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Reasons For The Commerce Commission Declined Woolworths And Foodstuffs’ Proposals To Take Over The Warehouse
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Reasons For The Commerce Commission Declined Woolworths And Foodstuffs’ Proposals To Take Over The Warehouse

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Reasons For The Commerce Commission Declined Woolworths And Foodstuffs’ Proposals To Take Over The Warehouse Reasons For The Commerce Commission Declined Woolworths And Foodstuffs’ Proposals To Take Over The Warehouse Presentation Transcript

  • Reasons for the Commerce Commission declined Woolworths and Foodstuffs’ proposals to take over The Warehouse
    Decision Nos. 606 & 607
  • Content
    Introduction
    Parties
    Barriers to entry
    Market power
    Conclusion
  • Introduction
    On 8 June 2007, the Commerce Commission declined the takeover proposals for The Warehouse by Woolworths Limited and Foodstuffs Limited.
    The acquisition would substantially reduce the competition in the market by creating significant barriers to entry and gain substantial market power.
  • Parties
    Woolworths Limited
    Foodstuffs Limited
    Australian-based company with approximately 3,000 retail stores throughout Australasia (Sales A$38 billion per annum) (Woolworths, 2007).
    Owns Progressive Enterprises Limited which holds approximately 45% of the New Zealand grocery market and operates the Foodtown, Woolworths and Countdown supermarkets (Woolworths, 2007).
    Foodstuffs operates a range of retail outlets including supermarkets, convenience stores and liquor stores (Sales NZ$6.8 billion per annum) (Foodstuffs, 2007).
    Each Foodstuffs store operates in a similar way to a franchise.It holds over 50% of the market. It owns Pak’n Save, New World and Four Square (Foodstuffs, 2007).
  • The Warehouse
    The Warehouse is a publicly listed company that operates 85 merchandise stores and 43 stationery stores in New Zealand. Retail sales of approximately NZ$1.7 billion per annum (Warehouse, 2004).
    The Warehouse has launched The Warehouse Extra in Sylvia Park which is a supercenter that sells groceries, general merchandise and clothing in one store. (Warehouse, 2004).
  • Barriers to entry
    There are three requirements needed to sustain entry in local supermarket markets in this case:
    Access to suitable sites;
    Resource consents; and
    Economies of scale (Pringle, 2007).
  • Barriers to entry
    Access to suitable sites
    The availability of suitable sites is often a major impediment to entry. It has become much more difficult in the last few years to acquire sites in New Zealand (Pringle, 2007).
    If acquisition was successful, they would take the advantages of The warehouse’s existing land holdings.
    It would become more difficult for new entrants to find suitable sites to establish stores. And it would be more expensive for new entrants to buy suitable sites.
  • Barriers to entry
    Resource consents
    Obtaining consents for new supermarkets has taken several years. The gaining of resource consents combined with the time for construction is perceived as a significant barrier to new entry (Pringle, 2007).
    If Foodstuffs or Woolworths have acquired The Warehouse, they could simply take the advantage of existing stores without the needs to acquire new resource consents.
  • Barriers to entry
    Economies of scale
    If Woolworths or Foodstuffs acquired The Warehouse, they would achieve economies of scale in which average cost falls as output increases.
    Moreover, incumbent firms have downward sloping AC curves and could charge lower prices. In contrast, the new firms would have higher AC curves and charge higher prices, so new firms would be soon out of business.
  • Market power
    Dominant firms
    Figure 1
    Foodstuffs owns over 50% market share, and Woolworths owns over 40% market share (Pringle, 2007).
    They are dominant firms, if any new firms want to enter the market, the dominant firms could just lower their prices to drive out the fringe firms (Carlton & Perloff, 2005).
    Source: (McCann, 2008).
  • Market power
    Cournot model
    Figure 2 Best-response
    Woolworths and Foodstuffs are the only two major players in the market; each of them acts independently and attempts to maximize its profits by choosing its output (Carlton & Perloff, 2005).
    Both firms charge a price where MC = MR, and each firm sells half of the industrial quantity.
    Source: (Carlton & Perloff, 2005).
  • Market power
    Stackelberg model
    Figure 3 Stackelberg Equilibrium
    Frontier’s study concluded the results are consistent with a leader follower model, with Woolworths price following Foodstuffs prices (Pringle, 2007).
    The Stackelberg leader Foodstuffs produces more output and the follower Woolworths less output.
    Source: (Carlton & Perloff, 2005).
  • Conclusion
    The commerce Commission declined the takeover proposals for The Warehouse by Woolworths Limited and Foodstuffs Limited.
    If the acquisition was successful, it would create significant barriers to entry for a potential new entrant into the supermarket market. Woolworths or Foodstuffs would also gain substantial market power: block entries, charge monopoly prices and split the quantity sold.
  • References
    Carlton, D. W., & Perloff, J. M. (2005). Modern industrial organization (4th ed.). Boston: Pearson/Addison Wesley.
    Foodstuffs. (2007). Our company. Retrieved September 18, 2008, from http://www.foodstuffs.co.nz/OurCompany/WhoWeAre/
    McCann, P. (2008). Monopoly [Handout]: The University of Waikato.
    Pringle, T. (2007). Decision Nos. 606 & 607 [Electronic Version]. Retrieved September 11, 2008, from http://www.comcom.govt.nz/PublicRegisters/mergersacquisitions-clearances.aspx
    Progressive. (2008). About us: Fact file. Retrieved September 12, 2008, from http://www.progressive.co.nz/about_us/fact_file/index.asp
    Warehouse. (2004). About us: Business profile. Retrieved September 18, 2008, from http://www.thewarehouse.co.nz/
    Woolworths. (2007). Our company: Key facts. Retrieved September 12, 2008, from http://www.woolworthslimited.com.au/phoenix.zhtml?c=144044&p=our-keyfacts