Warehouse Extra is Gone!

One of the longer takeover sagas appears to have ended with the warehouse having announced its decision to end the warehouse extra format. This will effectively clear the way for either of the big two supermarkets to take over the warehouse. This is because the commerce commission is of the opinion that the warehouse would be a “maverick”. No-one really agrees on what this means so I won’t try and explain it, but given the ambiguity of the term it’s interesting the commission became so fixated on it.

For those of you who don’t know how competition law works you compare the factual of the merger going through with the counter factual of the merger not happening. With the warehouse extra no longer existing going forward, therefore merger will not eliminate the “third player” from the grocery market and enhance competition in the grocery market will be no different in the factual then in the counter factual.

Two things to look out for concerning this are

  • The Commission’s response
    They really don’t want this merger to happen
  • Whether or not the supermarket that takes over the warehouse rolls out extra in the future.
    We discussed on the blog before that we (at least I) think competition would actually be increased if one of the supermarkets is able to roll out the extra format.

Watch this space!

  • Steve

    But the counterfactual still contains the “threat of competition”, if that threat were removed by a takeover, the existing supermarkets could increase prices knowing that no one could enter. At least with the Warehouse being owned separately, the supermarkets can’t raise prices too high because this would encourage entry from the warehouse extra.

    While there is no business case at the moment for the warehouse extra so they are phasing out the stores, with higher prices there may be a business case, and the warehouse extra could re-enter.

    While not as strong as before this is still enough of a counterfactual to support the Commission’s case.

  • Agreed, however the threat has to be credible for it to constrain the behaviour of the merged entity. On my reading (which may be incorrect, I’m not a lawyer!) the court of appeal decision effectively blocked the merger based upon the “possibility” that extra might be succesfull, not because it was currently a constraint or they thought it defnitely would be a constraint.

    My guess is that a failed attempt at entry would be unlikely to deter the supermarkets from raising prices.

    How big a price hike would it take to entice extra to re-enter? who knows. If it’s more then 5% (i.e doesn’t satisfy the SSNIP test) then economically it is unlikely to be a constraint. It would be interesting to see a time series of grocery prices to see if the extra imposed any meaningful constraint on the supermarkets when it announced the extra format. Presumeably if the supermarkets were worried they would have lowered prices.

    Also, I don’t think extra would be much of a constraint if it did succesfully enter. They would still focus on general goods and would be at a cost disadvantage for groceries.

    If another international grocery chain bought the warehouse that would be a different story all together since that would put it on an even footing cost wise for groceries, but this just begs the question of why another grocery chain hasn’t joined the bidding?