ACCC gives the nod to Woolworths' $552m foodservice acquisition

Australia's competition regulator will not oppose retail giant Woolworths Group's (ASX: WOW) acquisition of family-owned company PFD Food Services, which controls around 15 per cent of the country's wholesale food distribution industry.

The announcement comes almost 10 months after Woolworths made the $552 million offer to acquire 65 per cent of PFD and its properties, through a deal that includes options to buy the remaining shares three years after completion.

The Australian Competition & Consumer Commission (ACCC) had initially raised concerns about whether the acquisition would strengthen Woolworths' already considerable bargaining power over suppliers, but during the course of its review Woolies offered a behavioural designed to "maintain a degree of separation and independence" for three years.

This undertaking means that during a transition period suppliers will be able to do business with Woolworths and PFD independently, which both companies believe will give the market time to adjust to them not being independent of each other.

"We conducted extensive market inquiries across the industry, and undertook detailed analysis of supplier and competitor data, and internal documents of key interested parties," ACCC Chair Rod Sims said.

"Ultimately the evidence before us did not indicate the transaction would be likely to substantially lessen competition."

The regulator concluded Woolworths and PDF did not compete to a significant extent for customers, as PFD primarily sells and distributes food products that are "not suitable for direct retail sale".

"Our investigation focussed on the potential impact of the transaction on suppliers of food and grocery products. Market feedback suggested that some suppliers see the wholesale food distribution channel as a competitive alternative to supermarkets in distributing their products," Sims said.

"While there were concerns expressed by some suppliers, many suppliers did not raise competition concerns. PFD makes up about two per cent of the overall demand from food suppliers, which was a key factor in the lack of concern from some suppliers."

The ACCC closely investigated potential flow-on effects across the wholesale food sector and looked at specific segments of the market where supply through PFD and other wholesalers is a greater proportion of demand.

"There are very few suppliers for whom both PFD and Woolworths make up a significant proportion of their channels to market. The entire wholesale channel generally purchases less than either of the major supermarket chains," Sims explained.

"We consulted with suppliers of all sizes and found that many suppliers also have additional alternative channels, such as supply to manufacturing, direct supply or negotiation with institutional and restaurant chain customers, and exports."

However, many of PFD's competitors expressed very strong concerns to ACCC about the potential effects of the acquisition, including the potential for Woolworths to aggressively expand in food distribution and leverage its buyer power in supermarkets into food distribution, including through selling private-label products through PFD.

Market feedback indicated that Woolworths will likely be a strong competitor in food distribution. It may try to expand PFD's share of the wholesale segment by bringing down prices for restaurants, cafes and other businesses.

"The ACCC acknowledges that the acquisition will likely lead to changes in the way the wholesale food distribution industry operates," Sims said.

"Despite these potential changes, we concluded that there are several competitors in the wholesale segment with similar market share to PFD and non-price aspects of competition, such as range, quality and service levels are likely to remain an important part of the competitive dynamics. Consequently there is not likely to be a substantial lessening of competition."

Woolworths expects to complete the acquisition this month.

"We're pleased to have approval to invest alongside the Smith family in PFD Food Services. They are a great Australian success story and a well respected business with both suppliers and customers in the food service industry," Woolworths CEO Brad Banducci said.

"This investment is a logical adjacency for Woolworths Group and further supports the evolution of the Group into a Food and Everyday Needs Ecosystem."

PFD will continue to operate independently under CEO Kerry Smith. A separate board and governance structure will now be implemented.

"At PFD, we pride ourselves on the strength of our customer and supplier relationships and that will remain unchanged as a result of this investment," Smith said.

"We look forward to continuing to drive innovation in the industry and serving the evolving needs of our customers, suppliers and the broader community."

Ombudsman to monitor impact on small businesses

The Australian Small Business and Family Enterprise Ombudsman Bruce Billson says his office will be closely monitoring impacts of Woolworths' PFD acquisition on small businesses in the food distribution space.

"The ACCC's decision not to intervene or impose any conditions on Woolworths' proposed acquisition of a majority stake in PFD is disappointing," Bilson says.

"The deal is an example of another creeping acquisition by an already dominant player in the food and grocery sector, eating away at the competitive landscape and the footprint of independent businesses.

"In this case it's the wholesale food distribution channel, which has been one of the few genuinely competitive areas of the food and grocery sector."

Bilson says food and grocery suppliers are concerned about the likely further narrowing of alternatives to supermarkets for their products with the transaction expected to result in Woolworths significantly increasing its presence and influence in wholesale food distribution channels.

"Small and family business food and grocery suppliers will understandably feel one of the truly open doors for their products closed a little today," he says.

"My office has made our concerns about this transaction clear to the ACCC and we note the evidence was not sufficient to support ACCC intervention as it has concluded the deal will not substantially lessen competition.

"Given that much of the concern about this acquisition relates to Woolworths' influence on the wholesale distribution channel and the impact on food and grocery producers who are already concerned about having too few customer options, I hope the ACCC will join me in keeping a close eye on how this plays out.

"In the meantime, my office welcomes ongoing feedback from small and family business owners and operators in food distribution."