The Warehouse Group @ Share Investor
Long vs Short: The Warehouse Group
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Quite a number of my readers have been searching for any possible hints on what may happen with The Warehouse Group [WHS.NZ] and the long winded saga over whether it is going to be allowed to be sold to either Foodstuffs or Woolworth's Australia [WOW.AX] when a hearing in the Court of Appeal is heard 29 April-May 1.
Lets get excerpts from the November 29 decision by the High Court to allow a buyer to make a bid for the retailer as to where a judge in the Appeal's Court might go with the High Court precedents :
“We consider that there is a real prospect that the Warehouse Extra will be abandoned when it is reviewed in [ ]. There is also a real prospect that the Warehouse Extra will instead continue to be trialled for a further period and then abandoned without any further stores rolled out. We consider there is not a real and substantial prospect that the Warehouse Extra will continue for long enough to establish the necessary halo on which the concept depends. Because of that, we consider that the roll out of more Extra stores on a scale that would make the concept sustainable is not "likely" to occur.”
This is the main crux of Foodstuff's and Woolworth's argument against the Commerce Commission in the High Court case and the same argument that compelled the Judge to make her decision in their favour.
Warehouse management haven't given an indication in their February profit announcement of any expansion of the "extra" format and didn't make more than a passing comment about its performance. Clearly a nod to the High Court's comments above "There is also a real...then abandoned without any further stores rolled out".
In addition to this, the High Court has also been very insistent that even if The Warehouse managed to roll out their originally planned 15 Extra format stores, that this wouldn't be of sufficient competition to the incumbent supermarkets, so poses no serious threat as a competitor of consequence and another reason for the High Court to make a decision to allow a sale of The Warehouse.
“For completeness, and although we consider that this is not a real prospect, we have also considered the likely state of competition in the event of a roll out of more Extra stores on a scale that would be sustainable for The Warehouse. We consider that the constraint from the Warehouse Extra, once rolled out to 15 stores, would not provide a material constraint on Woolworths or Foodstuffs.”
Now I'm not quite sure if this would be the case but if the new lawyers for the Appeals Court case have an argument to pin their appeal on, then it might focus on the ability of The Warehouse to be a serious contender once the 15 stores were rolled out, if The Warehouse do this of course, but in all probability they wont.
15 larger than supermarket stores would be good competition in the local areas in which they operate, but when you look at the New Zealand food market as a whole you can see the High Court's statement makes good sense. Real competition just wouldn't be there when one considers Foodstuffs and Woolworth's OZ combined, have over 200 markets of various brands and target markets.
The High Court also found the following:
The Court found (in some respects appearing to go beyond even Woolworths' submissions):
- The pricing impact when a Warehouse Extra is opened is the same regardless of whether it is in a location where a Pak'n Save is also located;
- The evidence indicates that Woolworths considers it worthwhile to observe the Warehouse Extra, not that Extra has led to a material change in Woolworths' competitive strategy;
- The impact at Sylvia Park is difficult to gauge. What is clear is that the market share remains very small;
- Foodstuffs has not responded to the presence of the Warehouse Extra at Sylvia Park;
- Any price change in response to the Warehouse Extra at Whangarei is well below the level at which the Court would have concern;
- Neither Foodstuffs nor Woolworths has responded to the Warehouse Extra in Te Rapa;
- There is nothing in the evidence that indicates that the Warehouse Extra would cause pricing impacts of 2% or greater in the local markets;
- The Warehouse Extra does not aim to be a main player in food (it seeks to get to 3% of the market), it does not intend to be a price leader;
- The Warehouse Extra does not intend to behave as a maverick;
- The one-stop convenience model has provided innovation but that innovation has not had the effect of constraining Woolworths or Foodstuffs.
Even if The Warehouse was to take the Warehouse extra format national, the most even the company sees as their share of the grocery market is 3%. Just on company intention alone it is clear why the High Court made its decision in November, they just wouldn't have been a serious competitor in the supermarket sector in this country, under any scenario put forward at the hearing and therefore having Foodstuffs or Woolworths buy them wouldn't be seen as removing a serious competitor to our two company supermarket duopoly.
Fast forward to the Appeal Court case in May and you can see that The Commerce Commission are going to have a tough case to argue against the November High Court decision.
You cant see them using the extra format stores as an argument to preclude either Foodstuffs or their giant competitor, Woolworths, from making a pitch at The Warehouse, because "Extra" doe not, and will not in the future, provide any serous competition in the grocery market and therefore a purchaser of The Warehouse would not have a competitive advantage over the remaining player or provide a third supermarket chain to the New Zealand retailing landscape.
The only thin veil I can see The Commerce Commission arguing a Appeal Court case on is a time factor.
That is, if The Warehouse were allowed to continue to trade as it now is, its Extra format stores, would in time, prove to be as successful as similar formats have been overseas. Walmart is a good example of this success. But that will clearly be hard to prove as results so far have been far below Warehouse management expectations and overseas comparisons.
The Commerce Commission seem in an un-winnable place in my opinion, because ultimately, their main basis in argument, The Warehouse Extra, isn't performing well and furthermore isn't going to be seriously considered as a long term prospect, even by The Warehouse themselves.
Disclosure: I own WHS shares
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