Merged Foodstuffs ‘could wield too much power over suppliers’

Thursday, 4 April 2024

• The Commerce Commission is considering an application from Foodstuffs North Island and Foodstuffs South Island to merge.

• It has outlined concerns, including the market power a new entity would have over suppliers.

• It has extended its timeframe to make a decision.

The Commerce Commission says it has concerns about a potential merger of Foodstuffs North Island (FSNI) and Foodstuffs South Island (FSSI) – including the pressure such a combined entity could have on suppliers.

The two co-operatives, which operate supermarkets in each of the islands, had sought permission to combine their businesses to create efficiencies.

But the commission said on Thursday it was extending the period in which it would make a decision until May 31 and outlined its worries about the move.

It said some of its main concerns related to the potential for the merged entity’s buying power to affect the market, and how that could affect downstream retail grocery markets.

“Currently and absent the proposed merger there would be three major grocery retailers that acquire grocery products from suppliers in New Zealand (FSNI, FSSI and Woolworths), with some joint buying by the parties. With the proposed merger, there would only be two major grocery retailers that acquire grocery products from suppliers in New Zealand.”

It said some submissions had been made about the impact of the merger on supermarkets’ acquisition of groceries, and the potential increase in supplier vulnerability when it came to negotiating trade terms and margins.

For their part, the supermarkets said the merger would lead to cost reductions, a significant proportion of which would be passed to consumers.

“The merged entity may be able to extract lower prices and more favourable terms from suppliers,” the commission said.

“This increase in buyer power may also reduce the ability of suppliers to invest, resulting in effects such as reduced capacity, quality or innovation in the supplier’s market; the merged entity may have greater ability and incentive to increase the penetration of private label products - potentially resulting in some suppliers of branded grocery products getting squeezed out and less choice/range for consumers; and/or some suppliers that are currently only supplying either FSNI or FSSI could be forced out of the market if the merged entity elects not to stock their product(s).

“As well as removing a distribution channel for those suppliers, this could have an impact on the market more generally if it is not viable for that supplier to supply the market without supplying the merged entity.”

It said the merger could also create problems if it resulted in a loss of competition between Foodstuffs North Island and Foodstuffs South Island or increased the barriers to entry or growth of other parties.

“On the first point, the parties submit that there is no existing competition between FSNI and FSSI at the retail level, as they operate in separate geographies (islands) and each co-operative focuses on competing within the island in which it is based.

“The parties further submit that the proposed merger would not remove any potential competition, as the only realistic counterfactual is that FSNI and FSSI would continue to operate in their own islands, not in competition with each other… We are continuing to consider what the parties would likely do absent the proposed merger.”

The commission said it was not currently satisfied that a merger would not substantially lessen competition.

“This is based on our current view that in the factual, the merged entity may be able to unilaterally extract more favourable terms from suppliers than it would in the counterfactual because of an increase in its bargaining power relative to suppliers. This may cause immediate harm to suppliers regardless of whether the merged entity purchases less product from them. In addition, we are concerned that harm may also arise if suppliers have less ability and incentive to invest and innovate over time because the subsequent imbalance of bargaining power increases risk and reduces their profitability.”

It said it was also concerned about product innovation.

It said a reduction in channels for suppliers could adversely affect competition by removing one of the options for new and innovative products or new suppliers to be listed.