Woolworths has proposed undertakings to the competition regulator to secure a green light for its $552 million acquisition of a strategic stake in PFD Food Services amid strong opposition from independent distributors worried about the impact of the deal on the $12 billion sector.

Under the proposed enforceable undertakings, submitted to the Australian Competition and Consumer Commission this week, Woolworths and PFD have made commitments to keep supplier and customer information confidential and have proposed a charter by which PFD will operate in its dealings with suppliers.

PFD Food Services CEO Kerry Smith, shown here with chairman Richard Smith, said the charter reflected how PFD already operated.  

The charter is a first for the food service distribution industry and mirrors fundamental provisions of the Food and Grocery Code of Conduct, which has led to significant changes in the way the major food and grocery retailers deal with suppliers.

The charter provisions include good faith dealings with suppliers, no retrospective changes to commercial trading terms, and confidentiality assurances. Specifically, where suppliers disclose confidential information about their products to PFD, including product development or pricing, PFD will not use that information other than for the purpose for which it was disclosed and will only disclose the information to necessary PFD staff.

To ensure compliance with the undertakings, an independent auditor would be appointed to monitor Woolworths’ and PFD’s behaviour and report to the ACCC on an ongoing basis.

A Woolworths spokesman said the undertakings cemented their previous public commitments to “do the right thing” by suppliers and customers to maintain long-term collaborative and sustainable relationships.

“At PFD we have always strived to set the highest standards in the foodservice industry. The charter is very much in keeping with how we always have and will continue to treat our suppliers, and the undertaking to abide by it is a good fit for us,” said PFD chief executive Kerry Smith.

The enforceable undertaking comes as the ACCC seeks detailed information from independent food service distributors on the impact of the proposed deal, which would make Woolworths the largest or second largest food service player in Australia.

It is understood that more than 50 small independent distributors have been interviewed recently by the ACCC about their trading terms, pricing on a core range of key lines, their purchasing power and the impact on their business of a 5 to 10 per cent reduction in prices. The ACCC has asked suppliers the same questions.

As reported by The Australian Financial Review last month, 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 ACCC to block the deal.

In a joint letter to the ACCC, 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.

They fear Woolworths will leverage its buying power and scale to subsidise key ranges or products to rapidly gain market share, reduce choice and increase costs for consumers, reduce choice for some suppliers and increase costs for suppliers by harmonising trading terms.

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.

Woolworths had previously made commitments to establish Chinese walls so there was 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 about the deal in mid-December and is seeking more information from market participants before it makes a final decision on or before April 22.

After establishing a partnership with PFD during the pandemic, Woolworths reached agreement last August to invest $302 million for a 65 per cent equity interest in the business, which is owned by Financial Review Rich Lister Richard Smith, who was ranked No. 91 on the AFR Rich List last year.

The Smith family will retain 35 per cent and will be able to sell its remaining stake to Woolworths after three years under a put and call agreement.

Woolworths will also acquire for $249 million 100 per cent of PFD’s freehold properties, which primarily comprise 26 distribution centres.

Extracted in full from: https://www.afr.com/companies/retail/woolworths-pins-pfd-food-hopes-on-charter-20210318-p57bvt