If Costco is the answer Nicola Willis doesn’t understand the problem.

Nicola Willis is quite rightly terrified of inflation and ideologically she sees competition as the saviour to bring down grocery prices. So her welcome for Costco to challenge our current supermarket duopoly seems a dream fit for her needs. But will it really help her and more importantly New Zealand?

Our current groceries market.

Foodstuffs (who run supermarkets Pak’n approx.Save, New World and Four Square) is a co-operative and 100% New Zealand owned.  Then there is Woolworths (formerly Countdown) an Australian owned company.  Together, they have approx. 90% market share of grocery sales in New Zealand.

Who is Costco?

Costco is a US based multinational designed to maximise profit to feed its shareholders. Its business model is to buy cheap, normally low quality, and sell cheap but with the same percentage markups as more expensive brands or stores.  High turnover is critical to keeping profits high as the dollar value of the Costco markup is less that the dollar value of the higher end brands markup.

Note: the United States being the bastion of capitalism has left the nutrition of their people up to private enterprise and personal choice. Personal choice may be a stretch concept when products are often made to be addictive, full of salt and/or sugar; and costs are low for these bulk ingredients so products are easier to sell low priced. US obesity and health epidemics are not a good advertisement for their style of cost reduction.

Similar supermarkets?

Costco also uses many of the same techniques that our existing supermarkets use to drive out competition. They sell core products like milk and bread at low prices. This draws people in for the core low costs but many of the other products are comparatively or slightly higher priced. The shopper then pays the slightly high prices for the convenience of a single shop, which removes the savings. You will have even seen between Pack N Save and New World (the expensive version of the same company)  that the same products are sometimes cheaper in New World than in their ‘cheaper’ Pack n Save brand shop. So lower price is often a fake marketing concept.

The future – based on long established past experience of capitalism

If these two companies, Foodstuffs and Woolworths, are happy to maximise their profits by not competing then how long before Costco with the same primary driver, to maximise profits, will be happy to, not compete once they get a foothold in?

Past experience shows that large multi nationals do not like to compete for customers on price; it damages profits. The trend for many many years is for multi- nationals to buy out competitors rather than benefit customers by competing. i.e. the money lost on consumers getting lower prices is lost forever, but the money buying out a competitor is an investment they can get back from future profit on keeping prices relatively high (creates tax benefits as well with paying less tax in NZ). This is how multinationals grow; not by wasting time, energy and effort pandering to customers.

The future Wolf, already in the door

The current low prices at the one or two new Costco supermarkets are a mirage. They are designed to make a few customers happy now and get a publicity buzz; the losses from one or two stores are tiny for a multinational.

The real target of that buzz is not to drum up customers, but to put the fear of god into the competitors. Do the competitors want to go into a huge challenging costly fight with a mega multinational and risk a lot of profit? Much easier to take a large capital gain and sell out. And that is the real target of the current low prices, buy out your competitors, take over their existing stores.

The easiest target would be the 100% New Zealand owned Foodstuffs. The tax benefits will be greater from having a parent company overseas (unless Foodstuff’s already have).

The wisdom of Nicola Willis

Dietrich Bonhoeffer’s ‘Theory of stupidity’ says stupidity is not a physiological problem but a moral one. It is our assumptions and beliefs that make us stupid.

Nicola’s belief that the arrival of Costco is an arrival of competition that will drive down grocery inflation, is driven by her ideological belief in the free market. It is a mirage as all our experience and knowledge of private enterprise in the free market over so many many years, is that it doesn’t drive down prices; it does the exact opposite; it seeks to drive up prices to maximise profit. New technologies can get cheaper but look at the prices of technologies now; they are rising.

Prices can go down under private enterprise free markets when there is a recession or collapse.

Nicola is risking a huge amount of tax income for New Zealand. Not just that Foodstuffs is 100% NZ owned and pays tax here (I hope!). Whereas multinationals will debt finance (Thin Capitalisation) and charge huge management fees, like it was just reported Uber is doing and paying a tiny amount of tax in New Zealand as a consequence.

The real way forward on grocery inflation

We must get a government facilitated supermarket without a massive profit motive; that will sell a basket of goods in particular for those with a social need. Beneficiaries would have to use it? This will remove a huge amount of demand from the current duopoly supermarkets and then they will find it harder to raise prices. And if they do raise prices it runs a risk to drive more people to the government supermarket. This is how New Zealand once kept private enterprises lean and honest – e.g. we had a government bank, insurance, transport and infrastructure entities, etc. And it worked until it wasn’t funded properly.

p.s. Some in Labour and the Green’s are pushing for private enterprise to fix the affordable housing crisis by trashing the RMA and community democracy. This will be a voting disaster for them. Bonhoeffer’s theory applies to them as well.