Real supermarket competition will require planning reform - Eric Crampton

The Government has said it will consider breaking up the supermarkets in order to increase competition. Photo / Getty Images

THREE KEY FACTS

• Finance Minister Nicola Willis is considering a possible break-up of New Zealand’s supermarket duopoly.
• Cabinet has agreed to begin a formal Request for Information to speed up the improvement of competition in the retail grocery sector.
• The Commerce Commission’s first annual report on the grocery sector, released last year, found no meaningful improvement in competition.

Imagine that you had to sell your house in a desperate hurry – Melbourne beckons, and the job there starts soon.

Some things that would help the sale go ahead would be well worth doing. Like securing a new compliance certificate for the spa pool so the buyer has less risk of hassles with council inspectors.

But you are a bit desperate. The deadline looms. If a buyer insisted, there are a lot of things you would do.

Should you tell your realtor to advertise just how desperate you are to make a quick sale? Or should you let the offers come in, see which one looks best, and negotiate from there?

If every buyer knows you’d be happy to put a new roof on the house and re-pave the driveway, you’re going to get offers asking you to do both.

On Sunday, Finance Minister Nicola Willis announced that she wants a third large supermarket chain.

She is asking potential entrants what they need to make it happen. And that potentially anything is on the table.

One thing must be on the table. The thing that has blocked large-scale entry for ages. It must be legal to build supermarkets. It is too often effectively illegal.

What do I mean by that?

Council plan changes authorising new subdivisions or centres set prescriptive rules.

Planners think cities must have a hierarchy of centres. Activities in a neighbourhood centre should never be so large as to compete with a regional centre.

Regional centres should not compete with downtown. So the number (typically zero or one) and sizes of allowed supermarkets will be prescribed in the plan change.

You might think I’m exaggerating.

Here is a recent example.

The plan change authorising an expansion of Homebase Shopping Centre in Christchurch first prohibited it from having any supermarket until 2031, for fear that a new supermarket would compete with a Woolworths in The Palms, a mall a few kilometres down the road.

Homebase Shopping Centre had to appeal, providing lengthy evidence that there were enough customers that the existing Woolworths wouldn’t be threatened. Homebase is now allowed one supermarket no larger than 4300sq m.

Actual head-to-head competition is often forbidden by our planners, who prefer a managed divvying-up of a market.

It sounds, and is, completely mad.

When town planners think competition is a harm to be avoided, rather than a benefit to be welcomed and encouraged, there will be problems – and not just in grocery retail.

The obvious solution is consistent with the kind of resource management reform that the Government is progressing anyway.

Set a fast-track process that can rezone land for supermarkets, ideally also allowing an apartment tower of new customers above the store as part of the bargain.

Let that process handle rezoning, consenting and overseas investment approval all at the same time – for a full slate of sites up and down the country. And promise decisions across the set of sites within a few months, rather than years.

It wouldn’t give you new stores tomorrow. An entrant would still need to purchase options on sites. But it would very credibly legalise real competition. The kind of competition that could run an underperforming incumbent out of business.

If nobody wanted to set up a third chain despite a very straightforward process, that would tell you something important.

It could be that our market really can only support two large players with a minor fringe.

But real potential for entry can provide its own discipline. If you know that no new player will be allowed into the market, you will behave differently than you would if there were real threat of entry.

Sunday’s announcement signalled desperation. There is an election looming. So, everything is on the table – including breaking up supermarkets’ wholesale and retail sides and forcing them to sell stores to a new entrant.

The supermarkets claim the suggested structural reforms could force substantial cost increases on them, raising their cost of getting groceries to consumers.

The minister seems concerned that easing the planning rules might not attract entry, or at least not quickly enough.

But there is risk the other way too. A new supermarket chain could wind up making consumers worse off, if it comes with a new regulatory regime or regulated structure that pushes up costs across the board.

I hope the Ministry for Regulation will have time to diligently check whatever is proposed.

Before even testing whether liberalising the country’s planning rules would enable competition, New Zealand’s purportedly centre-right coalition has promised willingness to break up existing businesses.

There is need for desperate measures in planning reform.

But this kind of desperation isn’t helpful.

Disclaimer: The New Zealand Initiative is funded by the subscription fees of its members, including two supermarkets.