The recently announced proposed merger of Foodstuffs North Island and Foodstuffs South Island has gained much press. Some argue it will change little, given that the cooperatives work closely, have common branding, and have chosen (or agreed) to operate in separate geographic markets. The proposal has been promoted as leading to greater consolidation of efficiencies.
The market structure, and conduct by participants, are important. The Commerce Commission’s (Commission) March 2022 Market study into the grocery sector findings included: (1) there was a market duopoly, (2) the intensity of competition between the major grocery retailers was muted and did not reflect workable competition, (3) entry & expansion by new grocers was difficult, (4) the retailers’ profitability appeared higher than expected under workable competition, (5) prices appeared higher by international standards (6) levels of innovation appeared low, (7) pricing, promotions & loyalty practices limited consumers’ ability to make informed decisions, (8) competition was not working well for many suppliers due to an imbalance in market power.
The merging parties may argue that this makes them a stronger competitor to Woolworths, and that consumers will benefit. They may also argue that recent regulatory reforms address earlier competition concerns, so those findings are no longer relevant. However, the regime is new and untested. Many commentators have suggested the reforms are insufficient to address the high barriers to entry and expansion. And we have just witnessed the collapse of online grocer Supie.
After the application for clearance is filed, we will see a public version of the parties’ arguments (likely supported by economic reports) setting out their reasons why the proposal (known as the factual) will not lead to a substantial lessening of competition (SLC) in any markets, when compared to credible counterfactuals (alternative future scenarios, which may not be the status quo). The parties must satisfy the Commission (on the balance of probabilities) that there is not a real chance of a more competitive counterfactual. The Commission will consider vertical, horizontal and conglomerate effects.
After the clearance is filed, the Commission issues its Statement of Preliminary Issues (SOPI). We expect the Commission will be interested in considering:
- most obviously, any anti-competitive enhancement of purchasing power (an area of increased Commission focus) – this will be a buy-side merger to duopsony (from oligopsony), mirroring the duopoly we hear about on the sell-side) – among other things the Commission will be concerned if this could make conditions of entry / expansion by actual / potential competitors even more onerous;
- if this could change or prevent other more competitive arrangements from emerging under counterfactuals (alternative future scenarios, which may not be the status quo);
- starting by closely reviewing the status quo as this may not necessarily be a valid counterfactual – for example, if internal arrangements within each of the cooperatives, and / or between them, or other market conduct, raise other competition concerns, noting the Commission already has open investigations into all three “regulated grocery retailers”.
Apart from the demise of Supie, other market developments will relevant. While there may new industry-specific rules on land covenants, there is a rebranding of Countdown to Woolworths (reflecting its trans-Tasman operations), and expansion of new supermarkets, and an apparent renewed focus on private label (house brands). There may be complexity for the Commission’s analysis with new regulatory regimes.
Another unknown is government policy for the industry. Could clearance lead to a further consideration of reform? Such a closer look may build on past work by Coriolis, Sense Partners & economic consultancy Cognitus: See Report co-authored by Cognitus into costs and benefits of breaking up New Zealand’s major supermarket chains proactively released with redactions by commissioning government agency, MBIE (Released version of report, Full release)
In the meantime, we have put together the following guides for stakeholders:
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Matthews Law competition law guide for grocery suppliers & their advisors
- Overview of the grocery wholesale regime