Regulating the grocers: Policy incompetence or malice?

Dr Eric Crampton
Sunday Star Times
27 November, 2022

Never attribute to malice that which can be explained by incompetence. Even still, it is hard to see how policy could be less friendly to entry by grocers like Aldi or Lidl if it were intentional.

Legislation for a new grocery regulation framework was released this week. It could force Countdown and New World to supply their competitors with products at regulated prices – as a potential regulatory backstop.

After operating here for five years, any new entrant can be subject to the same rule.

Wholesale access regulation on incumbent grocers is not likely to make sense. It could only possibly make sense, and then only possibly, if other regulatory barriers to entry were eased and no new entrants arrived.

But the regulation discourages new entry.

At the same time, the proposed Natural and Built Environment Act doesn’t just ignore that zoning rules can discourage competition and hurt consumers. It outright bans consideration of the benefits of competition in regional planning.

So, if a regional spatial plan blocked new grocery stores, submissions highlighting the benefits of competition would have to be disregarded.

It is, in short, a horrible mess.

Let’s step back.

The Commerce Commission undertook an exhaustive study of the retail grocery market. Its final report warned that regulatory entry barriers can be a substantial problem.

Just think about what would be required for a foreign entrant to set up a large-scale supermarket chain. They would need Overseas Investment Office approval to purchase sites. They would have to find sites that were zoned for large-footprint grocery retail. They would have to endure years of uncertainty through consenting processes.

New Zealand’s small market is not worth that hassle. Costco setting up small numbers of giant stores is a different proposition to finding sites for the dozens and dozens of supermarkets up and down the country needed for successful new entry.

The Commission recommended that the next review of the Overseas Investment Act check whether the Act imposes substantial barriers. It said that District Plans and Regional Spatial Strategies should be required to zone sufficient land for grocery retail to afford a new entrant an ample choice of sites. It also encouraged planners to consider the benefits of trade competition.

The Natural and Built Environment Bill, released last week, includes “the use and development of land for a variety of activities, including for housing, business use, and primary production” as one of eighteen outcomes and sub-outcomes. An optimist could read ample zoned land for grocery retail into that, but it is unlikely that regional spatial planning bodies will.

Worse, in multiple sections, the Bill forbids planners from considering effects of trade competition.

Some prohibitions are laudable. Businesses should not get to play games objecting to their competitors’ consent or zoning applications.

But the Bill does not just rule out those kinds of anticompetitive games. It also rules out submissions from anyone like Aldi pleading that land be zoned so they might benefit consumers by entering.

The proposed grocery regulation makes matters worse.

Forcing grocers to supply competitors at regulated prices is terribly fraught. Groceries are not like bits flowing through telecom cabinets and fibre optic cable. Heads of lettuce in a warehouse can vary considerably in quality and freshness. Mandatory supply to competitors then means an awful lot of policing. It risks increasing costs and complexity in the grocery business and, therefore prices.

But it also discourages new entry. The legislation allows the Minister subject additional grocers to the wholesale supply rules. Any company carrying on business as a grocery retailer for five years or more can be forced to supply its competitors at prices set by the state.

While the spirit of the legislation may be to apply such measures only if the Commerce Commission has recommended as much after careful study, the letter of the Bill says something different. The Minister can receive a recommendation from the Commerce Commission to leave a new entrant alone, reject the Commission’s recommendation, and make any other decision that the Minister considers is in the public interest.

In other words, any new entrant had better not annoy the Commerce Minister, who can force it to provide its local competitors with access to its entire supply chain at government-chosen prices. Who would enter our market under those conditions?

The surest protection consumers have in any market is vigorous competition among suppliers and potential suppliers for their trade. Economists know that even the threat of potential entry can provide substantial and real competitive discipline.

Hasty legislative drafting from a government trying to get too many things done simultaneously is more likely to blame than a deliberate effort to prevent new grocers from entering. It could yet be fixed by Select Committees.

But legislative urgency makes it more likely that bad ideas and drafting errors turn into policy failures.

And any sufficiently advanced incompetence does become indistinguishable from malice.

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