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Foodstuffs CEO pours cold water over forced separation plans

(Source: Foodstuffs)

Foodstuffs North Island CEO Chris Quin says draft recommendations of the Commerce Commission investigation into competitiveness in the supermarket industry won’t result in increased competition and lower prices for consumers. 

In a final submission to the commission, Quin said Foodstuffs has proven why options such as the proposed separation of grocery wholesale and retail business, or the forced divestment of retail stores, will not produce better outcomes for New Zealand customers.

“The market study process has been focused only on the supermarkets part of the industry and allowed a variety of voices to be heard and claims to be made. However, as we enter the final stages of the process it is clear that the more radical options being proposed are not supported by credible evidence and need to be reviewed by the commission in its final report,” Quin said in a statement.

He claimed Foodstuffs’ profit was less than half of what the commission stated in its draft report and criticised the report for “incorrectly” trying to treat Foodstuffs as two separate businesses – its retail stores and the rest of the co-operative.

“If you think about the co-operative like a human body, we have a central nervous system comprised of our distribution centre, supply chain, support centre and other shared services, which supplies everything to the limbs i.e., our retail stores. One part can’t operate without the other.

“Since we are fully integrated in the same way as any other major grocery retailer, it’s more appropriate to assess the returns over the whole of our business (instead of trying to artificially split it), the same way it has done for Woolworths and the same as the international competitors,” said Quin.

“Correctly calculated, Foodstuffs North Island’s average return on capital of 9-12 per cent is consistent with the returns made by the appropriate benchmark of overseas supermarkets – the average return on capital of the commission’s international sample of grocery retailers is 11.3 per cent. We trust our profitability analysis will be reflected in the commission’s final report.

“On competition, the extra information and data we have provided support a conclusion that the retail grocery sector is workably competitive and there are no material barriers to entry or expansion.”

Quin said that on pricing, the company was able to demonstrate that international price comparisons say little about the level of competition “but, in any event, New Zealand prices are fair by international standards (we rank 21st in the OECD using the appropriate PPP comparison)”.

And he took aim at the proposal from some submissions to the probe advocating forced divestment, or forced structural separation of existing market participants, labelling the idea “unprecedented in our economic history”. 

“While easy to throw around economic terms like divestment, we all have to be clear about what that would actually mean for owner-operators in communities around New Zealand. To be justified, the competition problem these remedies would be designed to solve would need to be of unprecedented severity, and could only be turned to when other, lesser remedies have been tried. Our final submission clearly demonstrates why we are nowhere near that threshold.”

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