ACCC to oppose Franklins sale to Metcash

Posted by Nicole Eckersley on 18th November 2010

Franklins supermarketThe Australian Competition and Consumer Commission yesterday announced that it will oppose the sale of supermarket chain Franklins to wholesale giant Metcash, on the grounds that it would create a monopoly in wholesale supermarket supply in NSW, and make it more difficult for another wholesaler to enter the NSW market.

Metcash had announced its intention to purchase the 88 Franklins stores for $215 million, and then onsell them to independent retailers under the IGA brand, retaining supply rights.

“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.

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,” said an ACCC release.

“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,” said Samuel

“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 also said that it was “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.”

However, the Chairman of Pick n Pay, Mr Gareth Ackerman, said that no other offers for the Franklins business had been made to them.

“We are surprised and disappointed by the ACCC’s decision and fail to see how it could view the proposed sale to Metcash Trading as lessening competition. On the contrary we believe the sale is in the best interests of Australian consumers.

“We are also very surprised by the ACCC placing any weight in its decision on unnamed parties, who have apparently expressed strong interest to the ACCC in acquiring the Franklins business. Pick n Pay has received no credible offer for the business from any party.

“We will be digesting the implications of the ACCC’s decision and considering our next steps,” he said.

The offer for the Franklins chain by Metcash was a welcome relief for the supermarket chain, with Pick n Pay intending to exit the Australian market entirely after losses for eight out of its nine years’ presence. The ACCC’s decision will make that exit more difficult for the company, requiring them to activate their back-up plan – sale of individual supermarkets, or groups of supermarkets, by tender.