Foodstuffs North Island and Foodstuffs South Island say proposed merger ‘isn’t capable’ of hindering grocery competition, others beg to differ

Foodstuffs North Island and Foodstuffs South Island say their application to the Commerce Commission to merge into a single national grocery entity wouldn't reduce competition, however others disagree.

In the latest submissions released by the Commission, the Food and Grocery Council and the Grocery Action Group oppose the proposed merger, arguing it will decrease grocery competition in NZ.

Meanwhile, Foodstuffs North Island (FFNI) and Foodstuffs South Island (FSSI) have stated in a joint submission that the proposed merger isn’t capable of hindering or undermining the ongoing efforts to strengthen grocery competition.

A report by economics firm HoustonKemp, commissioned by Chapman Tripp on behalf of the two Foodstuffs cooperatives, was also submitted. The report’s view was that competitive grocery acquisition wouldn’t be at risk with the proposed merger.

ComCom’s concerns

It was first announced at the end of 2023 that the two Foodstuffs co-operatives who currently operate as separate entities had lodged an application with the Commerce Commission to merge together.

In January, the Commerce Commission published its Statement of Preliminary Issues setting out the “competition issues” the Commission had identified and was planning to investigate further before releasing its Statement of Issues document in April.

In early April, the Commission released its Statement of Issues (SOI) where it set out the competition issues it wasn’t “currently satisfied” with following an initial investigation.

In it, the Commission said one of the “main concerns” it currently has is without the proposed merger, there are three major grocery retailers in New Zealand (FSNI, FSSI, and Woolworths), with some joint buying by the Parties. 

With the merger, there would only be two major grocery retailers (the merged Foodstuffs entity and Woolworths) acquiring products from suppliers in NZ.

“To grant clearance for the Proposed Merger, we must be satisfied that it will not have, or would not be likely to have, the effect of substantially lessening competition in any market in New Zealand,” it wrote in the SOI.

In the SOI, the Commission said it’s currently examining the issues raised in the SOI but has reservations about the Proposed Merger’s impact on competition. 

Particularly regarding potential “unilateral effects” in the market acquisition for groceries the Commission anticipates could arise if there are only two major grocery retailers instead of three.

In the SOI, the Commission wrote: “[...] our focus is on what would change with the Proposed Merger. Unless we are satisfied that any lessening of competition as a result of the Proposed Merger is not likely to be substantial, we cannot give clearance.”

Competitive power

In its latest submission published by the Commerce Commission earlier this week, the Food and Grocery Council said the Foodstuffs merger proposal would likely decrease competition in relevant markets due to the heightened buyer power resulting from the merger. The Council represents manufacturers and suppliers behind food, beverage, and grocery brands.

“We agree that, compared to the status quo, it would be a reduction in the number of options for suppliers from 3 to 2,” it wrote.

“It would increase buyer power impacting rivals’ ability to acquire groceries on competitive terms with the merged entity.”

The Council noted in its submission that it was also concerned, like the Commission was, that the merger would also give big retailers a large advantage with data, leaving smaller retailers behind when it came to planning retail strategies.

It agreed with the Commission’s preliminary view that the merger as it currently stands will substantially lessen grocery competition in relevant markets.

“We also consider that must be the final determination,” it said.

The Grocery Action Group (GAG) said in its group submission published on Monday that it “strongly opposes” the clearance application.

The group was created earlier this year driven by concerns market failure in the grocery distribution industry has become a serious social and economic issue. GAG is chaired by ex-Consumer NZ chief executive Sue Chetwin.

“The Commerce Commission should reject this application because it would lead to a considerable lessening of competition in an already failed market,” the group wrote.

“GAG believes if the merger were to proceed it would be highly likely to substantially lessen competition in two markets – the upstream market for the acquisition of groceries and the downstream market for sale of groceries.”

The Grocery Action Group said approving the merger would remove “any likelihood of competition” between the two Foodstuffs co-ops.

No competitive undermining

The two Foodstuffs co-ops submitted a joint submission in response to ComCom’s Statement of Issues.

They said the proposed transaction wouldn't “diminish competition” in retail grocery markets as it wouldn't grant the merged Foodstuffs entity sufficient buyer power to “unfairly lower prices or inhibit innovation”.

“[...] the Parties wish to be clear that the proposal to merge the co-operatives is in no way intended to hinder or undermine the ongoing efforts to strengthen grocery competition, nor is it capable of having that effect. In fact, the opposite,” FSNI and FFSI wrote.

FSNI is the larger co-operative of the two and is owned by 3,326 co-operative members who are all based in the North Island. FSSI is owned by 1,987 members who are all based in the South Island.

Members in the North Island co-op operate under grocery brands New World, PAK’nSAVE and Four Square while South Island co-op members operate under New World, PAK’nSAVE, Four Square and also Raeward Fresh and On the Spot.

In their submission, the two co-ops said: “There is no material competitive tension between the co-operatives that would be lost as a result of the Proposed Transaction.”

They wrote that the proposed transaction would instead streamline operations and reduce costs for the parties involved, leading to savings that could be passed on to consumers. 

This aligned with the expectations of the Commission, government, and other stakeholders, they added.

“But preventing the Proposed Transaction would not increase competition, it will only mean continued higher costs for the Parties, a co-operative structure that is no longer fit for purpose and, ultimately, less ability to offer lower grocery prices and provide a competitive offering.”

In HoustonKemp’s economic effects report submission, the firm wrote that grocery coordination wouldn’t be “enhanced” if the Foodstuffs merger went ahead.

“The merged entity may achieve a slight improvement in its relative bargaining position with respect to some suppliers,” they said.

They also disagreed with the Commission's SOI assessment that FSNI and FSSI would have access to more data on customers and sales if the co-ops merged.

“It appears unlikely to us that the combined set of data on retail sales in the North and South Islands will provide the merged entity with any material advantage over ‘smaller scale retailers’ than the parties may already have.”

Handshakes

The Commission is continuing to investigate the competitive effects of the proposed merger and is set to make a decision on the merger before the 31st May – although this date could be extended.

In mid-April, Grocery Commissioner Pierre van Heerden came out with a public letter to NZ’s grocery sector where he said the country's $25 billion sector needed to be more competitive.

In the letter he also wrote that he wanted to stamp out “old-style handshake supply agreements” amongst NZ’s supermarket duopoly and suppliers. 

Increasing competition won’t just benefit consumers in NZ but also drive more effective bargaining power between the supermarket giants and their suppliers, he said.