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Foodstuffs says it needs to take over the Warehouse Group so that it can compete against the buying muscle of retail giant Woolworths Australia.
And it says that The Warehouse's move into grocery with its Warehouse Extra to take on Foodstuffs and Woolworths is unlikely to be successful.
Foodstuffs' application to the Commerce Commission to allow a 100 per cent takeover has laid bare its rationale for buying The Warehouse Group, depicting the proposal as a defensive move against the Australian Woolworths.
Foodstuffs, which owns 10 per cent of The Warehouse, lodged the application on Thursday but has stressed that it has not made a formal bid for the 90 per cent of shares it does not own.
About 27 per cent of The Warehouse is held by founder Stephen Tindall, 21.7 per cent by The Tindall Foundation and 10 per cent by Woolworths Australia - which is also believed to have designs on The Warehouse.
Foodstuffs is believed to have the backing of Australian company Private Equity Partners.
The three Foodstuffs co-operatives have told the Commerce Commission that they need The Warehouse to be competitive against rival Woolworths Australia.
"Foodstuffs believes that the proposal would enable Foodstuffs to significantly enhance the general merchandise and apparel offering," the company said.
The combined buying power of Foodstuffs and The Warehouse would allow it to obtain merchandise and grocery items at cheaper prices.
"This would render Foodstuffs more competitive with Woolworths Australia which currently holds a significant scale advantage for purchases for general merchandise ... and would be an advantage to both Foodstuffs and its customers."
Foodstuffs has its own plans for integrating groceries with general merchandise.
"Foodstuffs believes that the Warehouse grocery strategy [through the Warehouse Extra] is unlikely to be successful principally due to the lack of purchasing power. If the proposal proceeds Foodstuffs would develop the supermarket business of the Warehouse and develop new approaches to retailing together grocery and general merchandise."
The application to the Commerce Commission says that The Warehouse is not a substantial competitive threat to Foodstuffs or Woolworths in its current locations at Sylvia Park and Whangarei and described its proposed expansion to another 15 sites as "an optimistic scenario".
"Many Warehouse [stores] are not suitable for conversion into fully converted Warehouse Extra stores because of existing constraints such as size and parking." Foodstuffs said.
Even if all stores were converted to Warehouse Extra stores, Foodstuffs believed its estimates of $400,000 per week for Sylvia Park extended by 15 stores would only amount to a 2.78 per cent market share of grocery spend in New Zealand.
The application says that if the takeover proposal went ahead, the combined company would be constrained by Woolworths Australia-owned Progressive Enterprises and would not be able to utilise "unilateral power" in the market.
The Foodstuffs proposal is not expected to be considered until mid January and a decision is unlikely for two to three months after that.But the application sets the tone for the co-operative to depict the purchase as a defensive move. All eyes are now on Woolworths and whether it applies for clearance before or after any bid.
Sources said an approval by the Commerce Commission would enable Foodstuffs to move more quickly once it decides on its strategy.
Its options range from a bid by a consortium made up of itself, PEP and founder Stephen Tindall through to a sole bid.
Meanwhile, approval would also set a helpful precedent for Foodstuff's chief rival Woolworths. As Woolworths is smaller than Foodstuffs in New Zealand its merger with the Warehouse is likely to create fewer competition concerns.
Observers expect Woolworths to file a similar application within days.
However some have raised questions over the extent to which Foodstuffs co-operative members - the store owners - will be prepared to fund the bid as it would probably result in reduced rebates on product purchases.
They may also be forced to accept competition from neighbouring stores run by the group.
