Commerce Commission Market Study on Competition with Key Building Supplies in New Zealand

This month, we discuss the Commerce Commission (“the Commission”) report on its Residential Building Supplies Market Study. In 2018, Parliament amended the Commerce Act empowering the Commission to undertake market studies. The report endeavoured to reveal whether competition for the supply and acquisition of key building supplies is working well. It also makes recommendations on its findings.

Focus and method of the study

The Commission’s focus was on factors affecting competition for these supplies on the supplier (manufacturer/importer) level and merchant (distribution) level. The Commission investigated the industry structure for key building supplies, the nature of competition for these key building supplies like industry pricing practices that impact on competition and finally, impediments to entry or expansion of new or innovative building supplies, such as ‘green’ building supplies. Three case studies were used: namely, plasterboard, structural timber, and ready-mix concrete (including cement).

Core finding

Ultimately, the report found that competition for the supply and acquisition of key building supplies is not working as well as it could. This is in terms of the ease for building products to be introduced into the New Zealand market and in turn, for competing suppliers to expand their businesses. Two main factors were identified as negatively impacting on this. These factors are:

  1. The building regulatory system encourages designers, builders and building consent authorities (BCAs) to prefer familiar building products over new or competing products.

  2. Quantity- forcing rebates are paid by established suppliers to merchants. Effectively, under certain conditions, this is reinforcing regulatory factors impacting entry and expansion, and making it challenging for new or competing products to access distribution channels and increase sales.

While the report discusses other findings regarding Maori needs, the impact of widespread use of land covenants/exclusive leases/contractual arrangements on competition, offsite manufacturing and vertical integration, the article elaborates on the two factors above.

Few competing suppliers for many categories of key building supplies

Currently, relatively few suppliers control a large share of key building supplies in New Zealand (“NZ”). Consequently, designers, builders and homeowners are faced with fewer options in materials to choose from. For example, from the nine out of 13 categories of key building supplies distributed to merchants, the three largest suppliers in the category have a combined share of over 70% of the supply to major merchants. This issue is partly driven by:

  1. NZ’s small market size – difficult for domestic manufacturers to reach efficient scale.

  2. Isolated geographic location (with associated transport costs) – combined with the market size, it is less appealing to import products here.

Features of the building regulatory system

How does the building regulatory system boost the preference towards familiar products and therefore bigger existing suppliers? First, is the complex nature of the Building Code and associated instruments and processes. For example, clear compliance pathways for building products are narrow, with few streamlined processes. Further, the regulatory system’s response to changing markets and innovations in building products is inefficient. The risk of potential liability for defects make BCAs reluctant to approve use of unfamiliar products. Market participants regarded the 67 BCAs decision making as inconsistent, with no formal or authoritative system for coordinating consent decisions. Consequently, designers and builders anticipate BCA response to new concepts, and tend to choose the least resistant option when specifying and purchasing key building supplies, given the additional time and costs related to delays in the consent process. This is further reinforced by the fact that homeowners expect building projects to be completed on time and within budget. The Commission regards this as a “mutually-reinforcing cycle” – a longstanding feature of the industry.

Quantity-forcing Rebates

Under certain conditions, rebates are impeding competing suppliers from entering or expanding in the market. Rebates are beneficial in that they lower costs per unit from supplying great volumes of supplies. However, given our market enables few suppliers to control a large share of the market, this impacts on competition from smaller or new competitors. Merchants are also less inclined to vary its sale range when some suppliers promise to  provide higher rebate percentages if a merchant exceeds its set volume or sale thresholds. 

Recommendations

Various recommendations were provided about how matters can be improved. The Commission recommends that measures be designed to “enhance the regulatory system”, “support sound decision making” and “address strategic business conduct”. Examples of measures given includes creating more compliance pathways for a broader range of key building supplies, the establishment of a national system to share information which includes information on new products and the basis on which they have been granted consent, and the promotion of compliance with the Commerce Act to discourage the anti-competitive practices such as the quantity-forcing rebates. It will be interesting to see whether this report and its recommendations triggers further action in this area.

Note: This article is not intended to be legal advice (nor a substitute for legal advice). No responsibility or liability is accepted by TM Bates & Co. or Building Today to anyone who relies on the information in this article.