ComCom declines to clear Foodstuffs merger

Tuesday, 1 October 2024

Foodstuffs North Island and Foodstuffs South Island have failed to gain clearance from the Commerce Commission to combine into a single business.

Foodstuffs North Island chief executive Chris Quin said it would wait until the commission published the full reasons for its decision before deciding whether to go to court to challenge the decision.

But based on what the commission had said to date, Foodstuffs was likely to appeal, Quin said.

Commerce Commission chairperson John Small said that the commission was “not satisfied that the proposed merger would not have the effect of substantially lessening competition in multiple acquisition and retail markets”.

“The proposed merger would result in a permanent structural change to the New Zealand grocery industry. We are concerned about the impact this could have on competition and New Zealand consumers,” he said.

The two supermarket groups applied for clearance to merge in December last year, saying that would reduce their costs and lower grocery prices and would not harm competition as they only had stores in their respective islands.

However, the merger bid ran into heavy opposition from competition advocates and some supermarket suppliers who argued it could increase Foodstuffs’ power over suppliers and result in less choice on the shelves.

Foodstuffs North Island and Foodstuffs South Island said in a joint statement that they were disappointed by the commission’s decision.

Quin said the merger was “a once-in-a-generation opportunity for Foodstuffs to position the co-operatives to meet the challenges of a fast-evolving market”.

There had been speculation Foodstuffs would go to court to contest an adverse ruling from the commission, or ask it to “authorise” the merger through a different process — arguing any negative implications for competition would be worth it.

Quin — who would have become chief executive of the combined business — did not back off singing the merits of the merger on Tuesday.

Foodstuffs remained convinced it was “the right thing to do for our customers, our 500-plus members and for New Zealand,” he said.

The merger ruling was “about a legal test, and we were confident in putting forward our proposal that it satisfied the legal test”, he said.

Quin told The Post that Foodstuffs would wait until it saw the commission’s full determination and see whether that differed from “a statement of unresolved issues” the commission had previously released before deciding its next step.

“But on the basis that it's not different to what we've seen in the unresolved issues process or in the media release so far today, we would be likely to appeal — if that is the basis,” he said.

Small noted on Tuesday that the merger would have reduced the number of major buyers of grocery products in New Zealand from three to two.

“This would result in the merged entity having greater buyer power than Foodstuffs North Island and Foodstuffs South Island each do individually, which would harm the competitive process,” he said.

That echoed the concern it had expressed in two “statements of issues” earlier this year.

Competition advocates have suggested rejection of the merger should raise questions over the current level of cooperation between the businesses.

Foodstuffs North Island and Foodstuffs South Island told the commission in December they already provided “support and assistance to each other as required in order to optimise their overall competitive proposition”.

The commission did not address that in its Tuesday statement, but has previously said that “based on the evidence before it” it did not consider Foodstuffs’ North and South Island co-ops had an arrangement not to compete with one another.

The commission won’t release its full determination giving all the reasons for its decision until October 23.

But going into some more detail on its thinking Small said the increased buyer power the merged entity would have had meant it would have been able to extract lower prices from suppliers.

The combined business would have been the country’s largest grocery buyer, with annual retail sales of more than $14 billion.

Small said the commission was also concerned the merger would lead to reduced investment and innovation by suppliers, reducing choice or the quality of grocery products.

“There is also a real chance that the merged entity’s buyer power would make it harder for other grocery retailers to compete and grow, potentially depriving consumers of a more competitive grocery industry in the future,” he said.

The merger could have made it easier for Woolworths and Foodstuffs to coordinate their pricing, he said.

Competition advocate Ernie Newman, a former chief executive of the Grocery Manufacturers' Association, believes the commission has been braced for a legal challenge from Foodstuffs and has been preparing for that.

He speculated that was the reason an earlier “statement of unresolved issues” it released in July had run to 149 pages of “endless repletion of the same points in marginally different language”.

“The commission’s worthy and extremely critical work has become a lucrative playground for some of the country’s most expensive lawyers to ply their trade,” he told the watchdog in a submission in August.

How they compare

Foodstuffs North Island:

108 New World, 45 Pak’n Save and 172 Four Square stores.

$10.8 billion combined store revenues.

More than 25,000 full and part-time employees, including franchise employees.

Foodstuffs South Island:

43 New World, 12 Pak’n Save, 60 Four Square, 72 On The Spot and five Raeward Fresh stores

$3.6 billion combined store revenues.

More than 14,000 full and part-time employees, including franchise employees.

More to come