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Knockback to grocery giants 'good news'

Thursday, July 31, 2008

Appeal Court knockback to grocery giants 'good news' for shoppers

Consumers have won out from the Court of Appeal decision preventing supermarket giants Woolworths and Foodstuffs attempting to take over The Warehouse, says senior economics lecturer and competition specialist Dr Simona Fabrizi.

Dr Fabrizi says takeovers would have been parrt of a strategy to pre-empt increased competition in grocery retailing from The Warehouse, which plans 15 new stores with grocery divisions.

The court made the ruling this morning after an appeal by the Commerce Commission against a High Court decision that would have allowed the retailers to lodge takeover bids.

Woolworths (Progressive Enterprises) and Foodstuffs account for 99 per cent of the grocery market in New Zealand and each has a 10 per cent stake in The Warehouse

Dr Fabrizi says if either of retailer succeeded in a takeover it would have made it very unlikely that any third competitor could enter the grocery market in New Zealand.

“There are high barriers to entry in this market and allowing the takeover would have been a way of guaranteeing that the incumbents could continue to enjoy high profits,” she says. “The market would have become less competitive and therefore the consumer would have lost out.”

She says she is surprised the decision process went through so many legal steps before the Commerce Commission’s position was upheld.

Although Woolworths and Foodstuffs have slim margins, it is possible that in fact they enjoy substantial margins because the degree of competition where the two are already dominant players is not as intense as pure duopoly competition would imply.

“I think the move to lodge takeover bids was a clear case of pre-emption by the two giants who want to maintain the market situation as it is. Even though The Warehouse planned to roll out only 15 stores, these would have only been the beginning of possible further expansion.”


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