hypermarkets

The Commerce Commission is sticking by its view that The Warehouse can make a success of its "Extra" supercentre format and says it is not for the court to conclude that the concept will fail.

In his opening submission for the commission in the High Court at Wellington yesterday, Stephen Kos, QC, said based on overseas experience it could take several years for the supercentre concept to be successful here.  "It should be no surprise that the first year for Extra has been a hard one."

Woolworths and Foodstuffs are appealing against the commission's June decision to block either of them from taking The Warehouse over.  The court can overturn the commission's decision.

The launch of the Extra stores, of which there are now three, was the main reason for the commission turning down the supermarket companies' takeover clearance applications.  The Warehouse originally talked about having 15 of the stores in five years.  When making its ruling, the commission said New Zealand's supermarket retail market was already highly concentrated, and a reduction of players from three to two would substantially reduce competition, to the detriment of consumers.

Last month The Warehouse said the performance of the Extra concept had been below expectations, and more of the stores would only be opened when the economic potential of the model was proven.

But Mr Kos said the commission had been aware that The Warehouse was planning to "pause" the roll-out of Extra when it reached its decision in June.  "Extra's success is not assured, but is in the commission's view a plausible prospect."  However, the supermarket companies had been "publishing Extra's obituary".

Woolworths had misrepresented a planned March 2008 review by The Warehouse board of the format as being held with a view to abandoning the strategy, he said.  This was not the case.  "It is not for the commission to reach a conclusion that the board of The Warehouse has not reached and may not reach. Until the owner of the enterprise says 'this is not something we are going to continue', we must assume there is a reasonable chance it will keep going."  Mr Kos said a defining feature of Woolworths and Foodstuffs' submissions to the court had been "their distorted view of the key facts and legal elements of the appeal".

He challenged many aspects of their points, including their suggestions that they could be more successful at running the Extra stores than The Warehouse.  "Either incumbent, if cleared to acquire The Warehouse would resist cannibalising sales from its existing stores."

Mr Kos also questioned the extent to which there was intense competition in supermarket retailing, as portrayed by Foodstuffs and Woolworths.  "The commission does not subscribe to that."  The supermarket sector was not intensely competitive either in pricing or service, and there was very little innovation in either service or product range till the advent of Extra, he said.

The case, being heard by Justice Mallon and Australian academic Stephen King, finishes on November 2.  Confidential evidence was to be heard in a non-public hearing today from The Warehouse's chief executive Ian Morrice, and managing director of Woolworths' subsidiary Progressive Enterprises, Peter Smith.

The Warehouse Extra lacks the economies of scale required to be a viable and effective competitor in grocery markets and would not achieve them in the foreseeable future, David Goddard QC told the Wellington High Court yesterday.  Goddard is acting for Woolworths in its appeal against the Commerce Commission's blocking of a prospective takeover of the company by Woolworths or Foodstuffs.

Goddard also said the Warehouse Extra "experiment" depended on the "halo effect" where selling groceries resulted in much higher sales of general merchandise in that store than in outlets devoted to general merchandise alone.  It was not clear that was being achieved.

Like much of the information which the court will hear over the nine-day hearing, Goddard's third key point was deemed to be commercially sensitive and will not be made public.  The hearing should not be "a clearing house for commercially sensitive information", Goddard told Justice Jill Mallon and lay member, Professor Stephen King of the Australian Competition and Consumer Commission.

Woolworths, Foodstuffs and The Warehouse are all involved in appeals against the commissions' June decision disallowing a takeover of The Warehouse by either of the other two.  Woolworths and Foodstuffs each have a 10 per cent stake in The Warehouse which is 51 per cent owned by founder Stephen Tindall. A successful appeal against the commission's ruling would likely be followed by a full takeover bid worth about $2.5 billion.

In July, commission chairwoman Paula Rebstock said that without the "competitive threat" offered by The Warehouse's fledgling move into grocery retailing via its Warehouse Extra stores "Foodstuffs and Woolworths would not face the same incentives to reduce prices, and increase quality, service and innovation".

Foodstuff's share of New Zealand supermarket sales is about 56 per cent against Woolworth's 44 per cent.

The commission was not satisfied a Warehouse takeover by either of the duopoly members would not lessen competition.  However, since the commission's initial decision, The Warehouse has said its three Extra stores, at Sylvia Park in Auckland, Te Rapa in Hamilton, and Whangarei , were underperforming and it had put plans for further Extra stores on hold for the current financial year.

Much of Friday's court session will be dedicated to an update of relevant information, which Goddard confirmed would deal with The Warehouse's postponement of a further rollout of Warehouse Extra stores.  "The game has moved on," he said.  That additional information, also to be heard in a closed session, would be central to Woolworth's appeal.

The court will hear opening submissions from Foodstuffs and the Commerce Commission today. Testimony from expert witnesses, principally economists, will be heard early next week.

The Commerce Commission was wrong in deciding that a Woolworths takeover of The Warehouse would harm competition, Woolworths says. The Australian supermarket giant and its rival Foodstuffs are appealing against a commission ruling in July blocking either of them from making a bid for the Red Sheds' owner. The Warehouse has joined the appeal against the commission, which began yesterday in the High Court at Wellington.

In his opening submission for Woolworths, David Goddard, QC, said the commission's findings were not supported by evidence. "The commission has made significant errors in its analysis of the material before it, has failed to have regard to important information before it, and has made findings that are based on speculation and lack of a proper evidential foundation," Mr Goddard said.

The main factor in the decision to reject the applications was The Warehouse's move into supermarket retailing through its new Warehouse Extra hypermarket stores. So far it had three such stores.

Commission chairman Paula Rebstock said in July that New Zealand's supermarket retail market was already highly concentrated, and "a reduction of players from three to two would substantially reduce competition, to the detriment of New Zealand consumers".

But Mr Goddard said the commission had erred in law in the approach it adopted to its competition analysis. The commission could not decline a clearance application based on "possibilities". The Warehouse lacked the economies of scale to be a viable competitor in grocery markets "and will not achieve those economies of scale in the foreseeable future". Mr Goddard said the proposed acquisition by Woolworths of The Warehouse was unlikely to substantially lessen competition because the presence of Warehouse Extra had no material effect on competition in grocery markets. The "supercentre" concept, as Extra has sometimes been described, was at least as likely to continue if a takeover of The Warehouse took place, he said.

The commission's decision had overlooked the fact that both Woolworths and Foodstuffs were better placed to advance the supercentre concept than The Warehouse due to their superior economies of scale and distribution networks. There was no reason to expect any reduction of the intense competition between Woolworths and Foodstuffs if The Warehouse was taken over, Mr Goddard said. The vigorous pursuit and passing on of cost savings and the introduction of competitive initiatives had begun before any Warehouse Extra stores opened and could be expected to continue.

Woolworths and Foodstuffs each acquired 10 per cent stakes in The Warehouse last year and had been expected to start a bidding war for the company if their applications to the commission were successful.

The appeal, being heard before Justice Mallon and Stephen King, an Australian academic and commissioner on the Australian Competition and Consumer Commission, is taking the form of a complete rehearing of the Woolworths and Foodstuffs applications. The court has the power to overturn the original commission ruling.

The Warehouse Extra announces café and bakery partners

Auckland, 31st May 2006 - The Coffee Club and Brumby’s bakery have been announced as the
bakery and café partners in the first Warehouse Extra store, which is just over a week away from
opening at Sylvia Park in Auckland.

“These partnerships are another step towards offering customers everything they need under one roof
at The Warehouse Extra. As well as The Warehouse Cellars and an in-store pharmacy, customers will
be able to get excellent coffee from The Coffee Club, and pick up freshly baked bread from Brumby’s,”
Cynthia Church, spokesperson for The Warehouse, says.

The Coffee Club at The Warehouse Extra is the first time The Coffee Club has moved into the
Auckland market. It will be run by Noela Atonio and David Lanham, who have recently returned home
from overseas. It will seat 95 people, employ approximately 20 staff, and will be open seven days a
week.

“We know Aucklanders love their coffee and their shopping. Living abroad I really missed my flat
whites, so now I’ll be able to offer customers excellent coffee while they take a break,” says Mrs
Atonio.

Brumby’s bakery will be situated at the front entrance of The Warehouse Extra store, to tempt
customers with the smell of freshly baked bread every day. Brumby’s currently has 21 stores operating
throughout New Zealand.

“We do our baking on site daily, and our breads are all preservative free, so we fit well with The
Warehouse Extra’s aim of offering customers the best fresh food all the time,” says Rachel Casley,
Franchise Operations Manager of Brumby’s New Zealand. The bakery will also stock a range of pies,
muffins, doughnuts and savouries.

The Warehouse Extra is Australasia’s first store with an integrated non-food and food product range
under one roof. The Warehouse Extra will feature fresh food and a full grocery offer, as well as
Brumby’s bakery, The Coffee Club café, pharmacy@thewarehouse, and wine and beer sold through
The Warehouse Cellars, along with the expected range of general merchandise and clothing.
The Warehouse Extra opens on Thursday 8 June at Sylvia Park in Auckland.
-ENDS

For further information on The Warehouse Extra, please contact Cynthia Church on 021 433 284
For further information on Brumby’s, please contact Rachel Casley on 027 4843 452
For further information on The Coffee Club, please contact Brad Jacobs on 027 526 3333

Background on The Coffee Club:
Headquartered in Brisbane, The Coffee Club is Australia’s largest locally owned coffee retailer with
more than 140 stores across Australia, and now there will be two in New Zealand.

Bay of Plenty, 18 April 2006 - The first branch of The Warehouse Cellars opens inside the Fraser Cove store of The Warehouse at 10am today, which is good news for Bay of Plenty residents looking for an extensive range of beer and wine at competitive prices.

The Warehouse Cellars is an associated company of The Warehouse Group Limited, and branches will be situated inside The Warehouse stores.  The next branch will be situated inside The Warehouse Extra in Auckland. As well as The Warehouse Cellars, the 12,500m store will offer a fresh food offer, a bakery, a café and an in-store pharmacy. Located in a landmark retail development at Sylvia Park, The Warehouse Extra will be the first store to offer a full non-food and food offer all under one roof.

Cynthia Church, spokesperson for The Warehouse Cellars, says that opening the first branch is an exciting step in the development of both companies. “We’re looking forward to offering customers a new option when they’re looking for beer and wine. We have over 250 different products in our wine range, including leading brands such as Kim Crawford, Huntaway and Leeward Landing, and of course all the leading beer brands will be stocked as well.”

An important part of The Warehouse Cellars’ philosophy is helping customers decide which wine to buy for each occasion. “It can be daunting trying to figure out which wine goes best with which food, so at The Warehouse Cellars all our wine is labelled with ‘descriptors’ to outline the type of wine and the food it suits. We want to make shopping easy for our customers,” says Ms. Church.

There will be regular wine tastings where customers can have their questions answered by wine experts.  The opening week will see some first-rate deals throughout The Warehouse Cellars, and it’s not only for wine buffs as there will be great value specials on leading beer brands.

The Warehouse Cellars has been established as a responsible retailer, and will be asking for proof of ID from anyone who appears to be under the age of 25. The licence restrictions in place for The Warehouse Cellars require that customers under 18 can only enter if accompanied by a parent or legal guardian, so the team will be checking this with shoppers as they enter.

The Warehouse Cellars branch opens at 10am on Tuesday 18 April, and opening hours from Wednesday 19 April onwards will be 8:30am to 8pm.
- ENDS -
For further information please contact Cynthia Church, Corporate Affairs Manager, The Warehouse Group, 09 488 3255 or 021 433 284.

Background information on Warehouse Cellars
The Warehouse Cellars is an associated company of The Warehouse Group Limited. It is a joint venture between The
Warehouse Group and business partner Reliance Wines Ltd. Reliance Wines is owned by Ed and Barbara Aster. Ed
Aster is joined as a Director of The Warehouse Cellars by independent director Laurie Doolan. Directors representing
The Warehouse Group are CEO Ian Morrice, CFO Luke Bunt, GM Commercial Development John Journee, GM Business
Development Phil Jamieson, and Director of Operations Richard Lewis.

Background information on The Warehouse
The Warehouse Group had sales of $NZ2.203 billion and profit of $NZ39.0 million for the year ended 31st July 2005.
The Warehouse Group comprises 85 Warehouse NZ stores and 43 Warehouse Stationery stores. The Warehouse
Group employs more than 9,000 people across New Zealand.