Suppliers warn against Foodstuffs merger
Suppliers to the country’s supermarkets fear the proposed merger of the North and South Island Foodstuffs supermarket co-operatives to create a single national supermarket business would hurt their businesses.
Their concerns are outlined in an issues paper published by the Commerce Commission this month.
Some suppliers even warned the commission that the last time such a supermarket merger was allowed, it resulted in a squeeze on suppliers, higher margins for the merging supermarkets, and did not bring prices down for shoppers.
The commission must decide by May 31 whether to allow the merger to go ahead and has been interviewing suppliers to supermarkets, who it quoted in its issues paper, while redacting their names to protect their businesses.
Some suppliers told the commission to examine what happened in 2013, when Foodstuffs Auckland and Foodstuffs Wellington merged.
Some suppliers were not criticial of that merger, but the commission said: “We have also heard from industry participants who consider that the North Island Foodstuffs merger led to increased margin for the merging parties, a reduction of suppliers entering the market and did not result in the lower prices that were promised at the outset.”
Foodstuffs North Island and Foodstuffs South Island are co-operatives of independently owned supermarkets, including the Pak’nSave, New World and Four Square brands.
The two co-operatives do operate some functions together, but otherwise stick to their own islands, though they have told the commission there are no agreements preserving that geographical split. Because their stores do not compete directly with each other, they say a merger will not lessen competition and could be good for consumers.
The merger would result in an entity whose only meaningful competitor in the acquisition of groceries would be Woolworths, the commission said, and it remained concerned that would have an impact on grocery suppliers.
Suppliers fear they would end up having to accept worse contracts and lower prices as a result of the merged entity’s buying power. It could spell disaster for local suppliers unable to supply their goods throughout the country, the commission was told.
Smaller grocery retailers did not provide any meaningful competitive constraint on the merged entity’s power over suppliers, the commission has concluded.
These smaller retailers included The Warehouse, Costco, Moore Wilson’s, Huckleberry, Farro Fresh and Bin Inn, but they accounted for a tiny proportion of the groceries market.
It was not only suppliers the commission remained concerned for.
It said it was possible a merged Foodstuffs could make it even harder for a new supermarket chain to start up.
The commission was also worried creating a duopoly of a single merged Foodstuffs and its single large rival Woolworths could increase the likelihood of “co-ordinated effects”.
Co-ordinated effects are where powerful businesses co-ordinate their behaviour and collectively exercise market power which leads to price increases for shoppers.
Suppliers also told the commission they feared that the creation of a true supermarket duopoly would stifle innovation.
“Market feedback has highlighted the importance to new suppliers or suppliers of new products of having multiple grocery retailer channels to gain a foothold in the market,” the commission said.
Some suppliers told the commission they feared a single merged Foodstuffs could “derange” cutting suppliers, and leaving shoppers with less choice.
They were also worried about Foodstuffs being able to drive more “own label” product sales, damaging their businesses.