Foodstuffs co-ops seem to be seeking permission to act as one, after the fact

Sunday, 14 January 2024

ANALYSIS: Foodstuffs may have handed the Commerce Commission a can of worms when it formally applied to merge its North and South island co-operatives in December.

Although the owner of the New World, Pak’n Save and Four Square chains is commonly thought of as a single business, it comprises two separate co-ops that are owned by their respective supermarket franchisees.

As the co-ops put it in their application to merge in December, they are two co-ops that don’t own any physical assets in each other’s territories and trade under the same brands “and present as a single national offering”.

The co-ops make plain in their clearance application that not only do they not compete at the retail level at the moment, but that in their view there is “no potential” for them to do so in future.

But despite keeping out of each other’s territories, they would appear to be making commercial decisions based in part on each other's business interests.

They state in their clearance application that they “provide support and assistance to each other as required in order to optimise their overall competitive proposition”.

The word “overall” is the most important one here.

On the face of it, the co-ops appear to be asking for clearance to combine, after the fact of acknowledging they are already working to support each other's competitive positions, as opposed to acting solely in their own immediate individual interests.

And they are doing this — with or without any explicit or implicit agreement — under a common understanding that they would never compete.

As such, it is not easy to see how the commission could do anything other than either rubber stamp that existing relationship and grant clearance, or deny clearance while assessing that the current situation was not in fact OK.

It is hard to see how it could instead deny clearance while allowing the status quo that the co-operatives have described to continue.

If the commission assessed that the two co-ops did currently have some form of agreement not to compete, then that could really be a problem.

“It is not uncommon for parties to claim in merger clearance applications that, for example, they do not compete, they focus on different geographic areas or selling different kinds of products, and that this situation would not be likely to change in the absence of the transaction,” a commission spokesperson says.

“To the extent that an absence of actual or potential competition is a consequence of strategies formed independently by each party … then this would not in itself raise concerns of illegality under the Commerce Act.”

But if in the course of its consideration of the clearance application the commission did receive evidence that the co-ops had reached an illegal agreement not to compete “then the commission would be open to investigating that under the Commerce Act”, its spokesperson says.

A Foodstuffs spokesperson declined to say if any non-compete agreement existed, saying it wouldn’t be appropriate to comment further on matters that touched on the clearance application “except through the official process”.

Fair enough, and let’s not get over-excited here.

Don’t be a bit surprised if the commission doesn’t receive evidence of any problematic agreement, doesn’t stress about the ways in which the co-ops are already collaborating, and approves the clearance application with minimum drama.

But there can be little doubt clearing the merger would be terrible “PR” for the competition watchdog, given the current toxic sentiment over supermarket competition.

Rightly or quite possibly wrongly, beleaguered consumers are likely to assume that any change that may be in the interests of the co-ops in terms of their business structure is unlikely to serve them well at the till.

So with a fall-back to the status quo perhaps not an option, why on Earth would the co-ops take the risk of applying to merge at this juncture?

Especially with the Government promising to “address the lack of a third entrant” in order to remove the market power of the current North and South island duopolies?

The jackpot for competition advocates would be if the Government could use the leverage provided by some kind of Commerce Act investigation to force a split on Countdown or Foodstuffs, in the same way the John Key government used its investment in the ultrafast broadband network to break up Telecom in 2011.

Foodstuffs’ clearance application reads as through the co-ops are just doing a bit of a tidying-up exercise.

Although they share brands and jointly own a buying organisation, Foodstuffs’ Own Brands, that negotiates the supply of their own-label branded products from manufacturers, they do run their own “support centres” to serve their franchisees and their own wholesale operations.

The support centres already have a close relationship but “a single national support centre” would reduce costs and “ultimately deliver better value for customers at the checkout, as well for wholesale customers”, the public version of the clearance application states, while providing no real detail.

In the context of two co-ops that serve separate islands, reaping the remaining synergies that the co-ops haven’t already realised through their existing collaborations by merging two support centres that already have a close relationship, appears small beer.

But their spokesperson insists the co-ops see it differently.

“The ‘big goal’ of the proposed merger is a one strong, nationwide and New Zealand-owned grocery co-operative … combining the best of both co-ops while cutting complexity and duplication, improving agility and delivering more innovation and better value,” she says.

Competition advocate Tex Edwards doesn’t buy it, and is certain there is a hidden agenda.

He is convinced Foodstuffs’ wealthiest Pak’n Save franchise owners have seen the writing on the wall and want the co-ops to move to a cleaner corporate structure so that they can attract an external investor to the business, allowing franchise owners to cash-out at a high valuation before they get walloped by regulation.

“It’s a brazen merger which is tone deaf to the cost-of-living and is focused on changing the documentation structure of the company to allow the Pak’n Save franchisees to sell out to third-party investors before the inevitable breaks up occurs,” Edwards says.

“As the supermarket public policy debate has gone on and on and new players like the ex-chief executive of Consumer NZ have returned to the fray, and small challengers like Supie have been fried, it's becoming more certain that market intervention is inevitable, he says.

Former Consumer NZ chief executive Sue Chetwin announced earlier this month that she was setting up a new lobby group that would work solely to improve supermarket competition.

Foodstuffs’ spokesperson says she is aware of Edwards’ theory, but says it isn’t true.

“Any suggestion that a merger could lead to the sale or listing of all or part of the business is based on a misunderstanding of the co-operative structure and is in fact impossible,” she says.

Any plan to sell-off or list the co-ops would be “completely contrary” to the purposes of the trust deeds under which they were established, she says.

“The only power to vary the deeds is vested in the trustees, who cannot alter the trusts’ purpose and have fiduciary duties to protect and perpetuate the co-operatives.”

In the case of Foodstuffs North Island, those trustees are a team of four, chaired by its former managing director Murray Jordan.

Whether or not the commission would see Edwards’ suspicions as being relevant to its ruling is probably debatable anyway.

Consumers might not like the idea that those who have profited from market power could crystallise their profits by cashing-up before competition improved, but there are no rules against that.

One thing seems for sure; Foodstuffs’ clearance request is a curve ball that the commission will not have wanted to land on its desk right now.

And if Foodstuffs is saying neither of its co-ops could ever compete in each other’s territories because they don’t already have assets there, what hope anyone else?