Yesterday I posted some data showing the profitability of different sectors of New Zealand business, based on Stats’ brand new release of the Annual Enterprise Survey for 2013. And based on a quick squizz at the data I concluded that “you start thinking deep, dark thoughts about whether there are strong enough competitive pressures at work to constrain the profitability of some lines of activity”.
I’ve done a bit more fossicking in the data, and I’ve ended up thinking even darker thoughts about the state of competition in parts of retailing – and the supermarkets in particular.
Here is what has been happening to the pre-tax rate of return on equity (ROE) in the main sectors of retailing. I’ve taken the data back to 2009 (which is where Stats started publishing more detailed sub-sector breakdowns), which helps to sort out whether any high recent ROEs are just a cyclical artefact of the recently strong economy rather than evidence of structurally limited competition.
There is no credible explanation for the high ROE of the “supermarket, groceries and specialised food” sector other than limited competition.
This is not a sector where you’d expect high ROEs because of the exercise of scarce, highly specialised skills. And it’s not a “high beta” sector exposed to a high degree of cyclical risk – unlike the car yards (who made no money in the tough market of 2008-9) or the sellers of consumer durables (who lost money in 2008-09). If anything, the supermarkets’ profitability increased in the tough times.
Let’s be clear – the supermarkets are fully entitled to these ROEs. There’s nothing wrong with charging what the market will bear. And if you were a duopoly behind reasonably formidable barriers to entry, you’d expect to coin it, too.
But the sooner a hard nosed, low priced Costco or Aldi comes along and upsets their apple cart, the better off we’ll all be.