Legalising groceries

Dr Eric Crampton
8 March, 2022

The Commerce Commission’s final report into retail grocery competition, released this morning, recommends legalising new grocery stores. While it is not formally illegal to start a new supermarket chain, zoning and regulatory barriers make it effectively impossible.

The report’s most substantial recommendations focused on removing the regulatory barriers that hinder new entry.

It’s about time.

For far too long, it has been effectively impossible for a new grocery chain to enter the New Zealand market. The Initiative’s submission on the Commission’s Draft Report explained the problem.

A would-be entrant would need to find sites in towns and cities across the country to set up its new chain.

But there’s a problem.

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 a hundred 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 anticompetitive.

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.

The Commission urged that District Plans and Regional Spatial Strategies include enough space for retail grocery that new entrants would have their choice of sites. They recommended a broad and liberal approach. Rather than prescribe how many stores of different sizes might be allowed, town plans should “enable competition to organically develop in line with demand.” And it recommended broad mixed-use zoning in brownfield sites “to enable a range of activities to take place.”

Apartments above supermarkets become a real possibility under broad mixed-use zoning.

The Commission recommended making it harder for councils to block new supermarkets. Retail grocery could be considered ‘permitted’ or ‘controlled’ rather than ‘discretionary’, easing the consenting hurdles. It also recommended that the proposed Natural and Built Environments Act stop councils from blocking new retail developments because of potential adverse effects on existing developments. I’d have gone further and recommended criminalising that kind of consenting practice. It too easily borders on corrupt protection of existing landowners.

The set of measures would go a long way to freeing up land for new grocery entry.

If ample amounts of land were zoned to allow grocery retail, restrictive covenants on particular sites simply would not matter. The Commission also suggested prohibiting those covenants, which could help free up sites in the short term until more liberal urban plans might be drawn.

Finally, the Commission recommended looking at the effects of the Overseas Investment Act and the Sale and Supply of Alcohol Act on grocery sector competition.

The Commission made other recommendations: requirements that grocery retailers consider others’ requests for wholesale supply in good faith; a grocery code of conduct; allowing collective bargaining by grocery suppliers; and a grocery regulator. If entry is not eased, it would be hard for any of these to improve outcomes. And if entry is eased, none of them are needed.

The Government should take the Commission’s recommendations around entry barriers very seriously. Resource management reform is currently underway. If that reform does not result in councils treating competition as a benefit to be sought rather than a harm to be mitigated, it will miss a real opportunity for benefitting consumers.

But the Government could go further and faster. Rather than wait for the next review of the Overseas Investment Act, the Government could direct the Overseas Investment Office that grocery retail entry is in the national interest and that applications should be approved immediately.

And it could tell potential international entrants that New Zealand will welcome competition.

Last year, I optimistically suggested, in my second submission to the Commission, that the Commission might wish to send an invitation letter to potential entrants – and to set the conditions that would make it true. The proposed letter read:

“Hello [international grocer],

New Zealand may not have featured in any plans you may have had for international expansion. Small markets at the far end of the world beset by regulatory impossibilities that make it hard for new entrants to set up shop are not the most enticing proposition.

We at the NZ Commerce Commission are writing you today to ask that you reconsider New Zealand, or to think about us for the first time. Our market study into grocery retail concluded that a new entrant would be in the national interest. Consequently, the Government has instructed the Overseas Investment Office that no application for OIO approval is necessary for overseas persons purchasing land for grocery stores. This waiver is broad. If a new-entrant grocer proposes an apartment or commercial tower above their new supermarket, that is also allowed.

We have also instructed councils that they must issue zoning variations and consents for new grocers, and that grocers have recourse to the Commerce Commission if zoning or consenting processes are hindering the establishment of a new entrant in grocery retail.

New Zealand is open for business. For too long, regulatory impediments stood in the way of new entry. Those impediments are now gone. Please consider New Zealand in any plans for future expansion.”

I thought I was being hopelessly optimistic. But the Commission’s core set of recommendations are not far from enabling this kind of invitation.

We could have real entry, and real competition if the Government takes the opportunity the Commission has provided. Consumers would be the better for it.

It’s about time that new grocery retail finally really be legal.

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