The Commerce Commission has declined to give clearance for Foodstuffs North Island Limited and Foodstuffs South Island Limited to merge to become a single national grocery entity.
Chair Dr John Small said that the Commission was not satisfied that the proposed merger would not have the effect of substantially lessening competition in multiple acquisition and retail markets.
“The proposed merger would result in a permanent structural change to the New Zealand grocery industry. We are concerned about the impact this could have on competition and New Zealand consumers,” Dr Small said.
“The proposed merger would reduce the number of major buyers of grocery products in New Zealand from three to two, reducing the number of buyers for many suppliers to supply their products to, and creating the largest acquirer of grocery products in New Zealand. This would result in the merged entity having greater buyer power than Foodstuffs North Island and Foodstuffs South Island each do individually, which would harm the competitive process, and we consider is likely to substantially lessen competition in many acquisition markets.
“As a consequence of the substantial lessening of competition and the associated increase in buyer power, the merged entity would likely be able to extract lower prices from suppliers and/or otherwise adversely impact suppliers in the relevant markets. We are also concerned that the consolidation with the proposed merger would lead to reduced investment and innovation by suppliers, meaning reduced consumer choice and/or quality of grocery products in New Zealand for consumers.
“There is also a real chance that the merged entity’s buyer power would make it harder for other grocery retailers to compete and grow, potentially depriving consumers of a more competitive grocery industry in the future.
“Finally,” Dr Small said, “we consider that the proposed merger increases the risk of coordination between the merged entity and Woolworths. In particular, we are concerned that the reduction in the number of major grocery retailers from three to two and the creation of a national Foodstuffs entity could make price coordination between the merged entity and Woolworths more likely, complete or sustainable.”
The Commission is only permitted to grant clearance to a transaction when it is satisfied it will not result in a substantial lessening of competition. The Commission sought several extensions of time from the applicants over the course of its consideration of the matter, because the merging parties had not – at the time it sought the extension – satisfied the Commission that the proposed merger would not substantially lessen competition. In each case, the applicants agreed to the requested extension.
A public version of the Commission’s full determination, including complete reasons for its decision, will be published on the case register by 23 October 2024.
Background
Foodstuffs North Island Limited and Foodstuffs South Island Limited operate as separate co-operatives that focus on serving the island in which they are located but share three major retail grocery banners: PAK’nSAVE, New World and Four Square.
While they procure private label products together, they otherwise currently acquire most grocery products from suppliers independently and represent separate options for suppliers to get their products on the shelves of major grocery retailers in New Zealand.
In making its decision, the Commission considered the effects of the merger on competition in acquisition markets (where Foodstuffs North Island and Foodstuffs South Island acquire grocery products from suppliers), wholesale markets (where Foodstuffs North Island and Foodstuffs South Island supply grocery products to wholesale customers) and retail markets (where Foodstuffs North Island and Foodstuffs South Island supply grocery products to New Zealand consumers, largely through their New World, PAK’nSAVE and Four Square banners).
When considering a merger clearance application, the Commission must consider whether any competition that would be lost with the merger would be substantial. Under the Commerce Act, we may only give clearance to a proposed merger if we are satisfied that the merger will not have, or would not be likely to have, the effect of substantially lessening competition in any market. More details on the merger clearance regime are available here.
