(adds comment from Woolworths from sixth paragraph)

Wellington, Oct 9 NZPA - Warehouse Group Ltd shares soared 12.62 percent today after the retailer retreated from food retailing, making it easier for a supermarket chain to take it over.

The Warehouse is closing down its Warehouse Extra stores at a cost of $12 million because people shopping for food did not buy as much general merchandise as hoped.

The withdrawal was significant because the two supermarket chains that dominate New Zealand, Foodstuffs and Woolworths, were prevented from bidding for The Warehouse by the Commerce Commission because of The Warehouse's potential to compete in grocery retailing.

Key to that potential was the Warehouse Extra stores.

They both have 10 percent of The Warehouse.

The commission is not commenting as its existing decision is still subject to a legal challenge by Woolworths at Supreme Court level.

Woolworths said it is evaluating that appeal.

"Woolworths has not made a decision in respect of its shareholding in The Warehouse or any proposal.

"Woolworths continues to monitor the performance of The Warehouse, the New Zealand retail climate, financial market conditions and the outlook for the New Zealand economy."

Analysts said it was most likely that a bidder would just apply again now that circumstances had changed rather than continue to challenge the old decision.

The Warehouse's shares were up 39 cents at $3.48 in afternoon trading.

James Smalley, a client adviser with Hamilton, Hindin, Greene, said the share price had had a takeover premium added to it.

The Warehouse's move into food retailing had been highlighted as a reason for turning down the supermarket companies, he said. So an impediment had been removed.

Chairman Keith Smith said the "company's aspiration to achieve the critical 10 percent halo benefit in general merchandise and apparel" would not be realised.

This is the effect of increasing sales of general merchandise to shoppers who came in to buy food.

"As a consequence of this, the Extra strategy will not meet our return on investment criteria."

He said the company planned to simplify the business and focus on its core business.

Fresh produce, meat and frozen foods will be withdrawn from the three existing Extra stores within the next six months.

The pharmacy and health and beauty category areas are to remain.

"A decision has yet to be made in respect of liquor currently ranged in six of the company's 85 stores."

Managing director Ian Morrice said the Extra stores had been an important trial for the retail chain.

"The format and level of investment has been managed to ensure the supercentre model was properly and thoroughly tested with the benefits flowing to the wider business. These benefits have been significant particularly in relation to range extensions, store operations, supply chain and systems."

Foodstuffs is a co-operative which runs New World, Pak'nSave and Four Square stores and it has previously talked about using a scheme of arrangement rather than formal takeover with partner Pacific Equity Partners. It did not return calls today.

Foodstuffs and Woolworths together have about 96 percent of the grocery market in New Zealand. Woolworths also operates Countdown, Foodtown, Supervalue and Fresh Choice stores.

The Warehouse founder Stephen Tindall has previously said he would act with integrity and in the best interests of shareholders, customers, staff and the community when deciding what he did with the 52 percent of the company he controls. NZPA WGT pjg kn