CEO of Foodstuffs North Island, Chris Quin, would run a merged Foodstuffs, if the regulator gives the nod. Photo / Michael Craig
Chris Quin laughs a little uncomfortably at the suggestion that the merger of the Foodstuffs grocery co-ops would make him the most powerful, unelected man in New Zealand.
The case is strong. Kiwi households spend an average of $300 a week on food, 20% of their budget, according to Stats NZ, and the single largest chunk of that is spent at the checkouts of New World, Pak’nSave, Four Square and the other Foodstuffs banners.
Quin currently heads Foodstuffs North Island, an owner-operator co-op of 330 supermarkets and stores. His plan is to merge this with sister co-op Foodstuffs South Island’s 200 stores. The combined entity would blanket the country, employ some 38,000 people, and ring up sales of some $13 billion a year.
Quin would run the merged Foodstuffs if it goes ahead. His bosses are the co-op’s hundreds of individual store owners and it’s a wobbly power-base, he quickly demurs.
He spoke to the Herald last week, before the Commerce Commisssion issued its latest statement of issues relating to the merger proposal. He was otherwise relaxed and wearing his favoured Kiwi-corporate look – a suit jacket over a plain dress shirt, one button open. It was paired with a rainbow badge earned in recent training.
Quin’s keenly aware that in the current political climate - marked by concern over concentrated market power and mirrored by a public mood made sour by several years of steep price inflation - the merger is his to sell.
He knows the price of staples is a sore point (when he speaks to the Herald he’s delighted that food price inflation has stalled, and the following day Stats NZ’s numbers show a minor drop in food prices over the last year).
”People say, if they merge, will butter be cheaper? Simple question. The answer, which will sound tricky but it isn’t, is that butter will be cheaper than it would have been.”
Supermarkets, he says, are responsible for 19 cents of a retail dollar price. New Zealand butter is sold in a global market, and he can’t control many of the forces at work on determining price: “this [merger] is about that 19c, and about working on how well we buy.”
The moment is an extraordinary one in which to push for greater consolidation. In 2022, a Government-ordered market study found that Foodstuffs (across both the North Island and South Island operations which don’t compete with one another) and its main rival Woolworths NZ together constituted a duopoly.
It determined that competition was weak and not working well for customers, and that prices appeared to be high by international comparison.
It was followed by new law, and very considerable new powers for the Commerce Commission to monitor and regulate the sector.
These include the creation of a new grocery commissioner with extensive access to the supermarkets’ business information, and the job of reporting annually on the state of competition in the sector (the first report is expected soon).
There is a new “wholesaling access” regime that forces both Foodstuffs co-ops and Woolworths to offer wholesale grocery supply to competitors. And, a new grocery supply code now sets the rules of engagement for supermarkets in dealing with their suppliers, parties which are often, though not always, much smaller.
An OECD economic survey released in May noted that despite all the new rules, or perhaps because complex regulation is often a very cumbersome and expensive substitute for competition, structural intervention “such as breakups” might be preferable.
It gave brief currency to an idea that is dormant, for now, but not dead: that Government intervention, and a forced sale and or separation of parts of the incumbents’ supermarket businesses, might ultimately be the least bad way to inject the desirable effects of stronger competition into the sleepy New Zealand sector.
In explaining why Foodstuffs chose to seek merger clearance late last year, Quin is keen to put to bed any notion that political calculus affected the timing - a proposition the Herald put to him, given that the plan was announced last November, just weeks after the Labour Government was voted out of power (yes, the Government that authored all that new supermarket law).
“We’re very aware New Zealand is now one of the most regulated grocery markets in the world. That happened but it was well understood and well under way prior to the election. And we didn’t have any view that that would be changed by the outcome of the election… it’s there and we needed to be shaping ourselves around it… the timing was not related in any way to political cycles.”
Quin says work on the merger started back in 2022, and involved bringing two boards together on a plan which is underpinned by a drive for efficiency and concern for customers: “this is the biggest thing we can do to make a difference to value and to innovation.”
Rather than being put off by the new regulation, the merger is a way of rising to meet it, he says: if you think the merger responds to things the regulator wants to improve, then the timing is favourable.
The question of whether or not the merger does hold this promise is now up to the Commerce Commission to decide. The test is set out in the Commerce Act, and it cannot go ahead if it is likely to substantially lessen competition.
The regulator is seven months into deciding whether to grant merger clearance, with an end date already delayed three times and now set for October 1.
”This is an excessive amount of time for a merger decision that (based on the application made by the merging parties) is not that complicated,” Edward Willis, associate professor of law at the University of Otago, told the Herald.
”This suggests that it [the commission] is very concerned about the process and getting the decision correct. We can only speculate as to the reasons for this from the outside.”
It may be a consequence of the political dimension to the decision, the existing lack of competition, and its effects on so many New Zealanders so directly.
The commission is independent. And, as such, it must swim against the tide of any popular or political mood and rely solely on the law and related precedents in its determination.
“This is a legal test,” Anna Ryan, partner at Lane Neave, said. “There is a lot of guidance from the courts, precedents. And if the parties are unhappy with the clearance decision it can be appealed to the High Court.”
There is discipline in that. And there is little doubt that Foodstuffs would use its deep pockets to seek remedy if it thought any determination was amiss.
For the time being, however, it seems to be acutely aware that a heavy use of its financial power would be damaging.
Last month, the company’s lawyers, Chapman Tripp, fired off letters alleging defamation to both Stuff and the University of Auckland, asking for the removal of an opinion piece from their respective websites.
The piece, by Auckland University Professor Emeritus, Tim Hazledine, is titled, “Foodstuffs wants to merge its co-ops, but consumers need the opposite”.
It suggests several things. First, that Foodstuffs doesn’t agree with the article’s contention, which is well labelled as Hazeldine’s opinion, that Foodstuffs North Island and Foodstuffs South Island already co-operate and co-ordinate their operations in ways that are contrary to the Commerce Act.
But that it has taken no further action - the piece remains on Stuff’s website - suggests an awareness of the problem that large parties wielding asymmetrical power in public view often confront. The optics of squashing small opponents are terrible.
Quin told the Herald that he’s pursued the matter no further because his “primary focus at the moment” is engaging in the regulator’s process with the merger, “but we’ve reserved our rights in relation to Stuff”.
Both supermarket groups get plenty of advice on such matters. The two Foodstuffs, which share communications and government relations services, use Sherson Willis for PR and have considerable in-house heft, including Andrew Gaukrodger, former head of government relations for ANZ New Zealand.
Newly hired Stefan Herrick, a former colleague of Gaukrodger at ANZ, will bring additional public relations and reputation management heft shortly. Woolworths uses government relations and communications shop Capital.
To be clear, lawyers the Herald spoke to found it unlikely that the commission is considering Foodstuffs North Island and Foodstuffs South Island’s current areas of collaboration.
“I don’t think there will be any serious consideration that the status quo is not acceptable. That’s just not a relevant consideration for this type of decision,” Willis said.
What is a focus for the commission is the potential competitive effect of the merger on supermarket suppliers.
Its process in considering the merger now has three parts. It published a Statement of Preliminary Issues in January, a Statement of Issues in April, and a Statement of Unresolved Issues on Tuesday (the last such deliberative step it can take).
The statements describe areas of law where the commission sees a need for further analysis, and interested parties can respond.
Consumers and retail prices are a concern. The commission’s last statement noted the possibility that a merger would make co-ordination nationally between a merged Foodstuffs and Woolworths, “more likely, complete or sustainable”.
But the “upstream market” for supply continues to receive the lion’s share of the commission’s attention. Foodstuffs North Island and Foodstuffs South Island operate largely separate buying systems (and much of the South Island co-op’s purchasing still happens at the store level).
It is one area that Quin and some individual suppliers describe as a great opportunity for paring cost and passing savings on, both to suppliers, who would no longer need to deal with multiple purchasing managers, and to customers.
The opportunity for greater efficiency certainly exists. And, as Quin points out, it is one that rival Woolworths, with its centralised corporate structure, already enjoys.
Allowing for greater efficiency, however, is only one consideration; after all, the sector could be reduced to a colossus monopoly if it were otherwise.
In its Statement of Unresolved Issues, the commission highlighted the “structural change” a merger would bring about, reducing “the number of major buyers of groceries from three to two”.
It’s a contention strongly echoed by suppliers’ main voice, the New Zealand Food and Grocery Council (NZFGC).
The reduction, the commission elaborated, would substantially lessen competition in some areas of supply: “causing an increase in the merged entity’s bargaining power and enabling it to extract lower prices from some suppliers, “cherry-pick” the most favourable terms, disadvantaging some suppliers and/or otherwise get more favourable trading terms from some suppliers.”
In an earlier submission, Foodstuffs’ hired consultants contended that better prices obtained from suppliers would flow through to supermarket customers. But the commission, it appears, remains unconvinced. Quin now has until August 14 (when responses to the latest statement are due) to make a more persuasive case.
Strangely, today’s concerns are all in stark contrast to the creation of Foodstuffs North Island in 2013. Back then, the merging parties were Foodstuffs Wellington and Foodstuffs Auckland, and they saw no need to obtain clearance from the regulator (it’s a voluntary process). Indeed, they suffered no consequence: the commission took no view that the transaction could substantially lessen competition and it pursued no enforcement action (under the same Commerce Act that’s relevant now).
Murray Jordan, who led Foodstuffs Auckland and then Foodstuffs North Island, rolled out much the same rationale Quin is articulating today: better for customers, efficiencies and savings, lower prices. The head of the NZFCG of the time, Katherine Rich, told Stuff she welcomed the move.
In a brief statement, the current head of the NZFCG, Raewyn Bleakley, said the “characteristics of the market” have evolved since the last merger. She cited both the market study and legislative reforms. Likewise, she said, “the impact of the proposed merger on our members and their views have changed...”
The difference in today’s unfolding events may be explained partly by the team of grocery regulators and investigators, some 21 strong, now housed at the Commerce Commission. A decade ago there were none specific to the industry. And there is also that huge and recent shift in awareness of grocery market competition, which might be best illustrated by the fact that ordinary Kiwis think about it at all.
Auditors PwC: Cited disruptions to operations from that IT upgrade.