Path cleared for Woolworths to takeover The Warehouse?

Posted by James Ferre on 10th October 2008

The Warehouse Group Limited, a New Zealand retailer, has taken the decision to discontinue plans to roll out the Warehouse Extra format, which could pave the way for a takeover by Woolworths or Foodstuffs.

The Warehouse has been a takeover target for the two major players in the New Zealand grocery sector, Woolworths and Foodstuffs, but a High Court decision that cleared the way for the three Foodstuffs co-operatives and Woolworths Ltd to acquire The Warehouse was overturned by the Court of Appeal in July.

The cancellation of the roll-out of the ‘Extra’ concept stores, which sell fresh produce, frozen foods and meat, will remove a major barrier to any potential deal as there had been concerns that a takeover would further reduce grocery sector competition in the highly concentrated NZ market.

“Having now had the opportunity to analyse key elements of economic performance, we have concluded that the company’s aspiration to achieve the critical 10% halo benefit in general merchandise and apparel will not be realised. As a consequence of this, the Extra strategy will not meet our return on investment criteria,” Chairman of The Warehouse, Mr Keith Smith, advised. “Having made the decision to withdraw, we can now simplify aspects of the business and focus attention and resources on our core general merchandise and apparel categories. This will be more important than ever given uncertainty associated with developments in world financial markets and present challenges in the domestic economy.”

The three existing Extra stores are to undergo a phased withdrawal from fresh produce, meat and frozen foods. This will commence immediately and is expected to be completed within six months. The company will continue to develop its pharmacy business and the health and beauty category, both of which are proving highly successful. A decision has yet to be made in respect of liquor currently ranged in six of the company’s 85 stores.

“This has been a very important trial for The Warehouse to leverage our larger footprint stores. The format and level of investment has been managed to ensure the
supercentre model was properly and thoroughly tested with the benefits flowing to the wider business,” Managing Director, Mr Ian Morrice said. “These benefits have been significant particularly in relation to range extensions, store operations, supply chain and systems.”

Woolworths has taken note of the situation and are to make a decision on their next course of action in the near future. “We’ve been actively watching both the New Zealand economy and the Warehouse performance and, over the next little while, we will determine what we might do with our present (10 per cent) shareholding of the warehouse,” Woolworths CEO, Michael Luscombe, said at a Queensland University of Technology forum yesterday.

Background

On 21 December 2006 the Commerce Commission (NZ competition watchdog) received an application from the three Foodstuffs co-operatives seeking clearance to acquire up to 100% of the ordinary shares in The Warehouse Group Limited. On 17 January 2007 the Commission received an application from Woolworths Limited seeking clearance to acquire up to 100% of the shares in, or assets, of The Warehouse Group Limited. On 8 June the Commission declined to grant clearance for either acquisition, on the basis that it was not satisfied that either of the proposed acquisitions would not have, or would not be likely to have, the effect of substantially lessening competition in relevant markets.

On 29 November 2007 the High Court, on appeal by Foodstuffs and Woolworths, overturned the Commission’s decision to decline clearance for either potential acquisition.

The Court of Appeal heard the Commission’s appeal on 28 April – 1 May 2008 and decided to overturn the decision of the High Court.