The Court of Appeal has revealed its reasons for blocking a takeover of The Warehouse by either of the supermarket giants Foodstuffs or Woolworths.
On Thursday, the court reversed an earlier decision by the High Court to allow the companies to bid for The Warehouse.
It said concern about the effect a purchase would have on competition led it to overturn the High Court decision.
The court said the Commerce Commission was right to decline the original applications by Foodstuffs and Woolworths.
It said while the The Warehouse's entry into the grocery sector has had little impact so far, it could increase its market share.
It says there is a real chance The Warehouse's move to be a one-stop shop will succeed, as it has in other countries. This differed from the High Court's view that eliminating The Warehouse from the grocery market would have little effect.
The Court of Appeal says it did not share the High Court's confidence that the current level of competition between Woolworths and Foodstuffs would continue if either of them absorbed The Warehouse.
It says the High Court focused too narrowly on price competition, and didn't have enough actual evidence to assume competition would not be affected if the takeover bids had been allowed.
The Warehouse has taken small steps into the grocery trade, with three Warehouse Extra hypermarkets offering more than general merchandise.
The Court of Appeal says that the hypermarkets are the only realistic source of ongoing competition to Woolworths and Foodstuffs in the near future.
It says the performance of the Extra stores has improved, and there is a strong possibility the Warehouse being in a position where it could have up to 10 stores offering groceries.
Victory for consumers - commission
Commerce Commission chairperson Paula Rebstock says the Court of Appeal decision is a victory for consumers and competition.
Ms Rebstock says The Warehouse is in a position to challenge the status quo, having opened three supercentres that stock groceries and general merchandise.
She told Checkpoint on Thursday if the bid for The Warehouse had gone ahead, it would have substantially reduced competition in the grocery sector from three major players to two.
Ms Rebstock says this would have disadvantaged consumers.
Both Foodstuffs and Woolworths say they are disappointed by the ruling and will consider the judgement before making any decisions.
The Warehouse says it will not make any comment until it sees the court's judgement.
All parties have 20 working days to consider seeking an application for leave to appeal to the Supreme Court.
The Court of Appeal ordered Foodstuffs or Woolworths to pay costs to the Commerce Commission.
The commission initially declined applications to buy The Warehouse in June 2007, saying a substantial lessening of competition would result if either chain bought the discount retailer.
Woolworths and Foodstuffs appealed. In November, the High Court found in favour of the supermarkets, prompting the commission to take the case to the Court of Appeal.
The Warehouse is about 50% owned by founder Stephen Tindall and associated interests. Woolworths and Foodstuffs each own about 10%.
Shares in The Warehouse fell 60 cents, or 16%, to close at $3.22 on Thursday.