commerce commission

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.

Questionable supermarket policy needs investigation: Greens

Allegations that supermarket giant Progressive Enterprises is applying pressure to its suppliers adds further impetus to the Green Party's call for a Commerce Commission inquiry into industry practices, and a code of conduct for supermarkets, Safe Food Spokesperson Sue Kedgley says.

According to a news report, grocery suppliers will be penalised for having their products promoted in rival supermarkets at or around the same time as Progressive's own advertised promotions. If this occurs, suppliers would be charged for the differential on the price offered in the opposition supermarket.

"These are precisely the kind of tactics that penalise small independent growers and suppliers who are already struggling in a highly competitive environment," Ms Kedgley says. "Progressive allegedly wants details of suppliers' supermarket specials with trade competitors - in advance - and will not accept promotions for inclusion in its mailers where there is a clash with a competitor's promotion arranged by the supplier," Ms Kedgley says.

Ms Kedgley says she is alarmed at reports that, while suppliers are furious about these practices, they fear if they don't play ball, their products would be left off supermarket shelves.

"Why should a farmer who grows and supplies broccoli to Progressive and the local New World be punished by a retrospective cut on their payment from Progressive because New World decides to have a special on broccoli in the same week?

"Most farmers and manufacturers have nowhere else to sell their produce than the two supermarket chains that control 96 percent of New Zealand's grocery market. An investigation would clarify whether there is any truth to the allegations that Progressive may be misusing its position to force small farmers and business people to take cuts in their margins.

"It would also determine whether this practice breaches the restrictive trade practices under the Commerce Act.

"New Zealanders spent $16 billion in supermarkets last year. They are a huge business, and it is essential that there are clear rules governing the trade, which prevent unfair trading practices occurring in the sector. That's why we need a Commerce Commission Inquiry into the sector and a code of conduct for supermarkets, such as exists in the United Kingdom," Ms Kedgley says

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.

Infratil says it has no plans to sell its minority stake in Wellington bus operator Mana Coach, even though the High Court has ruled out a planned merger with its Wellington bus business.

Infratil subsidiary New Zealand Bus runs the scheduled bus services in Wellington and the Hutt Valley. Mana Coach operates mainly north of Johnsonville and has limited runs into Wellington. Infratil acquired its 26 per cent holding in Mana Coach through the purchase of Stagecoach New Zealand in 2000.

New Zealand Bus was fined $500,000 and costs of about $600,000 by the High Court in 2006 after it tried to buy the rest of Mana Coach without Commerce Commission approval. The Mana Coach vendors at the time, Kerry and Ian Waddell, were found guilty of being accessories to the transaction, but not fined. Their conviction was subsequently overturned on appeal.

The Waddell family sold its 74 per cent stake in Mana Coach to merchant bank Bancorp, which in turn sold it to British transport entrepreneur Brian Souter last December.

Infratil executive Paul Ridley-Smith said yesterday that he expected the ownership structure of Mana Coach to continue in its current form.

Mr Souter was an experienced bus operator as a founder and major shareholder of Stagecoach, he said.

Last week the Court of Appeal turned down an appeal by the Commerce Commission against the High Court's decision not to convict Infratil for its role in the transaction. But the judgment upheld the $1.1 million fines and costs for New Zealand Bus, which were paid in 2006.

The Commerce Commission said today it had cleared Cavalier Corp and Norman Ellison Holdings to form a joint venture company that will acquire the carpet businesses of Norman Ellison and its subsidiaries. Commission chair Paula Rebstock said the watchdog was satisfied the proposed acquisition would not substantially lessen competition in any relevant market.

Auckland-based Cavalier manufactures and distributes broadloom carpets to domestic and export markets.

Norman Ellison is a privately owned and operated yarn and carpet manufacturer with tufting machinery and a yarn spinning plant in Auckland. It manufactures a range of carpets marketed under the Norman Ellison carpets brand in New Zealand and Australia. Cavalier shares were untraded today, having last traded at $3.13. They have traded between $2.96 and $3.62 in the last year.

The Commerce Commission's argument forbidding a takeover of The Warehouse by supermarket companies Woolworths and Foodstuffs is wrong, wrong and wrong again, the High Court has been told.

Closing submissions in the two-week appeal against the commission's decision to block the acquisition began in Wellington yesterday with brief public summaries by lawyers for the appellants and the commission.  The rest of the closing arguments, which are expected to finish today, were closed to the public because of confidential commercial information being shared.

In June the commission blocked any takeover bid for the Warehouse Group, which comprises 85 Red Sheds and 43 "blue shed" stationery outlets, by either Woolworths or Foodstuffs.  The two groups dominate supermarket retailing, and each has a 10 per cent stake in The Warehouse.  The case focused on the three Warehouse Extra hypermarket stores, which offer full supermarket service.

Yesterday commission lawyer Stephen Kos, QC, told the court the basis of that decision was that any takeover would lessen competition. The commission had good reason to doubt that any purchaser would run the Extra stores in a competitive and commercially "vigorous" fashion.  The appellants' argument that Warehouse Extra would be unlikely to succeed should not be assumed by the court, Mr Kos said.  "They will compete and the acquisition will decrease that competition."

Woolworths' lead lawyer, David Goddard, QC, said the commission's case was full of holes because its decision had been based on "theoretical assumptions" and "speculative possibilities".  Mr Goddard said it should not be up to the appellants to disprove any doubt the commission had about the potential takeovers because only the commission had the full picture. Even then it had not used it.  "(The commission) did not paint a complete picture (of the competitive forces in the market). Rather, it zoomed in on a tiny portion of that picture. That is not the process required by the (Commerce) Act."

Foodstuffs' lawyer Bruce Gray, QC, told the court that the commercial potential of the Warehouse Extra concept was irrelevant, and in any case had not been proved one way or the other.  "The experts (witnesses) argued themselves to a standstill about what has happened in the past and what might happen in the future."

As it stood, the takeover would affect only the existing three stores, which had no competitive impact.  Mr Gray said the commission had constructed its analysis to its own specifications, which were angled to promoting a third supermarket competitor in a market it was worried about being too small.  "The job of the commission and the court does not change because markets are big or small."

A Foodstuffs acquisition of The Warehouse would strengthen the Extra business, because it could bring economies of scale not present now, he said.

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.