Liam Dann: How the hell did we allow a supermarket duopoly?

A Big Fresh supermarket, formerly owned by Woolworths. Photo / NZME

OPINION:

The Commerce Commission's conclusion that competition in the retail grocery sector "is not working well for consumers" won't surprise long-suffering shoppers.

But it begs the question: how the hell did the government and Commerce Commission allow a duopoly in the first place?

The answer is complex, but the simple version is: they didn't want to.

They were caught by a surprise takeover play, outdated legislation and technical issues in amending the law.

Ironically, today's comments by the Commission mirror those it made in 2001 when it ruled against allowing the merger which led to the duopoly.

That merger went ahead despite the Government Commerce Act being amended to impose a tougher test on mergers and acquisitions, with a view to heading off these kind of uncompetitive duopolies.

But both the government and commission's hands were tied after a legal stoush that went all the way to the Privy Council in London.

That's right, up until 2004 if we couldn't reach a clear decision in our own courts we allowed a panel of British Lords to decide things for us.

Incredible, I know.

Here's how the venerable New Zealand Herald archives remember the saga.

In May 2001, Australian-owned supermarket group Progressive applied to the Commerce Commission to buy the 83-store Woolworths group, which included the Big Fresh and Price Chopper chains.

Progressive had about 26 per cent of the market. Woolworths held 10 per cent.

As the Herald's Brian Fallow warned at the time: "Grocery shoppers face the uncomfortable prospect of a duopoly, with the merger of the second and third-largest supermarket chains."

The Commerce Commission also found that the duopoly would substantially lessen competition.

It found that it would result in the number of supermarket chains shrinking from three to two, and market concentration would rise.

The commission also found that, because barriers to entry into the supermarket market were high, the two incumbents would not be constrained by the threat of new competition.

But the new tougher legislation had included a provision which said proceedings started before the law change came into effect (on May 26, 2001) would not be affected.

Progressive Enterprises had put its application for clearance to acquire Woolworths into the commission just before the law changed.

And when the commission considered it under the old test (in July 2001) it decided it was okay.

Its rival Foodstuffs appealed against the decision, arguing that the new test should apply.

Foodstuffs lost in the High Court but won in the Court of Appeal.

That (to quote Fallow again) "put the cat among the pigeons".

Another 11 applications to the commission, which had been live when the law changed, were thrown into confusion.

A quick legislative patch was applied in the form of the Commerce (Clearance Validation) Amendment Act.

It made it clear that the applications before the commission when the law changed would be determined under the old dominance test.

But it specifically excluded the supermarket case.

In select committee, Foodstuffs adviser Sir Geoffrey Palmer argued that it would be constitutionally wrong for Parliament now to deprive it of the fruits of that victory in the courts.

Sir Geoffrey Palmer. Photo / Steven McNicholl

Progressive's constitutional lawyer, Professor Philip Joseph, argued that it would be wrong for Parliament to single out any one of the 11 parties for separate, discriminatory treatment just because it had been the target of litigation.

Palmer and Foodstuffs prevailed in the political process.

But Progressive was still not happy and so off they went to the highest court in the New Zealand legal system ...the lords in London.

This was now a case of constitutional importance.

The Privy Council spent less than half an hour deliberating before overturning a Court of Appeal decision and allowing the possible merger between this country's second and third-largest supermarket groups.

In June 2002, Progressive's Australian parent, Foodland Associated, bought the 85-store Woolworths Group for $690 million.

In 2003, Parliament voted to end New Zealand's relationship with the Privy Council.