The New Zealand Commerce Commission (NZCC) released its draft report on its residential building supplies market study (Draft Report) on 4 August 2022.
The NZCC’s preliminary view is that “competition for the supply and acquisition of key building supplies is not working as well as it could if it was easier for building products to be introduced and for competing suppliers to expand their businesses.” The Draft Report identifies two main factors for this: (1) the regulatory system and (2) quantity-forcing rebates.
The Draft Report’s findings include
- The regulatory and standards systems, along with how they are applied in practice and the behaviours they incentivise, can make it difficult for new or innovative products to enter and expand. Eg suppliers of new products must establish compliance with multiple building consent authorities and building consent authority approaches are not always consistent. Many authorities take a strict interpretation of the consent test and require specification by brand.
- The preference for ‘tried and tested’ products from decision makers across the industry increases barriers to entry and expansion for new suppliers.
- Specification of building products by brand (as opposed to generic functionality or performance characteristics) is relatively common. This can reduce competing products to indirect substitutes when they may otherwise be directly substitutable for specified products.
- There are few competing suppliers for many categories of key building supplies. Some categories of key building supplies have only one or two main suppliers, eg plasterboard and fibre cement.
- High structural barriers to entry and expansion appear to protect the market shares of incumbent suppliers. There are often high sunk costs and scale economies for domestic manufacturing and the variable nature of NZ’s construction sector can create demand uncertainty. The viability of importing can vary between key building supplies due to product characteristics (eg the size and weight of products making freight costs prohibitive) or market characteristics (eg regulatory requirements preventing imported products from being approved in consents).
- Competition between merchants appears to be working relatively well at the national level, but the NZCC considers it is potentially limited by restrictive land covenants and exclusive leases. Vertical integration of two of the five major merchants does not appear to make it harder for suppliers to compete.
- Rebates between suppliers and merchants are widespread and can be significant in value. Quantity-forcing rebates paid by established suppliers to merchants appear to make it harder for alternative suppliers to be stocked through the merchant channel and harder for existing suppliers to expand.
- The use of customer specific quotes by suppliers to offer targeted price discounting to merchants may contribute to the difficulties new entrants at the supplier level have in gaining necessary scale in some markets. The NZCC seeks further information.
The Draft Report’s 8 draft recommendations
- To enhance the regulatory system
- Introduce competition as an objective to be promoted in the building regulatory system
- Better reflect a Māori perspective in the building regulatory system
- Create more compliance pathways for a broader range of key building supplies
- Explore ways to remove impediments to product substitution and the need for consent variations for minor changes to building design.
- Investigate whether the barriers to certification and appraisal can be reduced.
- To support sound decision-making
- Identify and develop methods to centralise information sharing about key building supplies, for example information about new or innovative products and the basis on which they have been granted consent.
- To address strategic business conduct
- Promote compliance with the Commerce Act, including discouraging quantity-forcing supplier-to-merchant rebates. This could involve legislative change to prohibit the use of quantity-forcing rebate structures or compliance with the new test for misuse of market power (effective April 2023).
- Further consider the economy-wide use of restrictive land covenants and exclusive leases. The NZCC notes this is the third market study (out of three) it identified restrictive covenants as a factor. Due to the prevalence of restrictive covenants and exclusive leases, it intends to launch a compliance programme later this year. This will likely start with the building supplies industry, but may include other sectors. The NZCC recommends an economy-wide review of the use of restrictive land covenants and exclusive leases to assess if a wider multi-sector solution is needed.
Figures on the Draft Report
- The Draft Report is 383 pages
- It includes 3 case studies on concrete, plasterboard and structural timber
- The NZCC held three surveys (1) on specifying and purchasing key building supplies (2) on the regulatory and standards systems (3) to suppliers
- The NZCC also engaged industry expert John Gardiner to report on regulatory barriers
- The NZCC held an initial hui, inviting Māori partners and stakeholders to share insights and published a summary of themes from the hui
Next steps
Submissions on the draft report close 4pm Thursday 1 September 2022.
A consultation conference will be held in the week of Monday 26 September 2022. Post conference (final) submissions will close 4pm Thursday 13 October 2022.
The final report of findings and recommendations is due by 6 December 2022.
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