Tuesday, July 24, 2007

New Zealand and Supermarket Competition

Posted by D. Daniel Sokol

Supermarket competition is a hot topic around the world (even when Whole Foods and Wild Oats are not involved).  Peter Hinton, a partner at Simpson Grierson in Auckland, New Zealand was kind enough to bring to my attention an interesting decision in New Zealand.  The New Zealand Commerce Commission issued a press release last week outlining the reasons for its decision to prevent the acquisition of The Warehouse Group Limited by either Foodstuffs co-operatives or to Woolworths Limited.  This is a situation in which a super center type store has transformed supermarket competition.  According to the press release:

On the 8th of June the Commission declined to grant clearance for either acquisition, on the basis that it was not satisfied that either of the proposed acquisitions will not have, or would not be likely to have, the effect of substantially lessening competition in relevant markets. Both applicants have lodged appeals against the decisions in the Wellington High Court’s supermarket retail market is already highly concentrated, and a reduction of players from three to two would substantially reduce competition, to the detriment of New Zealand consumers.

“Without the competitive threat offered by The Warehouse, Foodstuffs and Woolworths would not face the same incentives to reduce prices, and increase quality, service, and innovation” says Ms Rebstock.

“New Zealand’s supermarket retail market is highly concentrated by international standards.” “There are high barriers to entry in the supermarket retail market, as evidenced by the fact that, apart from The Warehouse, there has been no new entry into that market for 20 years, other than through acquisition.”

“Before The Warehouse’s entry to supermarket retailing, Foodstuffs and Woolworths operated in a duopoly,” Ms Rebstock says. “The purchase of The Warehouse by either company would return the markets to that state.”

Ms Rebstock says The Warehouse is uniquely placed to compete with the supermarkets because of its existing property portfolio, extensive distribution networks and established brand. The Warehouse would also have a significant advantage in being able to offer grocery and general retailing under one roof.

“The Warehouse already has the locations and the infrastructure to enable it to compete with Foodstuffs and Woolworths,” says Ms Rebstock. The Warehouse has opened Warehouse Extra “supercentres” in Whangarei and Auckland (Sylvia Park) that offer grocery and general retailing under one roof. It has plans for further Warehouse Extra stores, the next one opening in Te Rapa, Hamilton. “Overseas experience shows that such supercentres can be highly successful, and result in increased competition and lower prices for consumers,” Ms Rebstock says. Supercentres have been successful in markets in the UK, Europe, Asia, North America and South America.  One study showed that grocery prices in the supercentres of US retailer WalMart were 15-25 percent lower than prices in nearby supermarkets.

“The Commission’s view is that The Warehouse, both as an actual competitor in the local markets where it has opened supercentres, and as a potential competitor in markets where it might open more new supercentres, brings an important new source of competition.” Ms Rebstock says.

Ms Rebstock says the Commission would not be commenting further on the matter while appeals of the decision were before the High Court. The reasons are available on the Commission's website under Public Registers - Mergers and Acquisitions. Click on the Decision number in the right hand column. Applications.

On 21 December 2006 the Commission received an application from the three Foodstuffs co-operatives seeking clearance to acquire up to 100% of the ordinary shares in The Warehouse Group Limited. On 17 January 2007 the Commission received an application from Woolworths Limited seeking clearance to acquire up to 100% of the shares in, or assets, of The Warehouse Group Limited. Companies’ share of NZ supermarket sales. On an aggregated basis, Foodstuffs accounts for an estimated 56% of total New Zealand supermarket grocery sales, and Woolworths accounts for an estimated 44% of total New Zealand supermarket grocery sales.

Effects of duopolies. Duopolies protected by high entry barriers impede competitive outcomes in two main ways: by removing competition constraints leading to an increase in market power of the remaining firms acting independently (non-coordinated effects), and/or by changing the nature of competition in a way that makes tacit or express coordination between firms more likely, effective and stable (coordinated effects).


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