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? 

Pay gap reporting

The NBR's Dita De Boni asked me for comment on the push for companies to report their gender pay gaps. Her story's now up here ($).

As always, space constraints mean she could only use a bit of what I'd sent through (all used fairly). Here's my full comment, for those who were interested:

Pay equity reporting mandates are fraught where worker compensation is more than just pay. Roles vary considerably, and people also vary in how much they value pay as compared to flexibility in hours or location of work or being on-call.

If a worker’s total compensation bundle isn’t just pay, but also include whether they’re able to work flexible hours, or whether they’re expected to be on-call at odd hours, or whether they’re regularly expected to put in overtime or exempt from having to do so, then measuring only one aspect of pay and reporting on it could provide a rather inaccurate picture.

The best evidence we have on gender wage disparities, at least out of the United States, suggests that a lot of existing differences in pay are explained by those kinds of differences in overall job conditions. Claudia Goldin’s work in particular shows a substantial pay penalty for workers putting in fewer than 40 hours per week, regardless of gender. But if there are gender differences in willingness to work longer hours, that would show up as a gap in measured pay. Is that the kind of gap that policy or companies should care about? If so, what should they do? If there are real advantages for the company in some workers being willing to work longer hours, forcing that to pare back could hurt overall productivity.

And what evidence we have out of the US is consistent with that worry. A recent NBER Working Paper showed that Danish legislation requiring publication of gender-disaggregated wage statistics did reduce the measured wage gap – by slowing wage growth among male employees. The reduction in pay growth for male employees was matched by a decline in firm productivity, so overall firm profitability was not much hit (pay less for less work) – but is that really a good outcome?

Disclosure legislation could easily have a lot of perverse consequences. For example, consider a firm making staff diversity a priority in new hiring. If new hiring tends to be at more junior levels, because there is usually greater churn at junior levels, then the measured ethnic or gender pay gap would increase because of that round of new hiring. Conversely, if the firm wanted to reduce its measured pay gap, it [could] hire junior staff from groups that the company pays more on average, to help bring down that average – potentially at the expense of diversity in overall staffing.

The exercise is inherently fraught because compensation is complex.

Luxon's tax proposals

National Party leader Chris Luxon announced a few tax policies on Sunday:

• Index tax thresholds back to 2017
• Abolish the 39% tax rate
• Abolish the Auckland Regional Fuel Tax
• Reverse the 10-year bright-line test extension and restore interest deductibility for investment property
• And if either the Light Rail Tax or the Unemployment Insurance Scheme go ahead, he'd reverse those.

I agree with most of this, with a couple quibbles, and a bigger overarching concern about long term fiscal sustainability. 

First the stuff in Luxon's pitch. 

Failing to index tax thresholds in a high inflation environment is a tax increase with distributional consequences that probably aren't what Parliament would choose if it were trying to increase tax revenue. I'd prefer that he formally index the thresholds so that they ratchet upward every 1 April when enough fiscal drag has accumulated. 

Whether you use $1000 or $500 increments would depend on how expensive it is to update systems to do this stuff - the accountants would have a better handle on it than I do. But it isn't hard in principle. Say you ratchet whenever the cumulative increase rounds to $1000 thresholds. Once inflation means that the $14,000 threshold needs to go up to $14,501, increase it to $15,000 at 1 April. But don't reset the inflation anchor to the new threshold, just keep it running from the old one. Then you have overs-and-unders where for a little while the thresholds are too low relative to where they should be, then too high, then too low again, but they never get far out of whack. And it only shifts by $1000 increments. 

Abolishing the 39% rate also makes sense. Remember what Norm Gemmell said about it last year. 

The new top tax rate In November 2020, Inland Revenue conducted a regulatory impact assessment of the government’s proposed new top personal income tax rate of 39% on incomes above $180,000 (Inland Revenue, 2020). This clarifies that the objectives of the policy were to: (a) raise more revenue to fund the government’s intended future spending; and (b) do so in a way that improves equity.

Evaluation of the policy ex ante can therefore be decomposed into four important aspects: (1) How much equity improvement will be achieved? (2) How much extra revenue will be raised? (3) What sacrifice in efficiency will be made in pursuing these objectives? (4) Could the objectives be achieved at a lower efficiency sacrifice? 

On (1), empirical analysis from Inland Revenue (2020) shows that the effect of the top tax rate increase on the Gini coefficient – the most commonly quoted inequality index – is likely to be very small. It is forecast to fall by 0.2%, from 0.493 to 0.491. In fact, despite ‘raise the top marginal income tax rate’ being a popular mantra of the political left, changes to income tax rates at the top of the income distribution typically have little overall distributional impact. This is partly because the Gini coefficient weights each individual by the inverse of their rank in the income distribution.

...

Inland Revenue (2020) estimates that, averaged over the first three full years of its operation, the new tax policy will raise, on average, $510 million per year, 2021/22–2023/24.3 This represents just under (over) 0.4% of total Crown expenses (revenue) in 2020 (see Treasury, 2020). It is clear therefore that the new tax policy has a very limited capacity to increase Crown spending, or increase equality via the targeting of that spending at lower-income groups.

If tax revenues have to be maintained, it would be better – in terms of equality improvements delivered at lower efficiency losses – to raise GST rates (for all) and lower income tax rates only at the bottom of the income distribution. Alternatively, income transfers to lower earners (such as via family tax credits) could be paid out of higher GST revenues and almost certainly reduce inequality indices. Similar scenarios have been examined rigorously by Thomas (2015, 2020) and shown to be more effective for redistribution in many OECD countries, including New Zealand.

It is hard to avoid the conclusion that the new higher top tax rate is a policy designed to deliver the appearance of redistribution by focusing attention and revenue-raising raising on top earners. However, especially given the way the new policy has been structured, the actual effects are likely to be minimal on equality and small on revenue, but will impose significant costs in terms of the efficiency and integrity of tax revenue raising in New Zealand.

Emphasis added. Norm is Chair in Public Finance at Vic. 

Abolishing the Auckland Regional Fuel Tax, which is meant to be funding transport improvements in Auckland, would mean some other way of funding transport improvements would be needed - or a rethink of how transport is funded more generally. That could be worthwhile.

Reversing the tax moves in property also makes sense. Go back and read Norm's piece - the housing tax changes had introduced incoherence into the tax system.

The UI scheme isn't in place yet and is a bad idea anyway. Promising to reverse it provides some certainty so people don't go and cancel existing employment insurance policies in expectation that the new scheme would be durable. 

But there remains a big overall hole. Treasury's long-term fiscal outlook is grim unless we have some combination of fixing NZ Super to deal with increasing healthy life expectancies, restraint in growth of expenditures on government services (primarily healthcare), or tax increases. And it will only get worse in high interest rate environments.

Luxon's tax moves get rid of a pile of measures that cost a lot relative to the amount of money they might bring in. It's good to be rid of them. But if we think that defence expenditures are going to be higher over the next decade, and that health expenditures will too, then we need some clearer signals about where restraint might be applied to cover the cost - or where taxes might increase to plug the hole. 

Gemmell's piece suggested that a combination of GST increases and reductions in income tax rates in the lower tax bands would be more efficient than the combination of policies Labour had put up. It also wouldn't be a bad start if looking for ways of raising overall revenue. Make the GST increase neutral for those on lower tax rates by adjusting their tax rates down, and the GST increase winds up being progressive in effect. And remember that GST hits spending out of capital income as well. 

I'd prefer starting with spending restraint and doing away with useless or harmful bits of spend where we can find it: make-work construction projects during a construction labour shortage; Envirojobs; and, Medsafe for starters. The last one only somewhat tongue-in-cheek. 

And definitely start indexing NZ Super to healthy life expectancy: have a one-off upward ratchet in the age of eligibility scheduled for a decade from now, then have it upward-indexed whenever healthy life expectancy increases. Complement it with an enhanced disability benefit for those ineligible for Super but no longer medically capable of working - and remember there will be some who are in that hole even with an eligibility age of 65. 

I'd chatted this morning with Newstalk's Mike Hosking and with RNZ on all of this. 

What's a capital improvement?

Councils apportion rates across their ratings base: the value of land and capital improvements in their district.

Newsroom reports that Gisborne District Council is considering particular types of Kiwifruit licences to be part of the assessed capital value. 

Zespri owns the rights to some proprietary cultivars: Sungold G3 is the one here in play. 

There had been little consultation with affected farmers, and although the council had prepared a report in 2020 and got the changes signed off by the valuer general, the information was buried on pages 116-119 of the chunky document. It wasn’t even mentioned in the introduction to that report.

Still the impact for growers was clear enough, when it came through.

The rates bill for Tietjen’s orchard went from $4,364 for the 2020-2021 cycle to $8,221 in 2021-2022.

Some other Gisborne kiwifruit growers saw their bills triple.

“Kiwifruit is going through a boom time, which is why I think the council was maybe targeting kiwifruit growers,” Tietjen told Newsroom. “We can’t say we can’t afford it, but it makes things tougher. And kiwifruit is a risky business.”

I could see this being part of the land rating if the licence were tied to the land. Like if Zespri had to do some complex site suitability evaluation that then followed the land title.  

But that doesn't seem to be how this works:

“The licence is personal to the grower, not fixed to the land. A lot of people use a separate legal entity which owns the licence, separate to the landowner,” he says.

If a grower sells their property, they sell the rootstock, the irrigation systems and the fencing, but the licence goes back to Zespri, which then issues a new licence to the new owner.

The Court sided with the growers, who didn't want to pay council rates on the Zespri licence. But: 

With the appeal due to be heard in the High Court later this year, Gisborne District Council didn’t want to comment to Newsroom. However, its statement confirms the action comes from the top – New Zealand’s Valuer-General, Neill Sullivan:

“The decision to appeal comes on the advice and support of the Valuer-General, who considers that the Land Valuation Tribunal’s decision is inconsistent with past case law decisions and the Rating Valuations Act 1998 requirement to value established vines as improvements. 

“Removal of the gold kiwifruit vine value due to the existence of a licence creates an inequitable outcome for ratepayers, unfairly reducing the rating valuation and rates burden for some property owners and increasing the rates burden for others.”

The Valuer-General will bear the full cost of the appeal, the council says, as he “considers it to be in the national public interest for the matter to be heard”. 

The Valuer-General will also be joining the proceeding as an interested party.

The licence to grow this Gold kiwifruit variety costs about half a million dollars.

I wonder if they're viewing the "give the licence back to Zespri who will issue a new one to the new owner" as a convenience. If, on selling a piece of land with an irrigation consent, I formally gave the irrigation consent back to Regional Council, who issued a new one to the new owner, and everyone knew that the consent just stayed with the land, then the value of the irrigation consent should be part of the land valuation. 

Fun stuff though.   

Wilful unknowns

This week's column at Newsroom, now ungated, goes through the things that would be very helpful to know in weighing up risks over the next few weeks, would be eminently knowable, but seem instead to be wilfully unknown. 

A snippet:

I can, right now, find the current wait times at emergency departments across the United States. Premier Health has a handy map showing the wait time at each of seven emergency centres around Dayton, Ohio, so you can weigh up the total time it might take to see a doctor. When I checked, wait times ranged from 2 to 13 minutes – with wait time data refreshing hourly. Virtua Health provides similar data in New Jersey, where wait times range from zero to 97 minutes.

But current wait times at New Zealand’s Emergency Departments are wilfully unknowable.

The data is being collected for statistical reporting.

We just cannot see it.

Supermarket barriers to entry

Last year, my submission to the Commerce Commission's inquiry into supermarket competition urged the Commission to look at regulated barriers to entry that make it near impossible for a new grocer to set up at scale. It seems just stupid to make it basically illegal to set up a new supermarket chain while complaining that there aren't enough supermarkets around.

The material barriers to entry? You have to find a set of sites with the right zoning, that aren't already encumbered with a covenant against use in grocery retail (which only matters because so few sites are zoned), then you have to deal with lags in consenting that can range from months to a decade, and you probably need to get approval through the Overseas Investment Office because larger footprints adjacent to sensitive land need to be cleared and the definition of sensitive land is broad. 

Nobody's going to tie up the kind of capital needed to do this for the period needed to clear all the stupid hurdles. So we don't get much entry.

Well, we now have one new grocer in Auckland, on one site. A smaller footprint one so fewer barriers than a larger footprint one. And what does the new entrant say?

"We found a number of sites that unfortunately had a willing tenant; that was us, and a willing landlord, but there was a covenant on the land that prevented any food being sold, dating back to 1986," Snowden, who has worked in retail for 30 years, told the Herald.

This was a grocer looking for one site.

Free up zoning so that every site in the city can be retail grocery, and encumbrances wouldn't matter. ComCom could decide to strike covenants as having anticompetitive effect, and it wouldn't at all be nuts for them to look at those. 

But it is absolutely insane to be looking at breaking up existing grocery retail chains or forcing retail/wholesale splits while we still have a land use and overseas investment approvals system that effectively prohibit larger-scale entry. Fix the real problem. 

I wonder what they'll be announcing next Tuesday. It will signal the direction ComCom is likely to be taking in future market studies, including building materials supply. Will they look at the real government-imposed restrictions that create hefty restraints on competition and potential entry? Or will they take those as constraints and recommend breaking up retailers and their supply chains in a pandemic?

Afternoon roundup

The closing of the browser tabs:

• Cowen runs game theory on Ukraine. Recall that Schelling was his supervisor. 
• Current stand-down rules require self-isolation only if you or a member of your direct household has Covid. A fifth of Ports of Auckland workers are on stand-down, whether sick themselves or with a sick household member. 
• "the government’s capacity to control all facets of the pandemic is starting to visibly break down"
• Tony Burton has some cautions about Mazzucatto's mission-driven state. ($, but will presumably ungate down the track by dropping the /pro/ from the URL)
• Ryan Greenaway-McGrevy and Peter Philips find that the Auckland Unitary Plan roughly doubled housing build after it came into effect. They're having a seminar on it on Friday, 10-11am, Zoom link.