Photo: RNZ / Simon Rogers
The Commerce Commission says a Foodstuffs merger would have harmed competition in the supermarket sector, while the operator completely disagrees.
Earlier this year the country's biggest supermarket operator agreed to bring its North and South Island divisions together to create a national co-operative.
The boards of Foodstuffs North and South Island divisions currently operate separately and run a number of well-known brands including New World, Pak'n'Save and Four Square.
On Tuesday, the Commerce Commission declined the proposal saying it would substantially lessen competition.
In a statement, chair Dr John Small said it would reduce the number of buyers of grocery products in New Zealand from three to two giving it greater buying power.
"As a consequence of the substantial lessening of competition and the associated increase in buyer power, the merged entity would likely be able to extract lower prices from suppliers and/or otherwise adversely impact suppliers in the relevant markets.
"We are also concerned that the consolidation with the proposed merger would lead to reduced investment and innovation by suppliers, meaning reduced consumer choice and/or quality of grocery products in New Zealand for consumers."
The Commission said the merger would make it harder for other retailers to grow, potentially depriving consumers of more shopping options.
It also cited concerns about increasing the likelihood of Foodstuffs and Woolworths coordinating prices and ultimately reducing choice for customers.
Small disagreed with Foodstuffs' claim the merger would make the company more competitive and said whether it would make the business more effective was irrelevant.
"The test is not, is this going to make Foodstuffs more efficient and effective. The test is, is this going to substantially lessen competition, is there a real risk this is going to substantially lessen competition. That's the thing: our job is to protect competition.
"This is not necessarily a consumer welfare test. This is a competition test, and our concern is about maintaining and not significantly eroding competition in the buying of groceries and the retail markets."
Foodstuffs' proposal required Commerce Commission and High Court approval.
The Commission can only grant clearance to a deal when it is satisfied it will not result in a substantial lessening of competition.
Foodstuffs respond
Foodstuffs North Island chief executive Chris Quin said the merger would have lowered costs and improved operational support for the company.
He told Midday Report it also would have brought grocery prices down.
"We have a North Island set of retail operations and support centre, a South Island retail operations and support. [The merger] takes the cost that's sitting behind those doors and makes it much more efficient and lower, and that means we could share that with retail and consumers."
Quin said Foodstuffs has never had any desire to collude with Woolworths on prices.
"We have three retail banners and those are all under different pricing and experience strategies so the thought that some sort of easy collusion would occur feels like quite a long way from the evidence and the operational models that are on the table."
He said the co-ops remain convinced merging was the right thing to do.
South Island chief executive Mary Devine said operating as one business would make more sense.
What happens next
Chris Quin said Foodstuffs would receive the Commission's full reasoning for its decision towards the end of October.
He said then the co-ops will decide whether to appeal it to the High Court.
John Small said the supermarket operator could also apply for a different type of approval with the Commission called an authorisation.
An authorisation application tests if the public benefit of a transaction balances out its effect on competition.