Competition ‘not working as well as it could’ in building supplies industry – Commerce Commission

The building supplies sector is not functioning at the optimal level, primarily because of a high degree of difficulty for competing suppliers to be integrated into the market, according to a new draft report from the Commerce Commission last week.

The watchdog stopped short of recommending any breakups of large companies in the building supplies industry, but outlined a number of key contributing factors that are negatively impacting competition for building supplies.

The regulatory system is failing to provide an environment for healthy competition because it continues to incentivise builders and designers to favour ‘tried and tested’ building products over competing products, the report states. This often manifests itself in the specification of certain brands in building plans – this is very common in the plasterboard arena, especially with GIB-branded product.

This occurs through a mutually-reinforcing cycle: builders prefer to use tried and tested products to reduce risk and liability, so designers increasingly specify these products as they’re more likely to be granted building consent. This means that over time, compliance is more easily assured for these products — making them significantly more attractive, which results in a higher percentage of market share.

This is part of the reason why Fletcher Building subsidiary Winstone Wallboards dominates the plasterboard market, which was recently embroiled in a supply crisis. And while the Commerce Commission did not suggest any direct action on companies like Fletcher, neither did the report represent an ‘all clear’ for such suppliers, the Commission’s chairperson Anna Rawlings says.

“We discussed the vertical integration of a couple of the suppliers and merchant chains and we do identify that can give rise to difficulties at times, so it’s not an ‘all clear’,” she says. “But we haven't found at this stage that vertical integration is substantially affecting competition across the supply or the merchant level.”

Additionally, the commission found that some of the rebates paid by building supplies firms to merchants were exacerbating competition woes. Most concerning were the rebates that rewarded merchants for purchasing large quantities of materials through a single supplier, which could preclude them from offering competing products.

While the commission stopped short of recommending new regulations that would restrict the use of rebates, the report conceded that in certain cases they could breach the Commerce Act. “Allocation policies under which suppliers provide preferential treatment to merchants can breach the Commerce Act if the supplier has a substantial degree of market power and the allocation policy has the purpose of harming, deterring, or preventing competition,” the report states.

The Commission’s primary recommendation was for competition to be promoted as a primary objective in the building regulatory system.

“We think that if more competition is introduced into the system, that will contribute to the objectives of the system as a whole, which is to ensure New Zealanders are getting good quality housing,” says Rawlings. “We know that if there’s more competition, prices are usually better for end-users.”

The Commission’s recommendations to achieve this include proactively introducing competition as a regulatory feature, creating more compliance pathways for competing products, and investigating whether barriers to certification can be reduced – among others.

In a joint statement following the Commission’s draft report, the Minister for Building and Construction Megan Woods and Minister of Commerce and Consumer Affairs David Clark said that in the wake of a hard-hitting cost of living crisis, it’s ‘not acceptable’ that such an important sector is not working as well as it could be.

“New Zealanders want to be able to build, renovate and repair their homes and we are committed to removing barriers to making that as affordable as possible,” Minister Woods commented.