Foodstuffs

New Zealand businesses often have a tough time competing against larger Australian rivals.

Our corporate history is littered with failed New Zealand attempts to break into the Australian market, while large Australian companies have done well here, often buying and running dominant companies in New Zealand and increasing their profits.

The Warehouse, Telecom and Air New Zealand are the most recent examples of our corporate failures across the Tasman. Only Michael Hill comes to mind as a success.

Australian-owned media companies Fairfax (the owner of Stuff, TradeMe and the former INL chain of newspapers), APN (New Zealand Herald) and the banks (ASB, ANZ, BNZ, Westpac and National) have all done extraordinarily well since buying into New Zealand, particularly over the last five years as they profited from dominant positions in a relatively fast-growing economy.

So most assumed that when Woolworths bought the Progressive supermarket operation in 2005 it would monster the apparently outdated cooperative structure of New Zealand’s Foodstuffs operation.

There was plenty of swagger in Woolworths’ early approach in New Zealand. It flexed its muscles as a massive purchaser to drive down prices and margins for suppliers in new “Trans-Tasman” bulk purchasing arrangements. This made a lot of local suppliers very grumpy and lost it an enormous amount of goodwill with the supplier community. New Zealand is still a small place and many have not forgotten these tough negotiating tactics.

Then in August and September of 2006 Woolworths locked out workers at its Palmerston North distribution centre for almost a month to show them who was boss after they went on strike for fairer and higher pay. After a couple of weeks, gaps began to appear on shelves. Customers joined the queue of grumpy parties, alongside workers and suppliers. Eventually Woolworths settled, but the damage to its reputation was significant with customers used to well-stocked shelves.

This early robust approach may well have worked in Australia, but it just got a lot of people’s backs up here. There is definitely a difference in business cultures between New Zealand and Australia. New Zealand managers tend to be more consensual and less confrontational than those in Australia. They don’t like criticising rivals and tend to be much more careful before deciding to “burn” a supplier or rival or union.

Australian business leaders tend to be more brash, more willing to criticise rivals and debate issues publicly. Their approach is much more about a good stoush and a beer afterwards. Here we’re a little more reticent. There’s something about our national character which is more conservative and unwilling to confront rivals. We try to avoid open confrontation if we can. That means we can sometimes get monstered in negotiations.

This, of course, is a crass generalisation, but many New Zealanders would recognise it. I worked in Australia as a business journalist for five years and found it a much easier place to report business issues because leaders there are more direct and uncompromising, although ultimately had a more outward-looking and more optimistic view of the future. I admire it, but I know it’s different.

Toll Holdings is still patting itself on the back for the amazingly high price it managed to extract from a vote-hungry Labour-led government after years of arm twisting. People I talk to in Australia still can’t believe our government rolled over for this price. They just chuckle and count the money.

So the failure of Woolworths to win the battle with Foodstuffs is unusual. We like to beat the Australians in any battle and this win is particularly sweet.

Woolworths expected to “turn around” the business it bought for NZ$2.5 billion within three years by bringing in the Woolworths Australia model of using massive purchasing power and highly centralised distribution systems to pass on lower costs to customers while increasing margins.

Yet the three years is nearly up and the business, which includes the Foodtown, Countdown and Woolworths chains, is seeing its sales growth and profit margins dropping.

Figures from JP Morgan analyst Shaun Cousins show that Woolworths’ market share has dropped to 43% from 45% in New Zealand, while Foodstuffs’ share has risen to 57% in the last couple of years.

Woolworths’ results for the financial year released on Tuesday lay bare the scale of the failure in New Zealand.

Woolworths’ profit margin (earnings before interest and tax to sales) in New Zealand actually fell 4 basis points to 4.19% and its overall profit growth was up only 6.4%. This compared with 18.8% profit growth and a 5.52% profit margin in the Australian supermarkets.

So Woolworths is a full 133 basis points less profitable in New Zealand than in Australia. That may not sound a lot but for a tight-margin, high-volume business like groceries this is a big deal. Comparable sales growth (after taking into account the different number of weeks in the financial years) fell to 3.5% in the fourth quarter of the 2008 financial year from 9.9% in the first quarter.

This is shockingly weak when overall supermarket and grocery sales reported by Statistics New Zealand rose 5.3% in the June quarter from the same quarter a year ago. Woolworths itself said food price inflation ran at 4.6% for the year so a 3.5% rise actually implies a fall in volumes.

Foodstuffs, which owns the Pak’nSave, New World and Four Square chains, is winning the battle.

So what went wrong for Woolworths and right for Foodstuffs?

Woolworths’ robust approach to heavying suppliers and workers was not popular, but the problems run deeper. Woolworths believed it could make significant gains by imposing a centralised distribution system on Progressive and introduced big “Homebrand” ranges that are made under contract for Woolworths. It is also rolling out its own Select, Naytura, Organics and Freefrom brands for various specialist foods.

This sounds like a good idea, but other suppliers get nervous when the supermarket chain starts stocking and promoting its own brands in precious shelf space at the expense of real brands. Suppliers also seem to prefer Foodstuffs’ decentralised approach in New Zealand where the supermarket is itself the warehouse (stack ‘em high and sell ‘em cheap).

It’s easier to take the supplies direct from the factory to the supermarket than to some intermediate depot. Suppliers also like dealing direct with supermarket managers rather than with warehouse managers. It means they’re one step closer to the customer.

The latest clash between New Zealand suppliers and Woolworths was revealed last month by The Independent. Woolworths wanted to penalise suppliers who were selling goods on discount through Foodstuffs at the same time as through Woolworths. It’s no surprise suppliers don’t love Woolworths.

There’s also something more fundamental going on. Foodstuffs is essentially a collection of owner-operated supermarkets who share purchasing and marketing costs, but are often fiercely independent and “local” in their approach.

That means the individual supermarket owners are intensely motivated to run good supermarkets because they keep the profits and tend to guess right what the population around their supermarkets wants to buy.

The corporatised Woolworths model has lots of employees but not many owners.

The final (and probably key) factor is Foodstuffs’ dominance in the discount grocery area. Pak’nSave has become The Warehouse and TradeMe of the grocery world all wrapped into one. It is cheap and cheerful with great ranges.

That’s what New Zealanders want right now. We are feeling the pain from higher food and fuel prices and want to find a bargain whenever we can. Pak’n'Save is simply bigger and better at it than Woolworth’s Countdown brand, as can be seen in this report from The Press.

Woolworths is trying to turn this around by converting some of its Foodtown stores to Countdown stores (Greenlane in Auckland is one that comes to mind) and rejigging its ranges to take them down market.

I think of my own family’s buying habits in recent months. We have a great collection of Pak’nSaves around us in Auckland and quite a few Foodtowns. When we need something unusual such as gluten- and dairy-free stuff we go to Foodtown, but it’s less often than it used to be. The strike/lockout in 2006 and the shortages it caused were the trigger point for us to start looking elsewhere. A visit to a supermarket is useless if you can’t get everything in one visit.

We’re now doing our big shops now at Pak’n'Save. We reckon we can save up to $100 a week.

Kiwis love a bargain and right now we seem to love the Kiwi grocery chain a bit more than the Aussie one.

Grocery giant Foodstuffs' presence in liquor retailing could get a shot in the arm as it looks to swallow Liquorland.

The co-op, which controls around 56 per cent of the grocery retailing sector, is understood to be one of several parties interested in purchasing the 72 stores of DB Breweries' franchise retail chain. Besides supermarket wine and beer retailing, Foodstuffs also operates the large format liquor store Duffy & Finn's, and the smaller format Henry's.

Success in the Liquorland bid could add fuel to the already intense rivalry with Woolworths.

The Australian-owned supermarket firm is still pursuing Liquor Licensing Authority approval for store-within-store models selling spirits as well as beer and wine - despite being denied a bid to set up in a Christchurch Countdown in what was regarded as a test-case decision.

And success for Foodstuffs could spell trouble for independently owned stores, which cannot compete with the supermarkets' buying power. Large liquor chains have a slight edge in market share, controlling around 53 per cent, to the independents' 47 per cent.

Foodstuffs was not commenting on speculation of the bid, as was DB, citing confidentiality agreements. A DB spokeswoman said the company decided to review the option of selling the Liquorland franchise after several unsolicited expressions of interest. "We're not committed to a sale - we're investigating the possibility. "We just received a bit of interest and like any business, we evaluate opportunities as they arise. "Liquorland is a successful asset for DB Breweries, so while we are looking at the option to sell, we will only consider this if a suitable buyer is identified."

Cranleigh Merchant Bankers was appointed last month to evaluate bids and manage the sale process. Evaluation of a possible sale will take place over the next few months. The spokeswoman said any sale would ensure the future interests of franchisees and staff, and the continuation of the franchise as a whole. A sale would also need to ensure that DB retained "an excellent relationship" with the franchise, retaining placements for DB products within Liquorland outlets, the spokeswoman said.

The two-year battle for control of New Zealand's biggest retailer looks set to move to a new arena - the Supreme Court - after the Court of Appeal blocked Woolworths and Foodstuffs from making bids. The decision led to The Warehouse's share price plunging to a nine-year low of $3.01 before rebounding to close down 60 cents on $3.22.

Woolworths, of Australia, and Foodstuffs, owner of New Zealand's two largest supermarket chains, issued statements expressing disappointment and saying they were reviewing their options. They have 20 working days to decide whether to appeal to the Supreme Court. Stephen Tindall, The Warehouse founder whose interests control 52 per cent of the shares, was unavailable for comment.

The Commerce Commission, which blocked the two chains from bidding for The Warehouse last June and then had its ruling overturned by the High Court in November, hailed the decision as a victory for consumers. Despite The Warehouse having only three stores with grocery offerings, it could not be ruled out as a significant supermarket competitor, commission chairwoman Paula Rebstock said. "The commission considered the presence of an innovative third party, such as The Warehouse, had the potential to increase the level of competition in this important market."

Most analysts, fund managers and competition lawyers BusinessDay spoke to said they thought Woolworths and Foodstuffs would go to the Supreme Court. "I'd say there's an 80 per cent-plus chance of that happening," Tower portfolio manager Paul Robertshawe said. Buddle Findlay competition partner Tony Dellow said: "Given they have already spent a lot of money on this, the incremental cost of going to the Supreme Court is pretty low."

What chance the companies have in the Supreme Court will be hard to gauge till the Court of Appeal issues its judgment, probably early next week. "A lot is going to depend on how the Court of Appeal has framed its answer today," Chapman Tripp partner Andy Nicholls said. The two main questions would be about the likely performance of The Warehouse Extra stores (offering groceries) in the next few years and how speculative the commission could be in predicting whether the stores would challenge the existing supermarket duopoly. "The concern everybody will have is the extent to which the Court of Appeal has endorsed the commission taking quite a speculative approach when faced with a new entrant. I imagine the supermarkets will be looking hard at that, and that would be the question they would consider [testing] in the Supreme Court."

If they are unsuccessful, there are several other ownership scenarios for The Warehouse. Mr Tindall, who made a $5.75-a-share bid in partnership with Pacific Equity Partners in 2006, may have another go at privatisation. "Price-wise the timing would be better now than it was then," Forsyth Barr analyst Guy Hallwright said. "But raising debt would be a lot more difficult."

Deutsche Bank analyst Kristan Walker said Mr Tindall and PEP could well make an offer for the 20 percent held by the two supermarket players. "It could be quite an opportune time for Stephen Tindall to come out with a privatisation plan and literally offer something on the table and take the stock off their hands – that's an extra 20 percent that sits alongside his 50-odd percent, and then it's not so much of stretch to get to the compulsory acquirement level."

Market commentator Arthur Lim said funding such a move would not be an issue, with Mr Tindall's stakeholding and PEP among one of the most cashed-up private-equity funds around. Nothing was stopping Mr Tindall going ahead with another privatisation bid, but without knowing whether Foodstuffs or Woolworths would appeal, such a move would be premature.

Rival bidders may also emerge, with Australian conglomerate Wesfarmers seen as the most likely. However, after buying supermarket chain Coles last year, Wesfarmers was busy trying to turn that business around, ING senior analyst Craig Brown said. "I think you've got the two most logical bidders on the table right now."

The Warehouse may decide to scrap its grocery strategy, though it is unclear whether that would clear the way for a Woolworths or Foodstuffs bid. "One thing that hasn't changed in all this is that the key player is Stephen Tindall," Mr Brown said.

Foodstuffs and Woolworths have up to 20 days to decide on whether to appeal the court decision blocking any takeover bids for The Warehouse.

Legal experts were surprised at yesterday's Court of Appeal decision, having previously believed the Commerce Commission faced an uphill task overturning the High Court judgement granting the all clear to the two suitors. "These competition issues are difficult, and it's the hard cases that go to court," said Tony Dellow, competition lawyer at Buddle Findlay. To me I always thought that they would get the clearance. We've got to see the reasons I guess but to me, the High Court decision was very factually-based and they're hard to turn over, so I suppose the commission's done well in that sense. That being the case, there must be a fair prospect of an appeal."

The reasoning behind the decision has yet to be made public, as lawyers for Foodstuffs, Woolworths and The Warehouse are still to appear before the court again to be heard on what commercially sensitive information should be deleted from the judgment that is to be made publicly available.

Simpson Grierson senior associate James Craig said the parties also needed to work out if an appeal to the Supreme Court was an option.

The Warehouse founder Stephen Tindall may relaunch his bid to buy back the Red Sheds after a court decision to prevent the supermarkets from initiating takeover bids. The Court of Appeal's move to overturn the High Court judgment clearing suitors Woolworths and Foodstuffs to acquire the country's largest listed retailer means Tindall could resurrect plans to take back the business he started 26 years ago.

Tindall, who already controls 53 per cent of the company, announced plans on September 14, 2006 to reprivatise the group in order to pursue ambitious plans to spread super-stores offering a total retailing mix including groceries and general merchandising. Back then he and Australian private-equity firm Pacific Equity Partners were offering shareholders $5.75 a share - representing just a 12.5 per cent premium on the $5.11 closing price on the day. Weeks later he was trumped by Woolworths, which swooped on a 10.1 per cent stake at $6.50 a share.

But market experts say yesterday's development could see Tindall's grand plan back on the table.

Tindall and PEP managing director Tim Sims are understood to still hold each other in high regard, and the Red Sheds' share-price plunge yesterday to $3.22 means buying up the remaining 43 per cent becomes an entirely more attainable option. Based on his 2006 offer premium, Tindall may need to offer only $3.62 a share, given the state of the markets.

Deutsche Bank analyst Kristan Walker said Tindall and PEP could well make an offer for the 20 per cent held by the two supermarket players. "It could be quite an opportune time for Stephen Tindall to come out with a privatisation plan and literally offer something on the table and take the stock off their hands - that's an extra 20 per cent that sits alongside his 50-odd per cent, and then it's not so much of stretch to get to the compulsory acquirement level." But he cautioned that a private-equity investor would also be contemplating its exit strategy. With the two major players Foodstuffs and Woolworths unlikely candidates for a trade sale, the offer price now would have to factor in an attractive rate of return. "It comes down to price now."

Market commentator Arthur Lim said funding such a move would not be an issue, with Tindall's stakeholding and PEP among one of the most cashed-up private-equity funds around. "The ability to source funding might not be as readily accessible as before, but a 53 per cent shareholding accounts for a lot of underlying equity."

Lim said there was nothing stopping Tindall going ahead with another privatisation bid, but without knowing whether Foodstuffs or Woolworths would appeal such a move would be premature. "If Stephen makes his move he would have to be comfortable that they are not going to frustrate the process."

Head of research at ABN AMRO Craigs, Mark Lister, said the potential for Tindall to revive his privatisation plans was still there, but the prospect might be even more attractive in future. "The outlook for the domestic economy doesn't look like it's hit the bottom yet, so while it's at the low point, it still could go even lower," he said. "Retail's a sector that we're still all fairly cautious of, despite things having come back a fair way. There's still probably going to be a tough road for retailers in the short term."

With the two court decisions going either way, Lister believed there was a fair chance the suitors could appeal. "Either way, it sounds like that it's going to be reasonably drawn out, whether they do anything or not. "It still could be a little while before you get a final, final resolution on what ends up happening with The Warehouse," he said.

Deutsche's Walker, who had been favouring Woolworths to be the successful bidder, believed an appeal was likely. "I think it's going to be difficult, if not impossible, to replicate the same floor space that The Warehouse has in relation to Woolies wanting to be a major player in the general merchandise category in New Zealand. "It really does leave little options [for Woolworths] on the table."

Woolworths and Foodstuffs were reviewing their options after the decision.

Foodstuffs managing director Tony Carter said it was difficult to comment further or make a judgment on a potential application for leave to appeal, as they had yet to see the reasoning behind the decision. "There is a statutory 20-working-day period for an application for leave to appeal to the Supreme Court. We will be utilising this time to digest the Court of Appeal ruling before making any decisions."

The Commerce Commission, meanwhile, called the decision a victory for market competition and supermarket consumers.

THE STORY SO FAR
* The Warehouse has been in play since September 14, 2006, when founder Stephen Tindall revealed plans to privatise, offering $5.75 a share in partnership with Pacific Equity Partners.
* Later that month he was trumped by Woolworths, which bought a 10.1 per cent stake at $6.50 a share.
* In December 2006 Foodstuffs - already a 10 per cent owner - declared its intention to bid for The Warehouse. Foodstuffs and Woolworths applied for Commerce Commission approval to proceed.
* In late June last year the commission declined their applications.
* An appeal against that decision was heard in the Wellington High Court in October.
* On November 30 the High Court overturned the commission's decision.
* The commission applied for leave to appeal the decision and on January 31, the High Court granted it.
* The commission's appeal was heard in late April in the Appeal Court.
* On May 2, Woolworths and Foodstuffs agreed to a moratorium on bidding until 48 hours after the Court of Appeal issues its judgment.
* The Court of Appeal yesterday overturned the High Court decision, preventing Woolworths or Foodstuffs from launching takeover bids.

Updated 10:15AM

The Court of Appeal has stopped supermarket giants Woolworths and Co-operative Foodstuffs from bidding for The Warehouse.

The Commerce Commission's appeal against a High Court decision allowing the two retailers to lodge takeover bids has been successful. In an announcement to the stock exchange, The Warehouse said it would not be making any comment on the court's decision until it had received the full judgement and "considered its implications."

New Zealand-owned Foodstuffs and Australia's Woolworths each have 10 per cent stakes in The Warehouse, and successfully went to the High Court to overturn the Commerce Commission decision to block any potential takeover. The commission has now won this appeal. It has just released a statement on the case, saying the decision was "a victory for supermarket consumers and competition in markets. The Commission's case has focussed on its concerns about competition in the supermarket sector where there is, in effect, a duopoly at present, except in the three regions where The Warehouse has opened a super centre."

Commerce Commission Chair Paula Rebstock says in the statement "New Zealand consumers know that more competition is needed in the supermarket sector. In coming to its decision to decline the acquisition the Commission considered that The Warehouse had already brought important new dimensions to supermarket competition, and potential competition, through its innovative super centre stores.

"The Commission was prepared to leave it to the market to decide whether The Warehouse super centres would be viable. We did not consider that the Commission could rule out The Warehouse as a significant supermarket competitor, either now or into the future. The Commission considered that the presence of an innovative third party - such as The Warehouse - had the potential to increase the level of competition in this important market," said Rebstock.

"New Zealand consumers and competition are the winners today," she said. "The Commission declined clearance in mid-2007 for acquisition by either Foodstuffs or Woolworths, because New Zealand's supermarket retail market is already highly concentrated. There are high barriers to entry in the industry, yet The Warehouse is uniquely placed to compete with the supermarkets because of its existing property portfolio, extensive distribution networks and established brand."

Woolworths and Foodstuffs argued that if either was successful with bids, grocery competition would remain strong.

Between them, Woolworths and Foodstuffs account for about 99 per cent of the grocery market, but despite the duopoly, margins have been described as slim and competition intense. Foodstuffs, a co-operative, runs the New World, Pak 'N Save and Four Square brands. Woolworths bought Progressive two years ago and runs the Foodtown, Countdown and Woolworths brands.

The Warehouse had planned to roll out 15 Warehouse Extra stores, which have a grocery component. Three were opened but further expansion was put on hold in September to allow the company to assess their performance.

Forsyth Barr analyst Guy Hallwright said that he had thought the Appeal Court's decision would be an "each-way call", and was not surprised by today's outcome. "If the decision had not gone this way then firstly it would have basically made the Commerce Commission into a toothless body," he said.

Most people would have thought that any ruling made by the Commerce Commission could be taken to court where it would be overturned. That would have put parties in a strong bargaining position with the commission. "Secondly it (a decision in favour of Woolworths and Foodstuffs) would open the way for duopolists in any area of business to overtake new entrants in the early days on the grounds that competition is not substantially diminished because there's not much competition there yet. So, you would basically entrench duopolies," Hallwright said.

There could be further appeals, but in the meantime The Warehouse was takeover-proof against the supermarket operators. The Warehouse's share price was already somewhat reflecting that position, but he expected it to fall a little further today. "If you look at the share price, it has fallen away very, very substantially and the longer it took for the decision to come out, the more it fell away, which means people have been thinking `it doesn't look good for a clearance for the takeover'."

The Appeal Court hearing was held three months ago, when the company's share price topped $6. The price was $3.82 when the market closed yesterday. The Court of Appeal, along with setting aside the High Court decision, has also ordered the two supermarket chains to pay costs to the Commerce Commission.

Supermarket giant Progressive Enterprises is turning the screws on its suppliers with a "no clash policy" imported from Australia. The policy financially penalises grocery suppliers for having their product promoted in rival supermarkets at or around the same time as Progressive's own advertised promotions. Should a clash happen, suppliers will be charged for the differential on the price offered in the opposition supermarket.

Progressive also wants details of suppliers' forward promotion plans with competitors. The practice so worries the Food and Grocery Council, it went to Auckland barrister John McBride for an opinion.

The council told its members to seek their own legal advice, but says it would counsel against accepting the policy. It has recommended they decline the request to share forward promotion plans.

Progressive's managing director Peter Smith said in a written statement yesterday that the company was not breaching any law when indicating to suppliers it would not accept promotions for inclusion in its mailers where there was a clash with a competitor's promotion arranged by the supplier. But nowhere did Smith address the policy's punitive element dropping the price of a product in a Progressive store to match that of a competitor, then back invoicing the supplier for the price difference. Nor did he address the cost to the supplier of having a product dropped from a promotions mailer at the last minute.

Smith said it did not make commercial common sense to enter into a promotion arrangement with a supplier at the same time or immediately following the same or a greater promotion by a competitor arranged by the supplier. "Having the same or a greater promotion in competitor's stores immediately before or at the same time defeats the purpose." Smith recognised the policy might require suppliers to revise marketing plans and said he was happy to work through concerns with suppliers.

In documents obtained by The Independent the grocery council's commercial director, Lindsay Davidson, told his 158 members that Progressive risked breaching restrictive trade practices under the Commerce Act.

The policy could also be seen as a prohibitive price fix when Progressive had "Select" or "Home Brand" competing in the same category, or horizontal pricing, in which it could be seen as trying to influence the retail prices of a competitor.

Progressive told suppliers the week prior and the week of a promotion in rival supermarkets such as New World would be deemed a "no clash" period. This means there must be no advertised clash on the same product or assortment of products as between a Progressive mailer and a competitor's mailer for the week of and week prior to the promo. In the event a supplier had a promotion at New World with prices lower than in Progressive stores, Progressive would lower the retail price immediately on the same product in its store. It would then back invoice the supplier for the difference, based on items scanned at the checkout.

Progressive runs Foodtown, Woolworths and Countdown New Zealand-wide and Fresh Choice and Super Value supermarkets in the South Island. Foodstuffs runs rival New World and Pak'nSave.

Foodstuffs managing director Tony Carter said he had heard about the new Progressive policy on promotions but his company did not practice it, nor had it ever been practised in New Zealand before. He warned suppliers if they breached confidentiality by tip-ping Progressive about its promotions "we would view it very seriously".

Suppliers spoken to by the Independent are furious about the practice and don't want to co-operate with it, but fear if they don't play ball their products will be left off the supermarket shelves.

The Commerce Commission said it had not received a complaint about Progressive Enterprises' 'no clash policy' and did not have sufficient information to determine whether or not the behaviour breaches the Commerce Act.

RUNNING A RULE

Auckland barrister John McBride has run his legal ruler over Progressive's "no clash" policy.

Remember, the policy means that if New World, owned by competitor Foodstuffs, runs a promotion on a product a week before one planned by Progressive's Woolworths stores, Progressive would not only pull the product from its promotional mailer, but would lower the product price to match the competitor, then deduct from its next remittance the difference for what it costs Progressive to match a lower promo price.

The key issues raised were:

Supplier volumes could be reduced because a supplier's product is removed from the Progressive mailer, damaging the benefit of going to the lower price point. If Progressive had ordered the product before it was left out of the mailer it could mean the product didn't sell, forcing Progressive to delay re-ordering.

A contract cannot unilaterally be varied unless by agreement, so it is unlikely Progressive could legally enforce a back invoice that reduced the pre-agreed supply price of promo goods. It would also breach this contract by removing it from the mailer.

Section 30 of the Commerce Act prohibits a price-fixing arrangement between competitors. "There is no cartel hatched in a smoke-filled room or secret phone calls between CEOs of competing businesses," says McBride. But the likely effect is a regime to make sure New World doesn't have a promo price when Progressive does.

There is a risk of a prohibitive price fix if there is no Progressive house brand in the product market. But it would be difficult for the Commerce Commission to demonstrate individual suppliers' vertical agreements with Progressive also amounted to horizontal understanding between those suppliers.

On a possible breach of Section 36 of the Commerce Act covering the misuse of market power, McBride said it was hard to bring home a case against a powerful supermarket over alleged "bullying" of suppliers. The supermarket could convincingly say it was enforcing the policy in the interests of delivering benefits of price, quality and choice to consumers, therefore it was not anti-competitive. But McBride said it would be very difficult for Progressive to characterise a "no slash" policy as being in the interests of consumers.

New Zealanders are radically changing their grocery shopping habits as they tighten their belts.

Foodstuffs South Island chief executive Steve Anderson said the co-operative chain, which has Pak'n Save, New World and Four Square, had seen a huge change in shopping behaviour. "It's like someone flicked a switch three months ago and as a result people are changing the way they shop," he said. "The trend is towards Pak'n Saves for the cheaper prices," Anderson said.

Rising fuel prices had also proved a blessing for smaller grocery stores in rural areas. Anderson said the trend was towards shopping in rural Four Squares and New Worlds, rather than coming into the city. "People have been calculating how much it costs to drive and as a result they're shopping locally," he said. "Prior to the fuel increases no-one seemed to think about it and now they do it's cost-effective to shop there rather than spend $25 to drive to supermarkets."

Anderson said the popularity of products had also changed, with house brands increasingly in demand. "Budget and Pam's are doing very well, which is an indication of tighter times."

Another noticeable change was the shift towards 500g blocks of cheese rather than the traditional 1kg block as prices rose. "People went from a situation where they were happy to live this lifestyle because of the value of property and their job is safe and then they started thinking these pillars are not there so they've gone from spenders to conservers."

Angus McNaughten, of the Kiwi Income Property Trust which owns malls including Northlands, said there had been a shift to the cheaper supermarkets. "It would be fair to say ... people are becoming a lot more cost-conscious," he said. "It's a sign of the times."

Progressive Enterprises spokeswoman Fiona Breen said Progressive's supermarkets, which include Woolworths and Countdown, had experienced strong growth in their in-house label, Homebrand. She said there had also been a change in where people shopped.

Petrol prices had changed people's habits and many preferred not to drive as far to shop, she said. "Convenience in location is becoming a big factor," she said. However, they had not seen a noticeable shift from Woolworths to Countdown, perhaps because the prices at the stores were now similar.

Shopper Irena Sutherland said she had recently changed to Pak'n Save Moorhouse in Christchurch because of the competitive prices. "I used to shop at New World in Opawa but I found it cheaper here, I have to confess," she said yesterday. "I also buy the house brands, why not? They serve the same purpose."

Sharon Lister said that although she had closer supermarkets, she travelled to Moorhouse Avenue because it was the cheapest option. However, Lister also went to other supermarkets for specific items when they had good deals. "I shop around, especially with the cheap brands," she said. "If they've got something on special I will go down and grab it."

Glen Steele, of Hanmer Four Square, said more residents of the North Canterbury town were shopping locally but business was suffering from a drop in tourist numbers.

Seeking a new challenge, Blenheim couple Jo and Jack Stafford are moving south to take up the reins of Kaikoura New World.

The couple, who currently co-own Blenheim New World with Mrs Stafford's sister Andrea Boock and her husband Mark Elkington, take over the store from owners Jason and Joanne Williams on August 4. From then Ms Boock and Mr Elkington will be the sole owners of the Blenheim store.

"Kaikoura came up for sale and we just thought it was a great challenge and a great opportunity for us," Mrs Stafford said. The couple make the southward move at the end of the month, along with their 10-month-old baby daughter, Charlotte. "We're excited about moving to Kaikoura and getting involved in the community and being part of the small-town spirit," Mrs Stafford said.

The Williams', who have owned the Kaikoura New World for about five years, are moving to Timaru to take over the town's PAK'nSAVE store at the end of August. Six-and-a-half years ago the couple owned Kaikoura's Four Square for about 18 months.

At this point Mrs Stafford said she and her husband did not have any changes planned for the Kaikoura store and the takeover would not bring any noticeable differences for shoppers. "It will be really nice to eventually make our own mark on the store with maybe some different products, but for now it'll stay as is," she said.

Supermarkets are in the Boock family's blood as Mrs Stafford's parents, Bruce and Maria Boock, bought the Blenheim New World in 2000 before handing it on to their daughters and their husbands earlier this year. Mrs Stafford's paternal grandparents started the family in the industry with a Four Square supermarket in Dunedin in the 1970s. Much of her extended family on her father's side are either working or have worked in the family supermarkets or in supermarkets of their own. "So in my family, instead of falling out of cots, we fell out of shopping trolleys," she said.

Although the couple were looking forward to the move, Mrs Stafford said it would be tinged with a little sadness. "It will be sad to say goodbye to Blenheim with all our family and friends here. Also our staff, they have been a huge part of our lives."