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The Warehouse – awaiting the Court of Appeal decision

02 May 2008

The long-running and high-profile Warehouse saga reached the Court of Appeal this week. This alert recaps on how things got to where they are, and highlights the issues at stake on appeal.

In June 2007 the Commerce Commission denied clearance to both Woolworths and Foodstuffs to acquire The Warehouse. That decision was overturned by the High Court in November; the High Court was not satisfied that either proposed acquisition would substantially lessen competition in any market, and accordingly granted clearance. The Commission now appeals.

The High Court decision prompted a number of commentaries and responses, some bordering on the bizarre. Criticisms ranged from wishful thinking (it would be nice if we had three competing supermarket chains) to outright conspiracy theories (Woolworths and Foodstuffs manipulated market outcomes to obscure the competitive impact of Warehouse Extra, and misled the High Court).

The fact is, however, that the High Court heard from key commercial witnesses and six expert economists. With the benefit of this evidence, the Court concluded that if The Warehouse was left to its own devices:

  • there was no real prospect of new Warehouse Extra stores being rolled out, and
  • even if that judgment was wrong, and the Warehouse Extra got to where it was aiming; where it was aiming was only 15 stores (compared to some 150 each for Woolworths and Foodstuffs), 3-5% market share, and a strategy to be a price follower, not a price leader.

The High Court then asked whether the acquisition by Woolworths or Foodstuffs would lessen competition when measured against these alternative futures. This was the right question to ask, and given the Commission's factual findings on the likely alternative futures, it concluded that competition would not be substantially lessened.

In doing so, the High Court took a conservative approach. It measured the acquisition against a number of scenarios involving an independent Warehouse, on the basis that it must "pass" them all. A longer timeframe than usual was used in order to test whether the Warehouse Extra concept needed more time. And the Court set a threshold of declining the supermarkets' applications if the acquisition would result in a 2% price rise, instead of the customary 5%.

It's a lonely business being a decision maker. You don't get to indulge in wishful thinking, speculation or conspiracy theories. It seems to us the High Court approached the issues correctly – heard the evidence, made its findings of likely counterfactuals, asked the correct competition law question, and came to its answer.

The Court disagreed with the Commission's view that it was "not appropriate or possible" to carry out a "detailed assessment of the likely success of the Warehouse Extra concept". It might not be easy to do, but how else do you assess the competition issues in this case?

The Court of Appeal may come to a different view on the facts and the likely future of the Warehouse Extra concept. But the High Court cannot be faulted in its framework.

The specifics of this case aside, it has underscored some points of more general relevance.

One is the value of an appeal right. It is perhaps understandable that a frontline regulator may give in to wishful thinking, and a desire to wait and see, in a sector as important as supermarkets. But the High Court was firm when it stated that the Commission cannot say "we are not sure", and for this reason "we are not satisfied". Nor can the Commission say a clearance should wait until further developments in the market have taken place so as to better assess the likely effects.

The Commission is appealing this aspect of the Court's decision. But it seems to us the Court is correct here. If the Commission was to turn down applications because it is not sure, or in order to leave open the door to competition developing, the main value of the clearance process – certainty – would be significantly undermined.

The other broader question is the point at which the Commission is using litigation tactically, in the way a commercial party might but a regulator should not. The current appeal by the Commission boils down to a roll of a dice as to whether the Court of Appeal will take a different view of the facts. The Commission treads a fine line between performing its role as a frontline regulator, and simply using litigation options to delay and so scuttle a commercial process, with no real point of principle at stake.

We await the Court of Appeal's decision with interest.

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