Crunch time for competition watchdog on Foodstuffs merger

Thursday, 20 June 2024

ANALYSIS: There is only one thing that seems more difficult to imagine than the Commerce Commission deciding to allow the Foodstuffs North and South Island supermarket co-operatives to formally combine their businesses.

And that is working out what on earth it would do if it instead decided to torpedo the merger, as that would raise the question of whether the two co-ops should currently be working together as closely as they are.

The commission has been stuck between a rock and hard place, but now it’s crunch time.

Some time on Friday, the commission should announce whether it has decided to set aside its initial concerns and clear the merger, or issue “a statement of unresolved issues”.

The latter wouldn’t necessarily sound the death-knell for the merger, but would drive it very deep into the rough.

The co-ops, which own the New World, Pak’nSave and Four Square brands, already work very closely with one another.

But they argue formally combining would save customers money by further eliminating duplication and lowering costs, while critics argue the merger could increase their power over suppliers and lead to less choice on the shelves.

When they originally asked for clearance to merge in December, the co-ops noted they didn’t own any physical assets in each other’s territories, traded under the same brands “and present as a single national offering”.

They made it clear that not only did they not compete at the retail level, but in their view there was “no potential” for them to do so in future.

In words that could come back to haunt them if the merger is declined, they stated in their clearance application that they “provide support and assistance to each other as required in order to optimise their overall competitive proposition”.

The commission issued an initial “statement of issues” in April that made clear it had reservations about the merger and has so far delayed its decision three times.

The optics of the commission providing clearance would appear problematic, given the level of concern there has been about a lack of competition in the supermarket industry, and the bar that the merger needs to hurdle is a high one.

In order to clear it, the commission must be satisfied that it would not be likely to have the effect of substantially lessening competition in any market.

Top of the list of the commission’s worries is the fear that grocery suppliers might be disadvantaged if they had to negotiate with a single Foodstuffs entity.

But there’s also the risk the merger might snuff out a chance of two co-ops taking each other on in their own patches one day.

The Food & Grocery Council describes the merger proposal as “uniquely straightforward with no upside and considerable downside”.

“There are clear risks to competition and consumers, yet no indication that this is necessary to compete or evidence that consumers would benefit.”

Labour MP and former commerce minister Duncan Webb believes the delays in the commission reaching a decision aren’t a good sign for the supermarket group.

Webb, who was a partner at law firm at Lane Neave and a professor of law at the University of Canterbury before entering politics, says he doesn’t understand why the two co-operatives don’t compete with each other now.

The commission stated in April that several submitters on the merger clearance application “query whether the parties’ current relationship amounts to cartel conduct”.

“I struggle to see how the Commerce Commission could give it any kind of endorsement with a merger. What the commission could do is indicate that there are in fact three companies and they should start behaving that way,” he says.

Foodstuffs NZ, a service organisation jointly owned by the two co-ops, has consistently stated there is no “unlawful” agreement between the co-ops not to compete.

Responding to Webb’s comments, Foodstuffs NZ general manager of corporate affairs Andrew Gaukrodger said “what we agree on is that our number one job is delivering value at the checkout”.

“To do this we need to keep challenging every aspect of our business model to be as efficient as we can. As one national co-operative in our small country, we can do it better and faster,” he said.

The merger would see Foodstuffs realise the efficiency of operating as one national business, like most major New Zealand companies in a market of this size, including its “Australian and globally-owned competitors”, he said.

As Webb implies, the snag facing the commission is that if it can’t be satisfied the merger wouldn’t reduce competition, it is difficult to see how it could allow the co-ops to continue to work with one another as closely as they have done in the past.

The tidiest future may be either a union or a full forced lobotomy for the Foodstuffs co-ops.

Favouring a union, the co-ops’ business structure has been no secret to anyone, including the regulator, and had gone largely unremarked upon until the co-ops applied for permission to merge.

And while the commission might want to see genuine competition between three supermarket groups, it would no doubt prefer that to be between three nationwide competitors.

Although the commission is unlikely to acknowledge this as a factor, it also likely to be reluctant to put two New Zealand-owned businesses at a disadvantage competing against an integrated Australian competitor.

On the other hand, more competition is better than any less, and it may be a bit late for the commission to simply pretend it never had any serious doubts about the merger.

It may also be relevant that the commission felt a need to call out Foodstuffs North Island in February voicing a raft of concerns over its contracts with suppliers, including concerns that the co-operative might not have acted in good faith with them.

It had fewer bones to pick with Foodstuffs South Island, so might not be disposed to see it subsumed into what it may see as a more aggressive North Island business.

There is no reason to think Foodstuffs North Island’s decision to reach a settlement with the commission over its anti-competitive land covenants, announced on Wednesday, would have a bearing on the watchdog’s thinking.

But the commission will be making its call against the backdrop of concerns Woolworths and Foodstuffs are, if anything, tightening their grip on the groceries market by building out their store networks.

And amid growing doubts that the mandatory supermarket wholesale regime developed by the previous government is breathing much life into the competitive landscape.

The commission would no doubt have preferred the Foodstuffs’ co-ops took the hint it gave in April and withdrew their merger application, rather than putting it on the spot.

But instead the co-ops decided to press ahead with their own shareholder vote on the merger last week, so no chance of that.

Have the Foodstuffs co-ops overplayed their hand, as Vodafone and Sky TV belatedly discovered they had done when the commission declined to authorise their merger back in 2017?

Or will the commission limp away, bluff called?

We’ll find out for sure, or get a further strong hint, on Friday.