Woolworths’ acquisition of PFD Foods faces growing opposition

AFR – 2^nd February, 2021

Woolworths is facing growing opposition to its $552 million acquisition of PFD Food Services as the competition regulator delves deeper into the deal’s impact on the $12 billion sector.

Five food service and retail industry organisations – the Australian Convenience and Petroleum Marketers Association (ACAPMA), Small Business Organisations Australia (COSBOA), the Master Grocers Association (MGA), the Australasian Association of Convenience Stores (AACS) and Independent Food Distributors Australia – have joined forces to urge the competition regulator to block the deal.

Five retail and food industry organisations have banded together to urge the competition regulator to block Woolworths’ proposed acquisition of PFD.  Supplied.

Independent Food Distributors represents three food service distribution associations, Countrywide Food Service Distributors, NAFDA Foodservice and The Distributors, which set up an industry peak body last October to mount a co-ordinated campaign against the acquisition.

In a joint letter to the Australian Competition and Consumer Commission seen by The Australian Financial Review, the five organisations said Woolworths’ acquisition of PFD would likely have a “significant adverse impact” on businesses in the food supply chain, from growers to manufacturers to distributors, and ultimately flow through to food service retailers and independent grocers.

Their primary concerns were that the acquisition would reduce choice and increase costs for consumers, reduce choice for some suppliers, particularly smaller suppliers, and increase costs for suppliers if trading terms were harmonised.

Woolworths is Australia’s largest food and grocery retailer and has a growing B2B/wholesale business supplying small businesses such as schools and childcare centres, while PFD is Australia’s second-largest food service distributor.

“We believe that Woolworths’ ability to dramatically impact price through cross subsidy on key ranges or products to rapidly gain market share will be to the detriment of the majority of our members operating in the food sector and to many [small and medium enterprises] in Australia – and ultimately to consumers as a result of increased market concentration over time,” the five industry associations said.

“This is a significant step toward the demise of a vibrant and diverse distribution,

production and manufacturing sector, with adverse consequences for SMEs and customers alike in the longer term,” they said.

Woolworths chief executive Brad Banducci has tried to reassure independent distributors and suppliers, saying the food service sector, which Woolworths values at $18 billion, was highly fragmented and PFD’s market share was just $2.1 billion.

It has made commitments to establish Chinese walls so there is no sharing of information on trading terms between PFD and supermarket buyers and to retain existing trading terms for the two separate businesses.

Despite these assurances, the ACCC raised preliminary concerns in mid-December and is seeking more information from market participants before it makes a final decision on or before April 22.

“Our proposed investment alongside the Smith Family will help PFD better serve the evolving needs of its customers, suppliers, distributors, and the broader community,” a Woolworths spokesman said on Monday.

“The fact is there will be no more – and no fewer – competitors in the $18 billion wholesale food services sector than there are today as a result of this transaction,” he said. “There will be no reduction in competition in wholesale food services whatsoever.”

“Both PFD and Woolworths have made public and direct commitments to their suppliers and customers, in writing, to ensure the trading terms inside the respective businesses are confidential,” he said. “PFD will continue to have its own relationships with its customers – unaffected by its partnership with Woolworths.

Woolworths also said grocery products sold in supermarkets were different in format and size to those sold by PFD. “It is not commercially realistic for Woolworths’ trading terms to be ‘leveraged’ when the underlying products and cost structures are so fundamentally different,” the spokesman said.

The ACCC fears the proposed acquisition is likely to increase Woolworths’ already substantial bargaining power in its dealings with food manufacturers and remove an important alternative buyer, which may lead to a substantial lessening of competition.

The ACCC also fears the merger will enable PFD to secure considerably improved prices and terms from suppliers, giving it a distinct advantage over competitors.

“While some end customers in the market would benefit from this in the short-term, in the longer-run this could lead to the exit of rivals and therefore a lessening of competition,” the commission said in a statement of issues.

Woolworths and PFD currently sourced from a large number of overlapping suppliers and Woolworths competed with PFD in supplying food products to a small number of the same food service customers, it said.

PFD also supplied some retail competitors of Woolworths, such as Metcash, and the ACCC feared the merger might lead to full or partial foreclosure by Woolworths.

After establishing a partnership with PFD during the pandemic, Woolworths agreed in August to acquire a 65 per cent equity stake in PFD and its 26 distribution centres. PFD’s owners, the Smith family, will be able to sell their remaining stake to Woolworths after three years under a put and call agreement.