The Commerce Commission has stopped short of a radical shake up of the supermarket sector to improve competition for consumers.

Its final report into the $22 billion sector said competition in the industry was not working well for New Zealanders.

"We have found that the intensity of competition between the major grocery retailers who dominate the market, Woolworths NZ and Foodstuffs, is muted and competitors wanting to enter or expand face significant challenges," Commerce Commission chair Anna Rawlings said.

She said while there was a growing fringe of other competitors in the sector, they were unable to compete effectively with the big two on price, product range or store location.

To tackle this, it recommended that more land be made available for new grocery stores, by making changes to planning laws and banning the use of restrictive land covenants.

It also called for the improvements to be made to the wholesale supply of a range of groceries at competitive prices, by requiring the major retailers to consider any requests they receive to supply competitors.

However, the competition regulator stopped short of saying the big two should be forced to sell a certain number of their stores to enable a third major chain to be developed.

The food and grocery sector is dominated by Foodstuffs with its New World, PaknSave, and Four Square chains, and the rival Countdown, Fresh Choice and Super Value chains owned by Australia's Woolworths.

Between them they have about 80 percent of the market.

They also dominate wholesaling and distribution and have amassed large land banks in part to stymie rivals setting up shop.

Rawlings said the biggest challenge facing competitors was a lack of suitable sites for store development and difficulties in obtaining competitively priced wholesale supply of a wide range of groceries.

Other recommendations included monitoring the conduct of the big two and their use of best price clauses, the introduction of a mandatory code of conduct, consider whether to allow collective bargaining by some suppliers, and requiring major grocery retailers to display prices in a consistent format.

The commission's report highlighted that New Zealand's retail grocery prices appeared comparatively high by international standards and the profitability of major retailers also appeared high.

The government will decide on what reforms should be made.

Commerce Commission recommendations:

Making more land available for new grocery stores, by changing planning laws to free up sites, banning the use of restrictive land covenants and exclusivity clauses in leases that prevent retail grocery stores from being developed, and monitoring land banking by the major grocery retailers Improving access to the wholesale supply of a wide range of groceries at competitive prices, by regulating to require the major grocery retailers to fairly consider any requests they receive to supply competitors, and requiring the criteria for obtaining supply and terms and conditions of supply to be transparent Monitoring strategic conduct by the major grocery retailers, such as the use of 'best price' clauses and exclusive supply agreements.

Recommendations on suppliers to major retailers:

Introducing a mandatory code of conduct for grocery supply relationships to improve transparency and ban unfair conduct Strengthening the existing law prohibiting the use of unfair terms in standard form contracts Considering whether to allow collective bargaining by some suppliers.

Consumer information and stimulating competition:

Requiring major grocery retailers to ensure promotional and pricing practices, and the terms and conditions of loyalty programmes, are easy for consumers to understand Requiring grocery retailers to display unit pricing in a consistent format.