Yesterday, on 1 October 2024, the New Zealand Commerce Commission (NZCC) announced its decision to decline an application for clearance from Foodstuffs North Island Limited (Foodstuffs NI) and Foodstuffs South Island Limited (Foodstuffs SI) to merge the two cooperatives (the Merger).

The Merger would have created one entity operating over 500 stores across New Zealand, including staple grocery retail brands New World, Pak’nSave, and Four Square. In a media release published by the NZCC, Chair Dr John Small expressed concerns about “the permanent structural change to the New Zealand grocery industry” that would result from the Merger, and “the impact this could have on competition and New Zealand consumers”.

The NZCC must be satisfied that a merger will not result in a substantial lessening of competition in order to grant clearance. This decision marks the second time this year the NZCC has declined to grant merger clearance, following Alpha Theta’s application to acquire Serato being declined in July. Prior to this, the NZCC’s most recent decision to decline a clearance application was in 2018.

NZCC’s concerns

The application was registered with the NZCC on 15 December 2023. Having published a Statement of Issues (April 2024) and a Statement of Unresolved Issues (July 2024), as well as inviting public submissions on each of these documents, the NZCC issued its final determination on 1 October 2024. The NZCC’s written reasons for declining the Merger are due to be published by 23 October 2024.

Dr Small’s comments, alongside the recently published First Annual Grocery Report (Grocery Report), indicate that the NZCC’s key reasons underpinning its decision not to grant clearance for the Merger include:

1. The Merger would reduce the number of major buyers of grocery products from three (Foodstuffs NI, Foodstuffs SI and Woolworths New Zealand (Woolworths)) to two (the merged Foodstuffs entity and Woolworths). The merged Foodstuffs entity would become the largest acquirer of grocery products following the Merger. The NZCC considered that this increased buyer power could enable it to force wholesale suppliers of grocery products into charging lower prices, with reduced routes to market outside of the merged Foodstuffs entity and Woolworths;
2. The merged Foodstuffs entity’s buyer power was also likely to make it more difficult for current and potential competitors in the retail supply of grocery products to compete and grow, potentially depriving consumers of a more competitive grocery industry in the future;
3. Reduced incentives for the merged Foodstuffs entity and its competitors to invest and innovate could lead to reduced consumer choice and service quality; and
4. With only two major entities within the market for the retail supply of grocery products, price coordination between the merged Foodstuffs entity and Woolworths would be more likely, complete or sustainable.

Supporting competitive growth within the grocery sector has been a key focus of the NZCC following the conclusion of its market study into the sector in 2022, and can be seen in the recent penalty judgement obtained against Foodstuffs NI for use of anti-competitive land covenants (read our summary of that decision here). It is therefore not surprising that the NZCC declined to grant clearance in this case.

Merger clearance applicants have the option to appeal the Commission’s decision to the High Court. Foodstuffs NI and Foodstuffs SI have expressed disappointment in the decision but at this stage have said they will wait to review the Commission’s reasons in full before deciding on next steps.

The Grocery Report

This result comes shortly after the NZCC released its Grocery Report on 4 September 2024. The Grocery Report, described as the ‘foundation stone’ for measuring New Zealand’s success in promoting strong competition with our grocery sector, described competition in the sector as “limited and muted”.

The NZCC considers the key contributors to this limited and muted competitor to be the high market shares held by the Regulated Grocery Retailers (RGRs)^[1], and the continued growth of retail prices at a faster pace than costs (resulting in increases in gross margins for the RGRs). The Grocery Report identified that new entry in the form of another major grocery retailer is key to ensuring effective competition within the sector, whether this is through entry by an overseas grocery retailer (such as Aldi or Lidl), or growth from existing fringe competitors (such as The Warehouse).

Recent enforcement of cartel prohibitions by the NZCC

In other news, one of the defendant companies and its director have pleaded guilty in the NZCC’s first criminal prosecution for alleged cartel conduct. Interim name suppression for both the companies and their directors continues to apply, though we understand the prosecution relates to alleged bid rigging in the construction sector.  

The trial, expected to last three weeks, has been set down for October 2025. Read more about the case in our previous publication here.

As a reminder, penalties for breaches of the cartel prohibitions under the Commerce Act 1986 include financial penalties, in addition to the introduction in 2021 of potential criminal penalties for individuals, including a term of imprisonment of up to seven years

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Special thanks to Henry King and Tawhiwhi Watson for their assistance in preparing this article.