source locally. We also have relatively low volumes reflecting our low dispersed population.

    If you visit Rarotonga one finds they have a silly cost of groceries. Why? Everything gets shipped in and volumes are low. There are excessive relative transport costs and a lesser opportunity to lower cost through volume. NZ is pretty tiny by world standards. All of NZ buys less pasta then Melbourne for instance. Think of us as a bigger Rarotonga.

    Are there increased costs to the consumer from lessened competition? Absolutely – do we have a rort the consumer duopoly – sorry no. Attributing some mythical high cost of living to supermarkets making mega profits is just bollocks.

    Sadly increasing competition would be of some effect but then the new vendors would be hit by volume issues as supermarketing is a volume game. I believe increased competition with, say 2 more vendors will help but it will not be substantive as there are substantial underlying costs that cannot be taken out of the process.

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  34. gump (1,228 comments) says:

    orewa1 said:

    1 Why are our groceries, incluiding meat and produce, so much dearer than in Australia?

    ——————————–

    Australia has a different tax system to NZ in that many of the basic foods are GST free. This means that they are significantly cheaper at the till.

    http://www.ato.gov.au/businesses/content.aspx?doc=/content/13287.htm

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  35. TM (78 comments) says:

    Some articles and sites about the high prices in NZ.
    http://www.nzherald.co.nz/nz/news/article.cfm?c_id=1&objectid=10667773
    http://www.bobinoz.com/blog/2021/the-cost-of-living-in-australia-groceries/

    Meat and fish are cheaper, but just about everything else from milk to bread to cereals are more expensive.

    I also lived in the UK for 8 years and france for 2 years, and have noticed the cost difference in NZ (been back two years). And I’m sure you will find the same complaint from anyone from the UK/europe. When away on projects I used to live for week on £15 ($30) of shopping (plus eating out a maximum of a two times). I got a fixed £60 per day food and incidental allowance in addition to accommodation so I did try to keep costs down.

    I’m sure volume plays a part, as well as agricultural subsidies, tax, etc, but it would be interesting to know how much fat there is in the supermarket’s margins.

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  36. slijmbal (1,133 comments) says:

    @TM – insomnia strikes again.

    Those 2 articles don’t really do it for me – one has a single comparison between OZ and UK and has OZ coming off better and the other is journalist pick a list pseudo-scientific comparison. At the time of the strong NZ $ in the Herald link for instance we would have come across as dearer than other countries. Buying practises in supermarkets insulate us to some extent from currency fluctuations so we tend to look expensive when the NZ $ is doing well and cheap when it’s not. However, I absolutely would expect dry goods on average to be more expensive here than the likes of US and UK owing to volumes. Fresh goods are down to local availability (and subsidies and trade barriers) thus our relatively cheap meat for instance.

    Your links don’t really back up your hugely all ecompassing statement “Is it a coincidence that the two countries with a supermarket duopoly (NZ and Oz) also have some of the highest prices in the world?” I will cherry pick an example just to make a point as you have obviously not seen Hong Kong prices then. One would expect their prices to be cheaper as they have a large volume of people in a small space. However, historically, they have had significantly higher prices (based on industry figures I had access to). This is predominantly down to the availability and price of real estate. Their supermarkets tend to be small (thus inefficient) and have high overheads. This gets passed on. There are lots of countries more expensive than us and lots cheaper than us based on industry stats.

    As I keep banging on about. I’ve seen the numbers. Supermarketing has not been a particularly well rewarded industry for the internationals in NZ for a long time. It does OK in recent years but there’s no rorting going on and most of the price differences are related to systematic and logistical issues. I do love how yourself and orewa cheerlead the ‘it must be the nasty companies ripping us off’ brigade with no real understanding of the industry.

    I think we all agree that having a duopoly is stupid and I would like to see it go as it reduces competitive pressure, which will be causing inefficiencies affecting us but the supermarket companies haven’t abused their position of power to make monopolistic profits, which is the underlying theme of those of the left. Mobile companies though …….

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  37. mister nui (880 comments) says:

    orewa1 said:

    1 Why are our groceries, incluiding meat and produce, so much dearer than in Australia?

    2 Why is it common to find a NZ-made grocery food product on sale in the northern hemisphere materially cheaper than in NZ?

    4 What is the role of the supermarket chains in grossly inflating the prices of meat, milk, vegetables and other staples?

    1. You have no idea what you’re talking about. In Australian supermarkets most things are dearer, it is not unusual to find meat cheaper, but the quality is always lower. For some reason, I don’t know what, but the meat you buy in an Australian supermarket is rubbish. You of course can get good quality meat from Australian butchers, but certainly not their supermarkets.

    2. NZ produce can be found cheaper in European supermarkets, but it is all about economies of scale. As someone pointed out earlier, in NZ we have to move small amounts longer distances (comparatively) by road. But, generally most NZ produce is dearer in Europe than in NZ, but still remains cheaper than local European produce.

    4. Where do the supermarket chains “grossly inflate” the produce you speak of prices. Can I see some evidence? And don’t use milk prices as “evidence”, otherwise you might like to try and explain to me why alcohol is so much cheaper in NZ than Oz.

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  38. WineOh (428 comments) says:

    [quote]
    Recorded food inflation over the same time-frame was 7%, -0.7% and 7.5%, according to Statistics New Zealand.

    DPF- Again, so what? Take the middle year – EBIT increased 19.3% and food prices dropped by 0.7%. Great. [/quote]

    Food price inflation has been high (though will be first to admit we are not alone in this). The implication from the article is one of price gouging.
    Food goes down, profits go up – inference that the savings are not being passed on to the consumer
    Food cost goes up, profits increase by more – implying that there is additional price hike that goes to profit, but blamed in the media on rising food costs & the ‘market.’

    I have no objection to businesses making a profit, hell I’m a small business owner myself. The difference with this case is our mega duopoly in the grocery trade, where we have the ‘illusion’ of greater competition because the two market forces use different sub-brands. Its also virtually a non-negotiable buy, cos people gotta eat.

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