Woolworths Group Limited - PFD Food Services Pty Limited

Acquirer(s)

  • Woolworths Group Limited

Target(s)

  • PFD Food Services Pty Limited

Summary

Woolworths Group Limited (Woolworths) proposes to acquire a 65% shareholding in PFD Food Services Pty Limited (PFD).

Both Woolworths and PFD are suppliers and buyers of food and grocery products in Australia.

Through its Woolworths supermarkets, Woolworths is one of the largest food and grocery retailers in Australia. It provides the sale of grocery products to retail consumers both in-store and online. It also supplies food and groceries to businesses via its Australian Grocery Wholesalers business and the Woolworths at Work platform. 

PFD is a privately owned wholesale food distribution business in Australia. It supplies and delivers an extensive range of fresh, frozen and dry goods to business customers across Australia. It services two broad customer groups: Quick Service Restaurants including major national franchisee brands; and other food service business such as hotels, supermarkets, restaurants/cafes, petrol and convenience, bakeries, airlines and institutions. 

Market definition

The ACCC considered the effect of the proposed acquisition on markets including:

  • market/s for the acquisition of food products from manufacturers and suppliers, both generally and separately in relation to specific categories of food products. These markets are typically national markets, but in some categories may be regional/state-based, and
  • national, regional and local market/s for the (wholesale) supply and distribution of food products to food service customers (such as restaurants, cafes, hotels, hospitals, convenience outlets).

In reaching its final decision, the ACCC considered the effects of the proposed acquisition on these markets from a number of perspectives, and did not consider that a precise definition of these markets would significantly alter the competition assessment.

Competition analysis

The ACCC considered a number of potential theories of harm and concluded that the proposed acquisition is not likely to substantially lessen competition in any market.

Woolworths operates one of Australia’s largest supermarket networks. Woolworths also operates two wholesale businesses established in the past few years:

  • Woolworths at Work – a recently established online portal to supply Woolworths’ supermarket products to businesses like childcares, schools and offices, and
  • Australia Grocery Wholesalers (AGW) – a wholesale business originally established to supply Caltex (now Ampol) petrol stations. It has since started supplying small  volumes to certain charities and providers of meal kits / ready-made meals.

PFD is one of the largest wholesale distributors in Australia. It purchases a wide range of food products from suppliers and distributes them to a variety of customers such as restaurants and cafes, fast food franchises, hotels and clubs, petrol and convenience stores and institutions. While PFD has around 10-15 per cent share of wholesale food distribution, its purchases make up approximately 1-3 per cent of the overall acquisition of food from suppliers.

Although Woolworths and PFD often acquire food products from the same suppliers, they currently operate in adjacent markets. PFD primarily supplies and distributes products to businesses in bulk sizes that are unsuitable for direct retail sale, while Woolworths mostly supplies retail products to end consumers in smaller pack sizes.

Effects on suppliers

A focus of the investigation was the supply of food items to two groups of customers: supermarkets, and wholesale food distributors who on-sell the products to other businesses. Often the product may be the same or similar between the two groups, with variation in the packaging and size of the product. Depending on the nature of the product, some suppliers also have significant other routes to market, including direct delivery to end users, export, or supply to other manufacturers who use the product as an input for further processing.

Based on extensive market enquiries and other information it obtained, the ACCC concluded that the proposed acquisition would not be likely to substantially lessen competition in the acquisition of food and groceries:

  • In the acquisition of food products as a whole and in the majority of product categories, PFD accounts for only approximately 1-3 per cent of all purchases while Woolworths accounts for approximately 25-40 per cent. As such, the incremental increase of Woolworths’ acquisition volume and buyer power post-acquisition is limited, either by product category or overall purchase.
  • While suppliers see the wholesale food distribution channel as a long term hedge against over-reliance on the supermarkets, it is the entire channel that acts as the hedge and not just PFD. PFD accounts for approximately 10-15 per cent of acquisitions in the wholesale food distribution channel, meaning that the channel will continue to exist as a hedge.
  • There are a number of other routes to market, including other wholesale food distributors, other supermarkets, and for some categories of products, direct supply to end-customers or other manufacturers.
  • PFD, post-acquisition, is likely to continue to meet resistance from suppliers with strong brands.
  • Smaller suppliers have smaller output volumes, and are generally more nimble and able to switch to serving other customers. Small suppliers also tend to only supply one of the two channels, so the effects of the proposed acquisition on them is less likely to be direct and/or significant.

Effects on wholesale food distribution

The ACCC considers that the proposed acquisition will not substantially lessen competition in the market/s for the wholesale supply and distribution of food products to food service customers.

Compared to the supermarkets channel, the wholesale food distribution channel is less concentrated, comprising PFD, two other national distributors, and around 500-600 smaller privately owned businesses, many of which are part of at least one of three large buying groups.

PFD’s competitors were concerned that Woolworths may leverage its buyer power in supermarkets to gain better prices for PFD, leading competing wholesale food distributors to exit.

The ACCC considers that post-acquisition, there will likely remain a number of alternate distributors that will continue to constrain PFD, including the following distributors and buying groups:

  • Bidfood
  • Superior Food Services
  • NAFDA
  • Countrywide, and
  • The Distributors.

The ACCC noted the importance of non-price aspects of competition in this market. While we heard that price plays a significant role when a customer chooses a wholesale food distributor, market feedback suggests that relationship, level of service and product range are also key. Accordingly, the importance of these non-price aspects will likely enable PFD’s competitors to differentiate themselves and constrain the extent to which Woolworths can rationalise PFD’s range and service quality.

The ACCC recognises that the industry will likely transform over time, with the proposed acquisition changing the competitive landscape, and may bring down wholesale prices to the food distribution sector. However, the shift in market structure does not on its own satisfy the s50 test of substantially lessening competition, or necessarily make the market substantially less efficient or competitive than it is today.

The ACCC also considered the effects of the proposed acquisition on customers of food wholesalers, such as restaurants, cafes, hotels, hospitals, convenience outlets etc.  To the extent the combined Woolworths-PFD does obtain lower input prices, and therefore lowers its prices to its customers, this is likely to lead to a benefit for wholesale customers.  We did not receive sufficient evidence to conclude that the impacts would be so great as to cause rivals to exit, leading to a reduction in competition.

Effects on customers of wholesalers that compete with Woolworths

PFD also currently supplies certain products to a number of Woolworths’ retail competitors, so the acquisition potentially raises vertical integration issues. The ACCC assessed whether the proposed acquisition would enable Woolworths to foreclose those customers from accessing inputs or to increase prices.

Based on the information before it, the ACCC considers that there are sufficient viable alternatives such that the combined Woolworths-PFD would have limited ability or incentive to foreclose its rivals downstream, or profitably increase wholesale prices to those rivals.

The Undertaking

Woolworths offered a behavioural undertaking with temporary measures that it said were designed to preserve the current market dynamics and enable market participants to continue to do business with Woolworths and PFD independently.

The ACCC consulted on the undertaking, and the feedback received was generally that the undertaking would not be effective.

Since the ACCC ultimately formed the view that the proposed acquisition was not likely to substantially lessen competition, an undertaking was not necessary to address competition concerns arising from the proposed acquisition. The ACCC also considered that an undertaking of the type proposed raised considerable compliance risks that would likely have made it unacceptable. The undertaking was therefore not accepted.

Market inquiries

Statement of issues

Document title Date

Timeline

DateEvent
23/09/2020ACCC commenced informal review under the Informal Merger Review Process Guidelines.
09/10/2020Closing date for submissions.
06/11/2020ACCC requested further information from the parties. Former provisional decision date for announcement of ACCC's findings (10 December 2020) is delayed.
16/11/2020ACCC received further information from the parties.
14/12/2020Former provisional decision date for announcement of ACCC's findings (17 December 2020) brought forward.
15/12/2020ACCC published a Statement of Issues outlining preliminary competition concerns.
01/02/2021Closing date for submissions relating to Statement of Issues.
25/03/2021Former provisional date for announcement of ACCC's final decision (22 April 2021) is delayed to enable the ACCC to continue its investigation
11/05/2021ACCC commenced market consultation on proposed s87B undertaking.
19/05/2021Closing date for submissions relating to the draft proposed undertaking.
10/06/2021ACCC announced it would not oppose the proposed acquisition.