Supermarket YIMBYism
Breaking the duopoly and getting cheaper groceries through a National Policy Statement on Supermarket Development
Travelling through Europe recently I was struck by the abundance, choice and cheapness of supermarkets. Small-scale neighbourhood stores through to massive full-service offerings, and everything in between, throughout the whole city. Coming back home reminded me of what we’re missing out on.
Our supermarket duopoly and expensive groceries loom large in the political discourse and rightly so.
There’s been some changes. There’s a grocery wholesale regime which seems clunky, not well suited for markets outside of natural monopolies. The ban on restrictive covenants is good (though was likely already illegal, just not enforced). And there’s been a lot of talk about a potential break up of Foodstuffs and Woolworths.
I’m leaving those questions aside and focusing on an important yet forgotten recommendation by the Commerce Commission’s market study: Change planning laws to free up sites. This was recommendation 1 in the report yet it seems to have gone nowhere.
Low barriers to entry matter enormously to competition. Restrictive zoning is a big culprit stopping us getting something like a low-cost Aldi that holds prices down in Australia.
Minister of Finance Nicola Willis recently said she’s ready to “fight” the duopoly. Well here’s my suggestion. Let’s copy the playbook from our bipartisan upzoning reforms for housing. It’s time for a National Policy Statement on Supermarket Development. It’s time for Grocery YIMBYism.
We haven’t zoned enough sites for supermarkets
The Commerce Commission found that we just don’t have enough available sites adequately zoned for supermarkets across the country. You’d ideally want an abundance of sites of all possible sizes so there’s enough slack in the system for a new entrant to gain a foothold.
Yet what we see is the opposite. The Big Two landbank, acquiring and holding suitable store sites without specific plans for development. Woolworths even runs almost identical pairs of supermarkets right across the road from each other. The most well-known example is the two Woolworths opposite each other in Napier, the subject of an incredible Guy Williams video. But there’s actually, by my quick count, about 22 Woolworths right next to another Woolworths across the country.
The holding costs of those strategies aren’t cheap and would only make sense if there’s only a small number of viable sites left in each city to be held away from competitors. Delve into any major city’s District Plan and there just doesn’t seem to be many zones that enable supermarkets that aren’t already well build-out with high value uses on suitable plots.
The sites we have zoned for supermarkets are overly restrictive and unpredictable
Bizarre urban design requirements
The Productivity Commission (RIP) catalogued some examples in the South Island which included:
Frankton Pak’n’Save in Queenstown being asked to redesigning the exterior be viewed as a fruit processing shed, and placing a ‘dummy’ retail shop on the corner of the carpark to break up the open space.
Wainoni Pak’n’Save was being rebuilt after the earthquake but was opposed by the urban designer and consent planner at Christchurch City Council because the adjacent council open-space would have ‘less visual exposure’.
Kaikōura New World was asked to have its floor level dug down below the state highway and neighbouring commercial properties (the building is only 8.5m high).
Sensible urban design rules are nice, but we subject supermarkets to bizarre and inconsistent rules with no reference to their costs. I mean, who really cares about this visual exposure and fake fruit processing shed stuff anyway? And even if we did, is it really worth the cost?
Anti-competitive opposition from rival stores
This is a big one. There are countless examples of the duopoly opposing each other, or opposition from nearby commercial businesses.
The most egregious example I am aware of is the Wairau Valley Pak’n’Save in Auckland. It tried to establish the supermarket for 18 years, fighting off legal challenges from what is now Woolworths. The building was completed in 2005 but forced to remain unopened until 2009 waiting on the resolution of a series of court decisions.
One of our biggest RMA cases involved the Supreme Court siding with a shopping mall’s in a dispute with a rival outlet shopping centre from competition effects. These cases prompted the government in 2009 to amend the RMA to ban the consideration of trade competition in consenting.
Yet anti-competitive conduct has continued. The trade competitor ban seems poorly enforced, as shown by reasons in the declined consent for a McDonald’s in Wānaka. Plus opposition has snuck in under the guise of ‘indirect amenity effects’. New developments must prove that they won’t draw customers away from existing shopping areas, which might depress their liveliness and amenity. See examples in Ashburton, Christchurch and Dominion Road. God forbid stores would have to compete for customers. And as Malcolm McCracken rightly points out, letting areas naturally go through cycles of decline and reinvention make cities far richer, dynamic and diverse.
Councils stifling new stores through ‘centre hierarchy’ policies
Many councils have policies to maintain the ‘hierarchy’ of centres, typically starting at the central city at the top and going through classifications from metropolitan, town to local. The aim is to protect the hierarchy by not letting lower centres grow bigger than ones above them, not letting new development be too different or competitive to existing shops, and preventing stores from locating outside of those centres.
Often these policies are justified from their agglomeration and transport benefits, despite failing to understand that agglomeration occurs through businesses, residents and customers freely making choices to co-locate, accounting for land and transport costs.1 Not when forced to do so. Unsurprisingly international research has found they have a range of negative effects.2
The Productivity Commission found that about two-thirds of councils have centre hierarchies. Some examples:
Auckland’s Unitary Plan says that the effects of proposed retail activities on “the existing and expected future function, role and amenity of other centre zones”.
Palmerston North’s District Plan sees the success of its inner business area due to “the absence of strong competition from competing suburban centres, this being a consequence of previous commercial containment policies.”
Hamilton’s District Plan attributes the city centre’s underperformance to an “unplanned dispersal of retail and office development” and that future development should not “adversely impact the important role of the Central City”. That council tried to hinder the development of The Base mall by Waikato-Tainui to protect the city’s CBD by varying its District Plan without first consulting Tainui.3
Only very small supermarkets (<450m2 gross floor area) are permitted as of right in many zones in Auckland and Wellington, with medium size stores required to jump through hoops. In Wellington City’s mixed use zone, larger supermarkets have to prove they don’t have “significant adverse impacts” on other centres and “be compatible with adjoining land uses”, whatever that means.
This leads to a frustrating catch-22. Lots of demand for a new supermarket? Maybe there aren’t any suitable sites in the larger centres, they might also have average transport connections. So you find a site in a town centre. Uh oh, consent declined, that would undermine the nearby larger centre and its existing supermarket might lose customers.
How is anything meant to change over time? New centres emerge?
How are new entrants supposed to wade through this mess?
Even our current duopolists find it hard to open new supermarkets under rules they’re familiar with. How is a new player from abroad going to fare? They need to set up a minimum viable number of stores, probably across multiple cities. If they’re like Aldi, they’ll want simple stores with a standardised repeatable design.
What if a store gets held up for 4 years after completion by a rival or gets told it needs to dig below ground level and cosplay as a fruit-packing warehouse? They’d want an easy, certain and quick build timeline to get up and running fast. We just can’t afford these bad regulations in small, far-away market.
YIMBYism for supermarkets
If you’re a housing nerd this all sounds eerily familiar. Obscure and bizarre local council rules written by planners hidden deep in impenetrable District Plans restrict supply, enriching owners and hurting everyone else.
With housing central government got fed up and intervened with the National Policy Statement on Urban Development (NPS-UD). It’s super successful and this national-level intervention worked for a few reasons.
Highlighting costs of hidden regulations. Councils and the planning profession simply don’t know about the costs, or even the existence, of their regulations. Raising salience by making it a nationwide issue and just stating in law that ‘housing supply is very important’ has had a big legal and political weight in rezoning.
Just pushing stuff through. Councils do a lot of hand wringing and get political about even the most modest changes to land use. Central government has shown it can flood the discourse and use its political capital to get big changes done - eg, the removal of minimum carparking requirements nationwide.
Spillover effects. With multiple councils in one region, each one has an incentive to not build in their area and push all the projects onto a neighbour. All the benefits without the localised costs. Central government can cut through this freeriding.
Nationwide rezoning gives scale. Homebuilders can scale up and use similar new zones across multiple cities.
All of this applies to supermarkets.
National Policy Statement on Supermarket Development (NPS-SD)
My proposal: copy the NPS-UD but for supermarkets. Here’s a sketch of what it should contain.
State that new supermarkets and competition through an excess of suitably zoned sites is of national significance. The NPS-UD did the same for housing, make it explicit for supermarkets. This carries weight in zoning and consenting decisions.
Make councils zone for more sites. Councils are already required to do a housing and business capacity assessment. Much attention has been on the housing component of that. I’d make councils calculate their excess zoned capacity for large-scale retail like supermarkets. There should be central guidance and rules on how to calculate demand, what sites are considered feasible and profitable to redevelop, and a healthy competitiveness margin on top of that.
All bigger supermarkets in more zones. Just like the NPS-UD did for city and metropolitan centres, and near rapid transit, the NPS-SD should insert national level rules in all major District Plans. Promisingly, Housing Minister Chris Bishop has announced that a as part of ‘Going for Housing Growth’ a refreshed NPS-UD will allow “metro-style supermarkets [...] in areas subject to the NPS-UD’s six storey (or greater) intensification requirements.”
That’s great stuff, and a NPS-SD could go further. For example, large floor area supermarkets being permitted as of right inside all city centre, metropolitan centre and mixed-use zones. Meduim-sized ones in all town, local and neighbourhood zones. Move supermarkets to be at worst ‘controlled’ activities rather than the more onerous ‘discretionary’ or ‘restricted discretionary’. In short, give a big boost in allowable area and activities in all zones.
Remove the ability of councils to protect the ‘hierarchy of centres’. Just abolish all mention of new development having to not sap vitality from other centres, or be located in a certain centre. There’s no basis for it.
Allow side-payments to neighbours to get bigger stores. I’ve already written about how we should allow negotiations between neighbours to waive a rule benefitting them in exchange for the same in return, or a side payment. If a neighbour wants to let a supermarket build closer to the boundary than is allowed in the rules for a side-payment, allow it.
Rein in urban design considerations. Most people probably don’t care about some of the more egregious examples and would rather their groceries are cheaper. These should specify that repeatable designs are permitted, requirements need a cost-benefit analysis and be weighed against the national significance of supermarket competition, and recourse available to the Minister if councils are being obstructive.
Clarify that ‘effects’ under the RMA do not include impacts through the price system. In line with the Government’s ambitions for a planning system based on property rights and real externalities, any effect that occurs through the price system should be disregarded. They are not real externalised; they are internalised in prices. That includes less customers for a rival or the indirect amenity effects of competition.
Simultaneous consenting. A new entrant from overseas should be allowed to put all its initial sites through a one-stop fast-track process. This could look like: (1) all their sites, including distribution centres, should go to single independent hearings panel; (2) if council disagrees with the panel, there is recourse to the Minister to overrule the council; (3) no appeals; and (4) a time-limit on the whole process of say 18 months. That should give certainty to a new player that they won’t get held up on a few sites and that jeopardize their entire entry.
This is an idea Eric Crampton has floated around before. He’s also rightly pointed out that we need to ease the overseas investment rules for supermarkets – most people would love to see Aldi set up here and it doesn’t matter if they’re wholly owned by German shareholders.
Consider local incentives. New supermarkets can bring new externalities and disruptions. These are partly offset by the benefit of being close to a supermarket and new competition. But the Government should consider giving councils a cut of the additional tax revenue a new entrant would bring, to really encourage them to get on board with rezoning.
To wrap up: the Government has said it wants a culture of saying yes to growth. How about we say a big yes to supermarkets in our backyards.
Note: I sit on an expert advisory group that advises the Government on its Going for Housing Growth workstream. All views expressed are my own.
See Box 8.1 in the Productivity Commission’s report Better Urban Planning.
This was overturned on judicial review in Waikato Tainui Te Kauhanganui Inc. v Hamilton City Council HC HAM CIV2009-419-1712, 3 June 2010.
Great Post!
I wrote about similar issues in Aus when Kaufland tried to move into the market in 2017.
https://plannedchaos.substack.com/p/its-the-planning-stupid-part-2-supermarket