It's arguably the most important merger decision the Commerce Commission will make this decade - will it allow our biggest supermarket player, Foodstuffs, to combine its North and South Island businesses, allowing it to control around 60 percent of the country's grocery market? Or will it decide to keep things the same, the two islands separate?
The Commerce Commission has already delayed its decision once, and on Friday June 21 it delayed a second time, saying instead it would published a "statement of unresolved issues" in due course. The new decision date is October 1.
The delays suggest they are grappling with an almighty call, that would have major rammifications for New Zealand shoppers.
Consumer advocates and suppliers believe if one mega-entity is allowed to control the vast bulk of the country's grocery market from a single head office, things will get much worse for shoppers and suppliers.
The grocery market in New Zealand will go from "duopoly light, to duopoly full-strength", as one supplier puts it.
It would become one of, if not the most, concentrated grocery markets in the developed world, with a merged entity controlling around 530 stores.
Foodstuffs argues merging its North and South Island operations will be good for the co-operative, suppliers, and shoppers, with Foodstuffs North Island CEO Chris Quinn saying: "New Zealanders want us to deliver more value and innovation. We're up for this, and as one national co-op, we can do this faster and better."
Earlier this month, its 332 North Island grocery store owners and 198 South Island owners voted overwhelmingly in support of the merger.
It called that vote a "historic" moment, and rather than using his current job title, Quinn began calling himself CEO-designate of the future merged supermarket giant.
Are they really that different, anyway?
Why does this matter? You may ask. Aren't the two Foodstuffs co-operatives kind of the same anyway? The answer is only partly.
Pak n Save, New World and Four Square (the best-known Foodstuffs brands) do co-ordinate some marketing, some specials, buying from their own brand Pams, and PR across the two businesses.
But strategic direction, pricing, governance, distribution networks, supply deals, most buying, customer data, and stores are managed separately.
Foodstuffs argues the two islands do not meaningfully compete anyway, as they operate in different regions. A New World in Hawke's Bay for example, wouldn't be going up against a New World in Nelson.
"Suppliers already treat the Parties as a single national channel to market," it submitted to the Commission.
Adding: "There is no material competitive tension between the co-operatives that would be lost as a result of the Proposed Transaction (merger)."
But suppliers and consumer advocates believe the current separation goes deeper than just geography.
Ninety-six percent of suppliers surveyed by the Food and Grocery Council say there are differences in the two entities' operations, negotiations, or terms.
And they are concerned a larger and more powerful duopolist could more easily box out any future third player, more easily inflict losses on it, and even reduce competition with its only current competitor of scale, Woolworths.
Will grocery prices rise if the merger is allowed to go ahead?
The Food and Grocery Council supplier survey reveals 74 percent believe the merger will produce no consumer benefit, and do not expect Foodstuffs' cost savings from a merger to be passed on to consumers. That is, they definitely do not think prices will get lower.
Foodstuffs NI and SI refused to be interviewed, but argued in their submission to the Commerce Commission that prices for shoppers would not rise as a result of a merger, because the mega-entity would save money by consolidating its head office operations.
Foodstuffs argues the merged entity would then be under pressure to deliver those cost savings to shoppers.
"(The merger) would lower their cost of doing business, savings which would be shared with consumers," the two co-operatives say.
They add: "There is no question that any better buying terms would be shared with consumers… The Parties have a strong track record of passing through cost savings to consumers."
It cited the example of its 2022 "Price Rollback" marketing campaign, where it said it rolled back the price of 110 key value items, such as fresh and frozen vegetables, meat, flour and tea. It said all its supermarkets reduced those prices to consumers by an average of 10 percent.
But Sue Chetwin of the Grocery Action Group says she doesn’t trust a merged Foodstuffs to pass on savings to consumers. “I don’t believe that; that’s just them arguing to keep up their enormous profits. Consumers have seen no benefit from when Foodstuffs merged from 3 to 2 (in 2013). This merger would only be good for supermarket owners, not consumers.”
Consumer NZ also doesn't believe Foodstuffs' savings from merger efficiencies will be passed on to consumers in the form of lower prices.
Head of Advocacy and Campaigns Gemma Rasmussen says "it's highly dubious that would happen".
"If the merger goes ahead, they (Foodstuffs North Island and South Island) would be even more dominant over suppliers and wield more power over them. Suppliers will be further squeezed. It would be an incredible leap of faith to say they would pass those savings on to consumers in the form of lower prices."
Rasmussen says it all comes down to competition.
A Commerce Commission market study in 2020 found competition in our grocery sector is already "muted" and supermarkets are making excessive profits. In short, extreme market power means no-one is making you pass any cost savings on to shoppers. Businesses will only do it if they have to.
Foodstuffs, though, disagrees with the Commission that competition is "muted". It also submits that "preventing (the merger) would not increase competition, it will only mean continued higher costs for the Parties, a co-operative structure that is no longer fit for purpose and, ultimately, less ability to offer lower grocery prices and provide a competitive offering".
Lisa Asher is a global grocery retailing researcher at The University of Sydney Business School. She also spent 20 years in the food supply industry, working for large suppliers including Tegel, Unilever and Fonterra.
She says only Woolworths provides geographically widespread competition, so the savings a merged Foodstuffs makes will simply result in even higher profits for the supermarkets it controls.
"It would be complete market failure (if the merger goes ahead). NZ is already a considerably concentrated market, pre-merger. For it to be concentrated further, that simply aligns to increasing profits. There is significant academic research on supermarkets which supports this premise."
"It defies logic if it goes ahead. It will be very sad for the affordability of groceries because of that concentration in power."
The Food and Grocery Council says "the (merger) proposal is uniquely straightforward with no upside and considerable downside and must be declined: There are clear risks to competition and consumers".
Foodstuffs disagrees, stating: "The fact is that the Parties do face competition. If they do not compete on price and non-price terms they will lose sales to Woolworths, The Warehouse, Costco and several others."
What about suppliers? Would things be better or worse for them?
Suppliers argue things would become even worse for them under a merged Foodstuffs. Many are scared for their businesses.
Some have submitted anonymously to the Commerce Commission, and others have spoken directly to Newshub. Using their identity is something of a professional death-wish, fearing they could be deleted from supermarket distribution.
We spoke to one small grocery product manufacturer who supplies Foodstuffs South Island. "I'm shit scared this (merger) will put me out of business. What if they (a merged Foodstuffs) don't pick me for national distribution? It'll be all over. I will have to sell the house. But my kids love it here. I don't know, I just don't know. I don't know what I'm going to do if it happens. I have no answers but it keeps going round and round in my head. I feel sick about it."
At the moment, suppliers have two Foodstuffs entities to sell to. If they get deleted in one island, they can try the other. The North Island business has given more control to its head office, but in the South Island there is still more scope to sell to an individual store. It gives them, as one supplier puts it, a "fighting chance" to negotiate.
Suppliers see this option to sell to different co-operatives or South Island individual stores as a useful way to fuel innovation and growth. Not sure if people will like your new muesli flavour? Just make a small amount, test it out, and use your relationships to sell a small amount to an individual South Island store.
The Food and Grocery Council survey found 88 percent of suppliers think the proposed merger will make it harder for them to do deals directly with individual stores or groups of stores.
Foodstuffs South Island is in the process of becoming a more centralised buying model, but suppliers we spoke to are still heartened they can deal with a different co-operative.
Foodstuffs North and South Island both argue that suppliers would still be able to sell into individual stores post-merger.
It submits the merger "would not change the ability for suppliers to supply to a single store (or a small number of stores) or for a product to be tested in a smaller operation to prove its viability… There is no plan, and no incentive, for this feature to alter as a result of the Proposed Transaction".
The supermarket giant appears at odds with suppliers about how easy this is for suppliers to practically achieve in the real world.
Lisa Asher, a former supplier and grocery researcher, describes the time pre-2013 when Foodstuffs was three different entities, not two, and believes it was better for suppliers.
"It mitigated risk. You had three different co-operatives to sell into. When you have some stores who are more empowered to make decisions for themselves. Sometimes a region wouldn't take a product, but that didn't mean new products couldn't be launched. It also allowed for the testing of different products in different areas, before rolling it out further."
After Foodstuffs merged into two entities, the North Island arm massively cut the number of Sealord products it stocked.
"Through the North Island category review process, Sealord's range was reduced considerably. How are they going to make up that volume? And that could come from Foodstuffs South Island or Woolworths. If that happened under a single Foodstuffs entity, that would be catastrophic for that business," Asher says.
"There would be redundancies, no doubt, and a look at the business model."
"Export is certainly an option, but it couldn't make up all of it. I think it would materially impact food manufacturing in New Zealand. And that concerns me. One of things we learned through the pandemic is the importance of local because of the supply chain challenges that occurred. Things were out of stock but if you produce locally you don't have to worry about that. "
"When you lose local manufacturing and decommission factories, it's gone. To replace it with imported (seafood) product, was really sad."
Commerce Commission market study finds excessive profit
All of this is happening against a backdrop of what the Commerce Commission found was excessive profits in NZ's grocery sector.
In 2020, their market study conclusively decided more competition is needed. It detailed how supermarkets were making more than a million dollars in excess profits every day.
It found that profitability of the major grocery retailers appears higher than expected under workable competition, prices appear high by international standards, and the level of innovation appears lower than expected. It decided that pricing, promotional and loyalty practices are limiting consumers' ability to make informed decisions and that competition is also not working well for many suppliers due to an imbalance in bargaining power.
It found profits were much too high. It estimated a return on average capital employed (ROACE) for the major grocery retailers from 2015-2019 it was 12.7 percent for Woolworths NZ, 12.8 percent for Foodstuffs South Island and 13.1 percent for Foodstuffs North Island.
ROACE measures a company's operating earnings as a percentage of the capital employed in generating those earnings. The Commission said a "normal" rate of return for grocery retail in NZ would be 5.5 percent. In other words, supermarkets already make too much profit.
The Food and Grocery Council submitted it would "seem surprising to allow a proposal (the merger) that would result in further concentration and exacerbate known issues".
Foodstuffs North and South Island argue the more than $1 million a day in excess profits claim is wrong because it's based on the assumption that a business making a 'normal' return should only be covering their average cost of capital.
On its website they say: "On that basis no business would invest in New Zealand. We invest $150 million a year in innovation and new stores for customers. That would not be possible under this 'break-even' approach."
How will the Commission decide whether to allow the merger?
To allow the merger to go ahead, the Commission must be satisfied that "any lessening of competition as a result of the Proposed Merger is not likely to be substantial". That's a high bar.
It's considering any loss of competition between the North and South Island businesses themselves, such as when supply is short, and they both need it a product.
But it's not just competition against each other, but whether a stronger, merged duopolist would find it easier prevent outside players to enter markets and compete, and whether their combined strength would mean they are more able to inflict losses on a new entrant.
So how do we get lower grocery prices?
More competition: on this, suppliers, consumer advocates and the Commerce Commission agree, though Foodstuffs North and South Island say competition is working fine.
In the US, competition watchdogs have the power to break up companies by forcing the sale of some stores. Australia is investigating bringing those powers in.
In NZ, the Commerce Commission does not currently have that power. Economists consider it the most powerful tool to achieve competition in concentrated markets like ours.
The Grocery Commissioner has overseen some changes following the market study: a mandatory code of conduct for supplier contracts, opening up the wholesale supply of groceries, and bringing in anonymous feedback portal for suppliers. It has also recently launched investigations into pricing at the supermarkets.
And on June 19, 2024 the Commission announced it was taking Foodstuffs North Island to the High Court, alleging they lodged anti-competitive land covenants. They allege the co-operative’s purpose was to block competitors from opening rival supermarkets at particular sites, and developing other sites.
