The Australian Competition and Consumer Commission today announced it will oppose the proposed acquisition of the Franklins supermarket business by Metcash Trading Limited.
"Central to the ACCC's concerns is that the proposed acquisition is likely to result in a substantial lessening of competition through the removal of Metcash's closest and only genuine competitor for the wholesale supply of packaged groceries in NSW," ACCC chairman Graeme Samuel said today.
Metcash is Australia's largest wholesaling and distribution company servicing independent grocery retailers throughout Australia, including those under the IGA and Supa IGA banners. Franklins operates 80 corporate owned and 8 franchised Franklins supermarkets in NSW, and is currently owned by Pick n Pay Retailers (Pty) Limited South Africa's largest retailer.
Given the importance of competition in the grocery sector and of wholesale competition to allow independent supermarket retailers to compete effectively, the ACCC has conducted an extensive investigation of the proposed acquisition. It considered information from a wide range of sources, including supermarket retailers, suppliers, industry groups, consumers and other market participants. In addition, the ACCC conducted meetings and interviews and scrutinised a substantial number of internal company documents of the merger parties.
The ACCC concluded that Franklins' ability to offer the full range of services means Metcash faces competition in wholesaling services, terms, rebates and prices, to the advantage of independent retailers.
"Our thorough review found that the proposed acquisition would have reduced the number of players competing to provide these services from two to one, effectively giving Metcash a monopoly on grocery wholesaling to independent supermarkets in NSW. Barriers to entry in this market are already high, making timely new entry of a competitor to Metcash unlikely if this transaction proceeds."
"Because of high fixed costs, potential entrants need a large number of supermarkets as customers to give them the scale to operate a wholesale network profitably. The proposed acquisition would have resulted in the removal of a large pool of 88 supermarkets, including many medium and large supermarkets, which would otherwise be contestable, either partly or wholly, by a new wholesale competitor," Mr Samuel said.
The ACCC's investigation has also indicated that although the large supermarket chains impose a competitive constraint on IGA and Franklins stores at the retail level, this provides only an indirect and imperfect competitive constraint on Metcash at the wholesale level. The important additional competitive constraint that comes from direct competition at the wholesale level from Franklins would be lost as a result of the proposed acquisition. That competition presently forces Metcash to compete on wholesale prices, rebates, promotions and services to independents.
While Franklins' performance has deteriorated in recent months, the ACCC also noted that Franklins continues to provide competitive tension at the retail supermarket level, giving customers an additional full-line supermarket choice and drawing competitive responses from other supermarket operators, such as price matching and special promotions.
The ACCC also assessed whether the proposed acquisition would have additional anticompetitive effect in particular local retail markets. These additional concerns arise where Metcash-supplied and Franklins-supplied retailers compete closely and where there is not sufficient competition from other nearby supermarkets to prevent a substantial lessening of competition as a result of the proposed acquisition.
The ACCC is aware that other parties, whose bids would not raise the same competition concerns as Metcash's bid and indeed may enhance competition, have expressed strong interest in acquiring the entire Franklins business.
If Pick n Pay decides to pursue an alternative sale process following the ACCC's decision, the ACCC would examine any other bids to ensure competition concerns do not arise, with a particular focus on whether the bids would reduce (or enhance) the likelihood of effective wholesale competition to supply independent retailers in NSW being maintained.
"It should be clearly understood that today's decision by the ACCC does not in any way mean that the big supermarket chains can come in and acquire their choice of Franklins stores. To the contrary, any proposed acquisition will be subject to the scrutiny of the ACCC, and as part of this process the ACCC will be mindful that other parties, who appear to raise no competition concerns, have expressed strong interest in acquiring the entire Franklins business and continuing to provide strong competition in wholesaling to independent supermarkets," Mr Samuel said.
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