Supermarket competition is in the national interest: Why won't the Government tell the Overseas Investment Office - Dr Eric Crampton

Opinion

OPINION:

If years of arguing about supermarkets and supermarket policy have taught us anything, it's that allowing another supermarket chain to enter the New Zealand market is in the national interest.

So why won't the Government tell the Overseas Investment Office?

The Commerce Commission's market study into grocery retail identified the Overseas Investment Act as one of several barriers preventing new entrants like Aldi or Lidl from coming here. The Overseas Investment Office would have to determine whether entry was in the national interest.

Section 34 of the Overseas Investment Act allows the Minister of Finance to provide direction to the Overseas Investment Office. The Government could simplify entry by telling the Office to view grocery retail entry as being in the national interest. It could then tell potential entrants that the Office will not prove any barrier.

It seems the obvious first thing to do in encouraging greater supermarket competition. It would be simple. It would cost nothing. It would require no armies of bureaucrats to implement or enforce.

All it would take is a short letter.

If profits in groceries are as high as the Government seems to believe, international entrants would be scrambling to grab some of those profits for themselves. If international grocers are not entering, odds are that either the Government is wrong about supermarket profitability, or regulatory barriers stand in the way.

It would seem incoherent to view local supermarkets as rapaciously greedy but their potential international competitors as caring so little about profits that they are not interested in coming here to take a slice.

When it comes to retail grocery competition, has the Government lost sight of the national interest? Photo / NZME

So I asked the Overseas Investment Office whether they had received any direction from the Government about how it should treat grocery retail entry.

This week, the Office replied to my Official Information Act request. It told me that Land Information New Zealand, which runs the Overseas Investment Office, "has not received any specific direction from the Government about national interest considerations in retail grocery."

Neither had Linz "received any correspondence from or had any meetings with members of Cabinet, or their offices, regarding retail grocery entry." They provided me with the most recent Guidance Note, June 2021, and a copy of their most recent Ministerial Directive Letter, November 24, 2021. The letter noted some improved and streamlined processes but made no mention of supermarket retail. Three weeks earlier, Kate MacNamara had reported on Commerce Commission deliberations about retail groceries and had noted the potential for easing Overseas Investment Office constraints.

That the Government failed to include direction about retail grocery in its Ministerial Directive letter of November 2021 is perhaps understandable. The Commission had yet to issue its final report.

But the Commission's final report had urged that the next review of the Overseas Investment Act consider its effects on grocery sector competition.

In the interim, it should not have been difficult for the Government to tell the Overseas Investment Office that new grocery retail is in the national interest and that all new entrants should be approved.

That direction would clear one part of the tangled regulatory thicket that blocks new entry. There would be council zoning and consenting hurdles yet to be eased. But getting rid of the Overseas Investment Office's contribution to the thicket would be a useful start.

Purchasing land for supermarkets and warehouses requires approval by the Office if the land is considered sensitive. Establishing a new larger-footprint supermarket chain would be hard without triggering sensitive land tests.

Non-urban land over 5ha is considered sensitive, so purchases by foreign buyers have to go through the Office. It sounds like a lot of land, but Foodstuffs' Māngere warehouse covers 7.7ha.

Residential land, including land in lifestyle blocks, has no minimum size threshold. If a new entrant found a commercial site that could only be made viable by purchasing a few adjacent residential properties, the Office's permission would again be required.

Other land requires Office approval because it is nearby things that are considered sensitive, including regional parks, reserves, conservation land, the Whanganui River, and some other land near marine areas or lakes.

It would be surprising if a new entrant could find the dozens of sites up and down the country needed to set up a new retail grocery chain, and sites for warehouses, without having to run through the Overseas Investment Office.

On its own, that approval might not sound like that serious a constraint. Costco was able to open a store in Auckland. But Costco aims to have no more than one or two sites per city. Retail supermarkets have far more outlets. Plotting out a set of stores and distribution logistics would be more straightforward if each land purchase did not face delay and uncertainty at the Overseas Investment Office.

Unnecessary regulatory burdens make small markets at the far end of the world rather unattractive for potential entrants.

It would be one thing if the Government had decided to slow down its regulatory response because the Commerce Commission's final report walked back some of its earlier and more exuberant estimates of supermarket profitability. But Commerce Minister David Clark has regularly been in the news threatening to break up existing supermarkets and to force access into the supermarkets' warehouses at regulated prices.

Those options are fraught. In addition to administrative complexity bordering on impracticability, they don't stand all that great a chance of reducing prices faced by consumers.

They are not the measures that should be considered in the first instance. They are the kinds of desperate measures that might be invoked if strenuous efforts to reduce barriers to entry had not yielded any results – and even then, would likely be a bad idea. The Commerce Commission had even explicitly said that it does not recommend divestiture.

And yet the government has not even bothered to tell the Overseas Investment Office that new retail grocery entrants are in the national interest and worth expedited approval.

Perhaps when it comes to retail grocery competition, the government has lost sight of the national interest.

• Dr Eric Crampton is chief economist with The New Zealand Initiative.