Public Version ISSN No. 0114-2720 10415 / 10441 Decision Nos. 606 & 607 Determination pursuant to the Commerce Act 1986 in the matter of applications for clearance of business acquisitions involving: FOODSTUFFS (AUCKLAND) LIMITED, FOODSTUFFS (WELLINGTON) CO-OPERATIVE SOCIETY LIMITED, AND FOODSTUFFS SOUTH ISLAND LIMITED; and (separately) WOOLWORTHS LIMITED and THE WAREHOUSE GROUP LIMITED The Commission: Paula Rebstock David Caygill Peter JM Taylor Denese Bates QC Summary of Application: The acquisition by the three Foodstuffs co-operatives and the acquisition by Woolworths Limited to acquire up to 100% of the ordinary shares in, or assets of, The Warehouse Group Limited. Determination: Pursuant to section 66(3)(b) of the Commerce Act 1986, the Commission determines to decline to give a clearance for the proposed acquisitions. Date of Determination: 8 June 2007 CONTENTS EXECUTIVE SUMMARY ......................................................................................... I THE PROPOSAL ........................................................................................................1 PROCEDURE ..............................................................................................................1 STATUTORY FRAMEWORK..................................................................................1 ANALYTICAL FRAMEWORK................................................................................2 THE PARTIES.............................................................................................................3 Foodstuffs..................................................................................................................3 Woolworths...............................................................................................................4 The Warehouse.........................................................................................................4 PREVIOUS COMMISSION DECISIONS................................................................5 Decision 438 ..............................................................................................................5 Decision 448 ..............................................................................................................6 Woolworths Acquisition of Progressive in 2005....................................................7 WOOLWORTHS’ AND FOODSTUFFS’ SHAREHOLDINGS IN THE WAREHOUSE .............................................................................................................7 Acquisition by Foodstuffs of a 10% Shareholding in The Warehouse ...............7 Acquisition by Woolworths of a 10% Shareholding in The Warehouse ............8 DECISIONS 438 AND 448 VS THE PRESENT PROPOSALS..............................9 INDUSTRY BACKGROUND ....................................................................................9 Supermarkets ...........................................................................................................9 The Warehouse Extra Project ..............................................................................11 The Warehouse Extra – the Results to Date ........................................................14 The Experience of Supercentres Overseas...........................................................15 Success of Supercentres .......................................................................................18 MARKET DEFINITION ..........................................................................................20 Grocery Retailing...................................................................................................22 Product Market ....................................................................................................22 The Views of the Applicants............................................................................22 Commentary.....................................................................................................23 Conclusion on Product Markets ..........................................................................26 Geographic Markets ..............................................................................................27 Conclusion on Geographic Markets ....................................................................29 The Wholesale Supply of Groceries .....................................................................29 Conclusion on Market Definition .........................................................................30 FACTUAL AND COUNTERFACTUAL ................................................................30 Factual.....................................................................................................................30 Foodstuffs.............................................................................................................30 Woolworths ..........................................................................................................31 Conclusions on the Factual Scenario ..................................................................33 Counterfactual........................................................................................................33 Views of the Applicants........................................................................................33 The Commission’s Assessment of the Counterfactual .........................................34 Conclusion on Counterfactual .............................................................................37 COMPETITION ANALYSIS...................................................................................37 Introduction............................................................................................................37 Present Competition in Relevant Markets ..........................................................38 Mt Wellington.......................................................................................................39 Whangarei............................................................................................................41 Te Rapa ................................................................................................................43 [ ] ............................................................................43 Other regions where there is a credible potential for a roll out of a supercentre ..............................................................................................................................43 Potential for New Entry into the Relevant Markets...........................................44 Barriers to Entry..................................................................................................44 Access to Suitable Sites ...................................................................................44 Resource Consents...........................................................................................45 Economies of Scale..........................................................................................46 Economies of Scope.........................................................................................46 Likelihood of Entry..........................................................................................46 Fringe Competitors - Specialist Retailers............................................................47 Competition in the Factual and the Counterfactual...........................................48 Competition in the Counterfactual.......................................................................48 The Overseas Experience with Supercentres...................................................48 New Zealand Experience to Date ....................................................................49 The Importance of a Maverick to Competition ..................................................51 The Warehouse as a ‘Maverick’ ..........................................................................51 The Potential for Others to be a Maverick in the Markets ..................................52 Conclusion on Competition in the Counterfactual ..............................................52 Competition in the Factual ..................................................................................53 Competition between Foodstuffs and Woolworths..........................................53 Foreclosure of New Entry................................................................................53 Non-coordinated and Coordinated Effects.......................................................54 Introduction................................................................................................54 Factors Relevant to both Non-coordinated and Coordinated Effects...54 Non-coordinated Effects............................................................................55 Coordinated Effects ...................................................................................56 Ability of Each Firm to Identify and Respond to Deviation.....................57 Submissions on Co-ordination by the Applicants ....................................58 Information from Current Pricing Practices ...........................................59 Woolworth’s Assessment of the Impact of the 2002 Merger....................60 Conclusions on the Competitive Impact of the Acquisitions in the Supermarket Markets ...........................................................................................64 THE NATIONAL MARKET FOR THE WHOLESALE SUPPLY OF GROCERIES .............................................................................................................64