Foodstuffs not withdrawing merger bid despite setback
The country’s two Foodstuffs co-operatives aren’t giving up hope they will be allowed to combine their businesses, which own the New World, Pak’n’Save and Four Square supermarket chains.
That is despite the country’s competition watchdog making clear that it is currently minded to reject the merger, and the co-ops’ merger application sparking questions over whether they may already be acting as a cartel.
Foodstuffs North Island and Foodstuffs South Island applied in December for clearance from the Commerce Commission to merge into a single co-op in a move they said would reduce their costs and benefit consumers.
But they ran into strong objections from The Warehouse and the Food and Grocery Council, as well competition advocates Ernie Newman, Tex Edwards and the Grocery Action Group lobby group.
The two co-ops currently operate in separate geographies, each serving their own islands. But the commission made clear in a “statement of issues” earlier this month that it was concerned about the competitive harm that could result from a merged business putting more of a squeeze on grocery suppliers.
A merged Foodstuffs business might be able to extract lower prices and more favourable terms from suppliers and their combined buying power could reduce the ability of suppliers to invest, resulting in “reduced capacity, quality or innovation”, it said.
Some suppliers that were currently only supplying one or other co-op could be “forced out of the market if the merged entity elects not to stock their products,“it also warned.
The commission said it was currently not satisfied that the proposed merger would not substantially lessen competition.
It is not unusual for businesses to withdraw merger applications if they run into heavy traffic from objectors and writing on the wall from the commission.
That had happened nine times between 2018 and 2022, according to law firm Simpson Grierson. But a spokesperson for Foodstuffs NZ, which is a service organisation jointly owned by the two co-ops, said they did not intend to withdraw their application and instead “looked forward to engaging with the commission” as it worked to finalise its ruling by May 31. It is understood that the watchdog’s focus on the impact of the proposed merger on suppliers has surprised some in the supermarket sector. Assuming the commission sticks to its initial view and rejects the merger, focus is likely to shift to whether it is satisfied that the co-ops are currently operating within the law. The commission noted in its statement of issues that several submitters had queried whether the co-ops’ current relationship amounted to “cartel conduct” in breach of the Commerce Commerce.
The co-ops said in their original clearance application that they already “provide support and assistance to each other as required in order to optimise their overall competitive proposition”, while not owning facilities in each other’s territories.
But Foodstuffs’ spokesperson said they had “no illegal agreement”.
The commission noted in its statement of issues that “only a court can decide whether a breach of cartel laws has occurred” without going on to note that it would be rare for any party other than the commission itself to bring any such matters to the courts.
A spokesperson for the commission said it had not launched an investigation into the cartel claims referred to in its statement of issues, appearing to suggest those queries would be looked at separately by the commission, if at all.
“Sometimes during the course of our investigations other matters come to light that warrant closer scrutiny. Where that is the case, these are considered by the appropriate team within the commission,” a spokesperson said.
Unusually, a “counterfactual” that set out the commission’s initial assessment of how the market might develop without the merger was redacted in its entirety by the commission on the grounds of “confidentiality”.
It is therefore unclear whether the counterfactual sheds any light on the watchdog’s view of the status of the co-ops’ current operations.
Stuff has challenged the commission’s decision to withhold the information in its entirety.