Foodstuffs North Island's CEO Chris Quin is driving a proposed merger of Foodstuffs North Island and Foodstuffs South Island.
Foodstuffs North Island's CEO Chris Quin is driving a proposed merger of Foodstuffs North Island and Foodstuffs South Island.
The Commerce Commission remains unsatisfied that a proposed merger of sister supermarket co-ops, Foodstuffs North Island and Foodstuffs South Island, can proceed.
In a Statement of Unresolved Issues published on Tuesday, the industry regulator said such a merger would effect “significant structural change” in the sector, and that it continues to have concerns that it would substantially lessen competition.
It noted that a merger would result in fewer buyers for suppliers to the supermarket sector, and that it could consolidate Foodstuffs’ ability to co-ordinate its activities in a national market, and thereby harm competition for the retail supply of groceries.
The statement is part of a programme of scrutiny the commission has undertaken in considering Foodstuffs’ application for clearance to merge, made in December.
The commission is still testing the law in the areas of concern it has identified. Interested parties, including Foodstuffs, now have until August 12 to make submissions on the statement. The commission is due to make a final determination on the matter on October 1.
The two Foodstuffs owner-operator co-ops – which run the supermarket banners New World, Four Square and Pak’nSave among other businesses – are separate entities, though they already co-operate in various ways. In addition, they stick to their respective islands and do not compete at the retail level.
Taken together, the commission regards Foodstuffs and rival Woolworths NZ as a duopoly, and after years of intense scrutiny of weak competition in the sector the bid to pursue a merger has surprised many.
Last month the shareholders of both Foodstuffs’ co-ops overwhelmingly voted to merge. The main stumbling block, however, is regulatory clearance.
In January and April respectively, the commission published a Statement of Preliminary Issues and a Statement of Issues.
Across all of its statements the commission’s main concerns focus on grocery suppliers and the so-called upstream market.
New law has given grocery watchdog Pierre van Heerden extraordinary powers to examine supermarkets' finances.
“Concerns we continue to test”
Under the heading, “concerns we continue to test”, the most recent statement noted: “Parties and Woolworths New Zealand Limited (Woolworths) are the largest buyers of grocery products in New Zealand and a key route to market for many suppliers; the structural change with the Proposed Merger would reduce the number of major grocery retailers competing to acquire groceries from three to two.”
This point is echoed in submissions to the commission by the country’s main grocery supplier and manufacturer group, the New Zealand Food and Grocery Council.
The statement also said the commission is continuing “to investigate whether the Proposed Merger would make coordination nationally between the merged entity and Woolworths more likely, complete or sustainable.”
In 2022, a market study of the grocery sector, conducted by the commission, found that competition was weak, that “excess profits” in the sector ran to close to half a billion dollars a year, and that supermarket prices appeared to be high by international standards.
In response, the last Government introduced a slew of new regulatory change, including: a mandatory wholesale regime that forces supermarkets to wholesale goods to competitors on commercial terms; a code of conduct aimed at protecting supermarket suppliers from the often asymmetrical power of the supermarket buyers; and a new grocery commissioner with extraordinary powers to obtain financial information from the supermarkets and the job of publishing an annual report on the competitive state of the sector (his first report is due shortly).
Foodstuffs (both North Island and South Island) maintain that the merger is aimed at improving efficiency in their businesses, and that reducing costs - such as duplicate overheads across the likes of head offices and key supply-chain functions - will help to drive prices lower than they otherwise would have been (though perhaps not lower in an absolute “before and after” sense, given the significant other variables).
Chris Quin, head of Foodstuffs North Island and the proposed head of the merged entity, has also pointed to the freshly erected guard rails of the new regulatory regime as a reason to allow the merger to proceed.
The commission does not appear to share his view. The latest statement noted that the new regulations: “are designed to address some of the competition issues brought about by the existing high levels of concentration in the grocery sector. They are not intended to, and would not, mitigate the structural loss of competition in relevant upstream and retail grocery markets that would result from the Proposed Merger.”
