Photo: RNZ / Simon Rogers
The Commerce Commission has declined Foodstuffs' proposal to merge its North Island and South Island divisions.
Earlier this year the country's biggest supermarket operator agreed to bring the divisions together to create a national co-operative.
The boards of Foodstuffs North and South Island divisions currently operate separately and run a number of well-known brands including New World, Pak'nSave and Four Square.
On Tuesday, the Commerce Commission declined the proposal saying it would substantially lessen competition.
In a statement, chair Dr John Small said it would reduce the number of buyers of grocery products in New Zealand from three to two giving it greater buying power.
"As a consequence of the substantial lessening of competition and the associated increase in buyer power, the merged entity would likely be able to extract lower prices from suppliers and/or otherwise adversely impact suppliers in the relevant markets.
"We are also concerned that the consolidation with the proposed merger would lead to reduced investment and innovation by suppliers, meaning reduced consumer choice and/or quality of grocery products in New Zealand for consumers."
He said it would also make it harder for other retailers to grow, potentially depriving consumers of a more competitive grocery sector in the future.
Foodstuffs' proposal required Commerce Commission and High Court approval.
The Commission can only grant clearance to a deal when it is satisfied it will not result in a substantial lessening of competition.
Foodstuffs respond
In a statement, Foodstuffs North Island and South Island divisions said they were disappointed by the decision.
North Island chief executive Chris Quin said the merger was a once in a generation opportunity for the supermarket operator to adapt to the market.
"This merger is about bringing together the back-end support functions of our two regional co-ops to become more efficient and competitive, so we can better serve our customers. That's good for everybody.
"For around a century our co-ops have taken the lead in adapting to changing consumer preferences, facing economic challenges, dealing with crises and finding new ways to deliver value and innovation at the checkout.
"The merger proposal continued that legacy and is an important step for us to keep delivering the best value and experience to customers nationwide."
He said the co-ops remain convinced merging was the right thing to do.
South Island chief executive Mary Devine said operating as one business would make more sense.
