Retail shake-up on way

Foodland chief executive Trevor Coates.

The birth of a transtasman grocery giant looks set to create one of the biggest shake-ups in New Zealand's retail history.

Australian supermarket operator Woolworths will become one of two competitors slugging it out in the New Zealand grocery market after an A$2.5 billion ($2.67 billion) deal to buy Progressive Enterprises, operator of the Foodtown, Woolworths and Countdown supermarket chains, along with some Australian supermarkets.

The deal creates a giant with a turnover across Australia and New Zealand of A$35 billion, employing well over 160,000 people, with the ability to bring significant buying power to bear on suppliers.

The deal adds 150 New Zealand supermarkets and 22 Australian supermarkets to a company which already had 720 supermarkets in its stable of 1600 stores.

Woolworths has also already indicated it will use its scale to take lower prices to competitor Foodstuffs, the New Zealand co-operative which has a larger slice of the market, and push market share-winning schemes such as petrol discounting.

Perhaps more significantly, it has revealed naked ambition when it comes to the general merchandise market market, promising to investigate combined grocery and general goods supercentres as well as stand-alone stores.

"There's obviously a lot of opportunity in general merchandise in New Zealand," Woolworths chief executive Roger Corbett said yesterday.

Woolworths operates the Big W chain of discount stores in Australia, which foots it with global giant K-mart and has barely noticed the attempts of The Warehouse to establish its Yellow Sheds there. Warehouse investors exhibited some nerves at the deal yesterday: shares in the discount retailer closed 12c lower at $3.25.

Suppliers were also nervous. "It's fair to say there will be a level of concern," said Griffins Foods managing director Tony Nowell, who also chairs the New Zealand Food and Grocery council and is a major Progressive supplier.

"You've got a retailer operating in a market five times the size of New Zealand coming into this market ... in an industry where critical mass is a very important issue," he said.

One retail analyst said it could take up to 18 months for Woolworths to show its hand. "They respect Foodstuffs as a competitor and will work out the best way to run that business," he said.

Analysts predicted Woolworths would not hurry to drop existing Progressive house brands like the Signature Range, but said it was likely to soon supply the goods behind them from its own sources.

One industry watcher predicted the first noticeable change would be the rebranding of the Foodtown chain as Woolworths.

Corbett himself was taking a softly, softly approach. Australian goods were likely to end up on New Zealand shelves - but he also envisaged taking New Zealand goods to Australia. All three of Progressive's supermarket brands were "excellent", he said. And while Woolworths worked with suppliers to cut costs it was a partnership. "It's important to us that our suppliers make a quid too. We're not going around squeezing our suppliers."

The deal was part of a larger three-way deal which saw Woolworths and Australian grocery wholesaler Metcash split Progressive's parent Foodland up for up to A$3.38 billion, with Foodland board approval.

The deal is not yet 100 per cent done - but Woolworths' Australian rival Coles Myer, seen as the only serious candidate for a trump bid, ruled itself out of the running yesterday.

Foodland chief executive Trevor Coates said the company was "not soliciting" other offers, it had refused any negotiations including break fees and would keep a data room open for any other would-be buyers.

In a statement, the company said it would present the three-way deal to shareholders in August "in the absence of an alternative proposal on superior terms".

Coles Myer chief executive John Fletcher said the company had examined the opportunity but at market values a purchase was not in the best interests of shareholders as it would not generate appropriate returns on investment.

The final price struck - worth between $25.29 and $26.17 a Foodland share - was well within the $24.86 to $27.33 range set by a Foodland-appointed independent expert.

Analysts had believed fresh bidders would only emerge if the price came in at the low end of the range. "I think it has gone to the most likely acquirer," said one analyst.

Daiwa Securities retail analyst Shih Thin Wong said the strength of the agreement reduced the opportunity for a spoiler to come to the party. "The deal has also been in the market for quite a while," he said - many other bidders had already tried and fallen by the wayside.

The carve-up was sparked by a hostile bid for Foodland by Metcash in December last year, followed by a raised Metcash bid, and finally the three-way deal.

Consumers may emerge as winners from the shake-up, but Foodstuffs managing director Tony Carter played down the prospects for lower prices.