Wednesday 23 November 2022

Discouraging grocery entry

The main potential problem in retail grocery competition, in New Zealand, is the near-impossibility of at-scale entry. 

Now we have another one. New entrants could be forced to supply their competitors with products at regulated prices after having been here for five years - so why would they ever want to enter?

We'll save that bit to the end. 

First a refresher on the existing problem. 

A foreign entrant would face uncertain lags and outcomes through the Overseas Investment Office. Not many sites are zoned for grocery retail. The supermarkets have been voiding restrictive covenants that have tied up some zoned properties against use in grocery retail, but assembling a network of sites where large-footprint grocery retail is permitted will be a challenge. Then there are long and variable lags in council consenting processes. And the background suspicion that at least some towns, like Ashburton, are owned by cartels of existing town-centre property owners who'll block competitors no matter what the zoning is

Basically a pile of legislation, regulation, and standing practice caused by the regulatory thicket makes entry impossible. 

After the Commerce Commission's market study, the government moved to legislate in support of something the supermarkets were already doing - getting rid of those restrictive covenants.

But the Commerce Commission also had recommendations on zoning. It suggested that District Plans and Regional Spatial Strategies should be required to include sufficient land for choice of sites in development of grocery retail, that there should be minimum proportions of urban land zoned for retail grocery, and that positive outcomes of trade competition should be able to be considered in planning instruments. See 9.35 at page 386.

None of that's turned up in the draft legislation. Worse, the NBEB seems to forbid consideration of effects on trade competition full-stop. In parts it's ruling out rent-seeking uses of consenting to block a competitor's opening or expansion. And that's fine. 

But in other parts Commissioners, Independent Hearings Panels, and planning committee are instructed to disregard effects on trade competition full-stop. 

Some examples.

  • The IHP, in formulating its recommendations, must disregard trade competition and the effects of trade competition. Schedule 7 126(1)(e).
  • When formulating recommendations, commissioners must disregard trade competition and the effects of trade competition. Schedule 7 60(d).
  • A person who could gain an advantage in trade competition through a submission may make the submission only if directly affected by an effect that (a) adversely affects the environment; and, (b) does not relate to trade competition or the effects of trade competition. Schedule 7 20 (4)(b)
    • Note that this one blocks rent-seekers, but would also block Aldi from putting in a submission saying "Hey! You're zoning for only one supermarket! Make room for us too!"
  • When considering a requirement and any submissions received, a regional planning committee must not have regard to trade competition or the effects of trade competition 512 (1)(d)
Just go to the bill, hit Control-F, type in "trade competition". Some restrictions against rent-seeking, some bans on considering trade competition full-stop. And ComCom said that they needed to make room to consider the positive effects of competition. 

Either it's poor drafting or they want to block pro-competitive effects from being considered. 

In any case, they're not easing the barriers to entry. And they haven't instructed the Overseas Investment Office to make darned sure it's simple for new entrants to come in.

Instead, they're doing something else. 

The regulation proposed is a mess. 

Leave to one side for now all the problems in regimes mandating that an integrated grocery operator supply competitors at regulated prices for heterogenous and perishable goods. 

Sections 22 through 25 say that additional retailers can be made subject to the wholesale supply requirements after having been operating here for 5 years. How does that work?

A grocer can be designated as having wholesale supply obligations under section 23, on the Minister's recommendation in Section 24. 
24 Minister’s recommendation for designation under this Part


The Minister may recommend that a person (A) be designated as a regulated grocery retailer under this Part only if—


the Commission has given the Minister a recommendation about whether A should be designated; and


the Minister has had regard to the Commission’s recommendation; and


A has been carrying on business as a grocery retailer in the whole or any part of New Zealand for 5 years or more.


In deciding whether to make a recommendation, the Minister may do any of the following:


accept the Commission’s recommendation that A be designated if the Minister is satisfied that the criteria set out in section 25(2)(b) are met:


reject the Commission’s recommendation:


request that the Commission reconsider any matter (such as an error, an oversight, or competing policy interests):


make any other decision that the Minister considers is in the public interest.


For the purposes of subsection (1)(c), A must be treated as carrying on a business referred to in that paragraph if—


A is a member of a group of interconnected bodies corporate, and that group (or any part of it) has been carrying on business as a grocery retailer in the whole or any part of New Zealand for 5 years or more; or


A acquires (directly or indirectly) the whole or any part of the business of a regulated grocery retailer.

Ok. So suppose the Minister receives a recommendation from the Commission not to designate a retailer as being subject to the wholesale supply requirements. 

That satisfies 24(1)(a). The Minister has received a recommendation. Doesn't say anything about the direction of the recommendation now does it? 

The Minister can then have regard to it in (1)(b), reject it (2)(b), and make any other decision that the Minister considers is in the public interest (2)(d).

In short, if the Minister considers it as being in the public interest to force Costco, or Aldi, or any other new entrant to provide rent-seeking New Zealand competitors with access to its products at regulated prices, the Minister can go ahead and do that. 

Unless the legislation is changed. Like maybe they just assumed that the Minister would only proceed if the Commission had recommended that a grocery retailer fall under the designation. But nothing in the legislation specifies that. The Minister need only have been given a recommendation about whether the retailer should be designated. 

Anyone with kids is smart enough to see the problem here. If you tell the kids they can do something only if they ask their mother, without having said that their mother has to say they can do the thing, you're just asking for trouble. "You can if your mother also confirms it is okay with her" is safer. 

Now. Suppose you're an international grocer who's spent decades building supply chains. And New Zealand's started looking potentially more open for business. Maybe zoning and consenting does get fixed, and maybe the Overseas Investment Office eventually gets told to approve new grocery retail.

If you figure that five years after you're considered to be operating as a grocery retailer in New Zealand, you'll be forced to open up access to every rent-seeking New Zealand competitor at regulated prices at the whim of the Minister, why would you ever want to open up shop here?

I guess one bottom line is that the Commission should refuse to provide any recommendation unless they actually want the Minister to make the designation - unless the legislation gets changed to require a positive recommendation. 

But more substantively, government needs to be assuring potential entrants that they won't just be expropriated after having been here for five years if you want them to open here, rather than spelling out an obvious mechanism for existing and potentially preferred incumbents to get access to new entrants' supplies.

Everything is stupid and broken and getting stupider and more broken. 

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