Thursday, 29 July 2021

Supermarkets and land use planning

If you're going to read the Commerce Commission's market study on supermarkets in New Zealand, I'd suggest starting with the first half of Chapter 6. 

There, they go through the effective difficulties in entering the New Zealand market. As far as I'm concerned, evidence on margins and such really don't mean much unless there are substantial restrictions against new entry. High profits should motivate entry, if they're real. If they're not motivating entry, what's stopping entry?

ComCom's presentation of the issues in Chapter 6 reverses the sequencing of how I'd think about it, but gets to the same spot. I'll put it in the way that makes sense to me.

They note that opening a new supermarket retail chain requires having a lot of sites near potential customers.

At 6.102, the study starts in with the problem of planning regulations. They do not get into as much depth as would be warranted because Resource Managements is being reformed; I'd suggest that it should be gone into for precisely that reason, so that better RM systems can avoid old problems. 

They note that a site has to comply with zoning requirements within a District Plan. They don't note how few sites might exist that might comply with those zoning requirements. 

They note the ways that consenting processes get used to slow down new entry. It is a giant mess. If you want to open sites across the country, and consenting in some places could be tied up for a decade but move quickly in other places, how do you even start dealing with that as a new entrant? 

So we start from there. As a new entrant, you'd have to find a lot of sites that comply with existing zoning requirements (ComCom doesn't note the extent to which existing zoning knocks back the range of potential sites), and you might spend years with a scattershot of stores as different places take different amounts of time to get zoning permission.

At 6.55, earlier in the report, they go through the site requirements. You need spots that work well for supermarkets. There might not be a ton of those, even if zoning were permissive - but it will depend on your business model. 

But among the sites that might be suitable, ComCom describes at 6.65 rather a few problems. Existing supermarkets either own those sites already, or previously owned them and sold them off with encumbrances on the title restricting any future owner against using the site as a supermarket, or the site is part of an existing shopping centre where the supermarket has an exclusivity restriction. 

Now in a sensible world, this just couldn't be an obstacle to development. Run a proper city set on a grid where a block can be basically anything, and you'd have to buy up the entire city to stop a new entrant. It's impossible. But if planning rules have already sharply limited the number of feasible sites, in part because infrastructure constraints mean few sites may be viable, well, that's another matter entirely. If you set the rules so that only a half-dozen places can be a supermarket, it seems odd to complain afterwards that there isn't much competition. 

There can be very good reasons for exclusivity covenants in leases. If you're setting up a shopping centre and you want a big supermarket as anchor tenant to cover a fair share of the cost, that anchor tenant isn't going to be happy about its competitor showing up after those fixed costs have been sunk. If you can't guarantee exclusivity over a reasonable period, the supermarket will not be willing to bear as big a chunk of those costs. And that can matter. ComCom has some discussion of this at 6.86.

But if those exclusivity arrangements are over a very long period, they can wind up mattering. And, at 6.77, ComCom notes the cumulative effect of these things in places where there isn't much land appropriate for retail grocery and where that land which might be appropriate has covenants on it preventing its use in selling groceries. At 6.86.3, ComCom notes that it's unlikely that efficiency rationales explain exclusivity periods in excess of twenty years, as seem to here be the norm. 

And they note that Section 28 of the Commerce Act would make anticompetitive covenants unenforceable.

Then, from 6.92 they get into land banking. They note the difficulty in determining whether potential sites have been acquired with a view to very long-term growth, or as a way of blocking others' entry. 

In general, as discussed at paragraph 6.82, the preferred strategy from the major grocery retailers appears to be to use restrictive covenants or exclusivity covenants in leases to impede store development by competitors. We have seen relatively few instances of the major grocery retailers buying and holding land for significant lengths of time primarily for this purpose. 409 These sites generally appear to be sold once their purpose is fulfilled (potentially after lodging a restrictive covenant). 410 

Overall, it looks damned hard to open a new supermarket chain in New Zealand. 

You'd have the Overseas Investment Act to deal with in buying properties. 

Then you have to find any properties with the right zoning.

Then you'd find that there aren't many properties with the right zoning where a covenant on the property doesn't ban you from using it for a supermarket.

Among the ones you do find, you'll get crazy lags in consenting that mean you can't just open everywhere. You'll have hit-and-miss opening where things can get drawn out in some places for years depending on the whims of the consenting authority in that District. And not in any way that lets you plan a distribution network. 

Look at all that, consider that NZ is at the far end of the world, and that you'll have capital tied up for years while all the permissions go through, and you could be forgiven if you decided we just aren't worth the hassle. 

Small places at the far end of the world cannot afford to have these kinds of barriers against entry. 

The report has a few suggestions around policy remedy, including potentially mandated access to the supermarkets' owned wholesalers. That one seems an impossible nightmare. How can you prove that access is being provided on the same terms - or otherwise? With telecom, it's easier. You can measure service speeds reliably. Could you ever tell whether a retailer was having its wholesaler send the day-olds to its competitors rather than the fresh stuff? How? What enforcement mechanism would you need to set up around it?

As a first cut, I'd start in instead on the real restrictions against entry. Note that these are draft views on a draft report - they'd be subject to change on more careful thought. 

Begin thusly: "Henceforth, supermarkets are automatically approved under the Overseas Investment Act." 

Get rid of the uncertainty that the OIA provides by wiping it. It seems just stupid to think that Aldi or whoever would need to prove that their entry is in the national interest, and have things held up in those processes, when ComCom has just pointed to that an increase in grocery competition is in the national interest. 

If the covenants really are void under the Commerce Act, wipe them. Make sure that competition and the promotion of competition is in the new RM reforms, and that District Plans have tons of permissive zoning allowing lots of different shops in lots of places. Limit the duration of exclusivity contracts at the malls if those are anticompetitive. 

Let that rip, and see what happens. Doesn't that make more sense than trying to set up some new government-sponsored KiwiGrocer alternative that would have to wrangle its way through the consenting processes too?

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