Wednesday 9 March 2022

Barriers to entry in grocery

Yesterday's final report from the Commerce Commission was a lot better than I was expecting. 

In the draft report, the real problems were relegated to Chapter 6 and did not feature prominently. Zoning and consenting were noted as a problem but were mostly punted as not being ComCom's bailiwick. 

In the final report, zoning and consenting made up a hefty chunk of work, tallied together as their first recommendation. Exclusive covenants were recommendation 2, and the messes from the Overseas Investment Act came in as recommendation 4.

I got a quick column through to Newsroom summarising things shortly after the report landed. 

Apart from places that are already supermarkets, very little land is zoned for larger footprint grocery. And land with the right zoning is often tied up by restrictive land covenants forbidding their use in grocery retail.

If the would-be entrant managed to find the right set of sites, there’s another problem. Council consenting can take anywhere from months to years – or even a decade in some cases. And councils too often decide that a new retailer should be blocked if it would hurt the amenity provided by other retail centres, sometimes after the retail developer has already built premises.

We wind up in the ridiculous spot where a new supermarket may have to demonstrate that it will not do too much to draw customers away from other places. Where we should want and welcome retail grocery competition, the would-be competitor may have to prove it will not compete very much at all. New Zealand’s zoning and consenting processes have treated competition as a harm to be mitigated rather than a benefit to be sought. 

A new entrant, if it can find the right set of locations, will easily have over $100 million in capital tied up in sites that it has purchased while having no clue when it might possibly be allowed to start building grocery stores. Try planning a distribution network when you can’t tell when different stores might be allowed to open. It won’t be easy.

But it gets worse. The Overseas Investment Office adds hurdles if you have more than a trivial amount of foreign backing. If you want to run full-service stores, you will need to get a liquor permit – and those processes are highly anti-competitive.

It is hardly a surprise that international retailers like Aldi and Lidl have decided that New Zealand is not worth the hassle.

The Commerce Commission’s report strikes at the root. The report has other recommendations, but the only recommendations that matter for ensuring competition are removing the barriers to entry and making it de facto legal to open new supermarkets, rather than just “New Zealand legal” and impossible in practice.

My submission on the draft report and cross-submission after the hearings emphasized freeing up land use to enable entry. The submissions also noted the absurdity of even considering breaking up existing supermarkets while Councils were still forcing new supermarkets to prove that they wouldn't compete very much.

I wonder whether the corrupt-looking mess in Ashburton, noted in my submission and presentation, helped in getting the recommendation to ban councils from considering reductions in amenity value of other shopping areas in consenting processes. 

The Ashburton case looked so very dodgy. As I'd put it in the submission:

And, again, consider the position of a potential international entrant. If small councils are in the habit of using plan changes to frustrate new entry, is it safe to invest here? Would it be unreasonable for a potential international entrant to conclude that cartels of existing connected property owners collude with councils to set anticompetitive zoning rules to frustrate entry and that the Commerce Commission ignores such activity? 

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