Foodstuffs has received its strongest indication yet that the nation’s competition regulator may block the planned merger of its North and South Island businesses.

In a Statement of Issues (SOI) released on Thursday the commission outlined its concern that combining the two entities would lead to a three-to-two reduction in the number of major grocery retailers acquiring groceries from suppliers, leaving a merged entity to compete with Woolworths which it describes as “the only meaningful competitor in the acquisition of groceries”.

“We are continuing to explore the issues set out in this SOI, but we are currently not satisfied that the proposed merger would not substantially lessen competition due to unilateral effects in markets for the acquisition of groceries. This is based on our current view that in the factual, the merged entity may be able to unilaterally extract more favourable terms from suppliers than it would in the counterfactual because of an increase in its bargaining power relative to suppliers.”

The commission said this could cause “immediate harm to suppliers” regardless of whether the merged entity purchases less product from them. 

“Imbalance of bargaining power”

“In addition, we are concerned that harm may also arise if suppliers have less ability and incentive to invest and innovate over time because the subsequent imbalance of bargaining power increases risk and reduces their profitability.”

While the commission reiterated that an SOI is not a final decision and “does not mean that the commission intends to decline or clear the merger” the strong wording of its concerns speaks volumes. It is now up to Foodstuffs to counter these concerns, and others raised in the document by the middle of this month. 

The commission said that based on current evidence, the two separate Foodstuffs entities provide separate opportunities for suppliers to negotiate listings, prices, other terms of trade and contract renewals. 

“Following the proposed merger, for suppliers who may not have the ability to divert supply through other channels (ie, through other grocery retailers, export, wholesale, foodservices and direct-to-retail consumers) this would reduce their major customers by one, and the merged entity would account for more of a suppliers’ total business. The value of those suppliers’ outside options would consequently be reduced. In contrast, the merged entity would continue to have many suppliers from whom it could acquire grocery products, with little to no change in its outside options.”

The SOI suggests that the commission is concerned that with two entities replaced by one, the higher volume of combined orders would allow Foodstuffs to pressure suppliers for better terms – including lower prices – with no surety these would be passed on to consumers. 

“Other existing grocery retail competitors, including Woolworths, may not be sufficient to materially constrain the merged entity and prevent a substantial lessening of competition in the acquisition of grocery products from suppliers. Beyond Woolworths, other existing grocery retail competitors are of smaller scale and/or focus on different offerings within different geographic areas. Barriers to entry and expansion have the potential to inhibit rival grocery retailers from purchasing more products from suppliers,” the SOI continued. 

However, the statement also acknowledges that there is “limited competitive tension” between the two cooperatives currently and no mechanism with which they can play the parties off against each other to obtain better trading terms.

Historical precedent

The commission also considered the impact of the merger of Foodstuffs Auckland and Foodstuffs Wellington which created Foodstuffs North Island in 2013 and the extent of efficiencies and/or cost savings on the supply-side, that were passed through to consumers as a result. 

Foodstuffs North Island had told the commission that if the proposed merger brings about cost savings to suppliers, those suppliers may willingly offer lower prices to the merged entity. 

“A few suppliers we have spoken with consider that the North Island Foodstuffs merger did bring about efficiencies in terms of streamlining of processes, aligned strategy and simplification,” the SOI stated. 

“Conversely, however, we have also heard from industry participants who consider that the North Island Foodstuffs merger led to increased margins for the merging parties, a reduction of suppliers entering the market and did not result in the lower prices that were promised at the outset.

“We also note that in the case that costs were passed through previously there is no guarantee they will be passed through again with the proposed merger.

“We invite interested parties to provide us with instances where efficiencies and/or cost savings came about as a result of the North Island Foodstuffs merger from the supply side and the extent to which they consider any efficiencies and/or cost savings might arise as a result of the proposed merger. We are also interested in evidence of the pass-through of any such cost savings into retail consumer prices.”

Submissions in response to the Statement of Issues are now being sought from the applicants and other interested parties by April 18 with cross-submissions due by April 30. They can be sent by email to registrar@comcom.govt.nz with the reference “Foodstuffs merger” in the subject line.