ISSN NO. 0114-2720 J4890 PUBLIC Decision No. 448 Determination pursuant to the Commerce Act 1986 in the matter of an application for Clearance involving: PROGRESSIVE ENTERPRISES LIMITED and WOOLWORTHS (NZ) LIMITED The Commission: P R Rebstock P J M Taylor D R Bates Commission Staff: Summary of Application: Progressive Enterprise Limited has sought clearance to acquire all the shares in Woolworths (New Zealand) Limited and/or its immediate holding company Denstree Corporation Limited Determination: Pursuant to section 66(3)b of the Commerce Act 1986, the Commission declines to give clearance for the proposed acquisition. Date of Determination: 14 December 2001 CONFIDENTIAL MATERIAL IN THIS REPORT IS CONTAINED IN SQUARE BRACKETS CONTENTS THE PROPOSAL...........................................................................................................................................4 UNDERTAKINGS ...........................................................................................................................................4 Effect of Divestments...............................................................................................................................5 THE PROCEDURES.....................................................................................................................................6 THE PARTIES...............................................................................................................................................6 PROGRESSIVE ENTERPRISES LIMITED ............................................................................................................6 WOOLWORTHS (NEW ZEALAND) LIMITED.....................................................................................................7 OTHER RELEVANT PARTIES ..........................................................................................................................7 FreshChoice/SuperValue.........................................................................................................................7 Foodstuffs...............................................................................................................................................8 MARKET DEFINITION ...............................................................................................................................8 PRODUCT DIMENSION...................................................................................................................................9 The nature of the product ........................................................................................................................9 The Commission’s previous view of the market ......................................................................................10 Progressive’s proposed market..............................................................................................................10 The Commission’s view of the appropriate market.................................................................................11 Top-up shopping...................................................................................................................................14 Separate full service and discount supermarket markets.........................................................................14 Convenience stores ...............................................................................................................................15 View of the appropriate market in other jurisdictions.............................................................................15 Product market conclusion....................................................................................................................16 THE GEOGRAPHIC DIMENSIONS OF THE MARKET.........................................................................................17 THE WHOLESALE SUPPLY OF GROCERIES ....................................................................................................17 CONCLUSION ON MARKET DEFINITION........................................................................................................17 COMPETITION ANALYSIS PRINCIPLES ..............................................................................................17 SUBSTANTIALLY LESSENING COMPETITION .................................................................................................18 THE CHANGE IN THE THRESHOLD ...............................................................................................................19 The New Threshold ...............................................................................................................................19 THE COUNTERFACTUAL..............................................................................................................................20 POTENTIAL SOURCES OF MARKET POWER ...................................................................................................20 CONCLUSION – COMPETITION ANALYSIS PRINCIPLES ..................................................................................21 ANALYSIS OF EXISTING COMPETITION FOR RETAIL GROCERY MARKET..............................21 INTRODUCTION ..........................................................................................................................................21 EXISTING PARTICIPANTS.............................................................................................................................22 Inter-firm Relationships ........................................................................................................................22 MARKET SHARE OF PARTICIPANTS..............................................................................................................23 Safe Harbours.......................................................................................................................................24 Market Share ........................................................................................................................................24 DEGREE OF DIFFERENTIATION IN THE MARKET ............................................................................................25 Conclusion on Differentiation................................................................................................................26 PRICING BEHAVIOUR OF SUPERMARKETS ....................................................................................................26 Pricing Policies ....................................................................................................................................27 Conclusions ..........................................................................................................................................28 SCOPE FOR THE EXERCISE OF UNILATERAL POWER......................................................................................28 Introduction..........................................................................................................................................28 A Pricing Model....................................................................................................................................28 SCOPE FOR THE EXERCISE OF COORDINATED MARKET POWER.....................................................................31 Introduction..........................................................................................................................................31 Collusion ..............................................................................................................................................32 Discipline .............................................................................................................................................39 3 Conclusions – Coordinated Market Power.............................................................................................43 CONCLUSIONS – EXISTING COMPETITION ....................................................................................................44 CONSTRAINTS FROM MARKET ENTRY..............................................................................................44 Introduction..........................................................................................................................................44 BARRIERS TO ENTRY ..................................................................................................................................45 Barriers Assessed in Decision 438.........................................................................................................45 Conclusion in Decision 438...................................................................................................................46 Current Application ..............................................................................................................................46 The “LET” Test ....................................................................................................................................48 Views of Possible De Novo Entrants......................................................................................................50 Conclusion on Barriers to Entry............................................................................................................50 OTHER COMPETITION FACTORS.........................................................................................................51 ELIMINATION