The Commerce Commission is calling for bans on the use of anti-competitive restrictions in sale and lease agreements, preventing new retailers opening petrol stations, supermarkets and hardware stores.
It is set to file court action against one building supplies business, in a first shot across the bows. The retailer facing enforcement action is believed to be a big player in the Mitre 10 co-operative, according to industry sources.
The Commerce Commission action is the first step in a crackdown it plans against the anti competitive use of land covenants and lease exclusivity agreements, that it says are used by big, established retail chains to protect their dominant market positions.
The Mitre 10 chain refuses to discuss the matter: “Mitre 10 New Zealand Ltd is not the subject of the Commerce Commission investigation, hence it is not appropriate for us to comment at this stage,” says Lisa Wilson, the company’s head of public relations.
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“As a co-operative of independently owned businesses, we will be reviewing our position in relation to covenants now that the Commission has issued its final report.”
But, asked if she is splitting hairs and to confirm that the subject of the investigation is indeed a Mitre 10 member business, she says: “We’re unable to comment, sorry.”
The Commerce Commission confirms it is investigating and is set to file a statement of claim in court this month.
Dr John Small, who took over as chair of the commission this week, gave an interview to Newsroom after publishing a report into anti-competitive behaviour in the building supplies sector. He says the company involved is aware it’s being investigated and faces court action.
The commission’s market study report, commissioned by the Government in the face of soaring construction costs, identified land covenants as a problem. It says the limited availability of suitable sites to open stores can restrict entry and expansion by merchants.
Small says the commission can’t afford to go to court to challenge every restrictive covenant. “Doing these one at a time on an individualised basis is extremely resource intensive,” he says. “We think a broader look across the economy is the way to go here.”
There have previously been ugly turf wars in hardware retail, between incumbents such as the Mitre 10 co-ops, and more recent arrivals including Bunnings. In Queenstown, the Environment Court found the Mitre 10 Mega owner had abused court process in its attempts to stop a new 8100 square metre Bunnings store opening 500 metres away. Mitre 10 owner H&J Smith was ordered to pay the maximum $60,000 in legal costs.
And in 2011, the Commerce Commission issued warnings to Mitre 10 and Bunnings over misleading advertising in which both claimed to have the lowest prices.
“Store covenants and exclusive leases are likely to reduce a new or existing merchant’s ability to access suitable sites. In turn, this may hinder entry and expansion.”
– Commerce Commission
Attempts by challengers to open new stores have been subject to continuing delays. Four years ago, the owners of Bunnings in Whanganui announced plans to open a new 8400 square metre store, spending $19m in the town and creating 50 new jobs. Locals welcomed the news, saying it would “give Mitre 10 a run for their money”.
But today, the land beside the BP on London St remains vacant. The project has been tied up, first in resource consents and now in other unspecified delays.
According to Commerce Commission analysis, the three largest merchants hold more than 80 percent of sales of key building supplies, though this is slightly diminished from five years ago. In some regions, there are only a couple of building retailers, limiting competition in prices. Commission hui participants noted that PlaceMakers is the only merchant operating on Waiheke Island.
The regions most reliant on a smaller number of dominant retailers are Gisborne, Northland, Southland, Tasman and the West Coast. Those few dominant retailers are pulling in bigger profit margins, the report says.
There are several key factors in finding suitable sites. These include location – retailers need sites with plenty of customer traffic, and easy access to facilitate delivery of materials to building sites. The site needs to be large enough for a building supplier, which can be particularly challenging in urban areas, given that merchants need a large amount of land. And the land must be appropriately zoned for development.
The commission has found that some suitable blocks of land come with exclusive lease agreements or covenants attached. This is registered by a previous owner or tenant, and restricts how that land can be developed or used.
Fuel retail chains, supermarkets and building supply merchants all use this tactic to stop competitors coming onto their turf. It’s such a problem in supermarkets that Parliament this year passed a law nullifying such covenants, and the two big supermarket chains agreed to get rid of them.
But the big, established building supplies incumbents like Mitre 10, Carters and Placemakers have been slower to change. The problem is such that the Commerce Commission is now warning it will use its new powers under section 36 of the Commerce Act, to stop them engaging in behaviour that will “have the effect of substantially lessening competition”.
The restrictive land covenants appear to be used more often in regions such as Auckland and the lower North Island.
The commission has identified 60 restrictive covenants set in place for building merchants, and another 80 exclusive leases that potentially limit competition.
Most of the covenants block competition for years to come – and the remaining ones don’t have a fixed expiry date. Sometimes new merchants are precluded from operating on a site, long after the merchant who benefits from the covenant has left the area.
The covenants are over land adjoining, or near, land leased by a merchant, where the landlord has agreed to lodge a covenant for the merchant’s benefit.
“Store covenants and exclusive leases are likely to reduce a new or existing merchant’s ability to access suitable sites. In turn, this may hinder entry and expansion. The effect is likely to be greatest in developed urban areas where the cost of land is high or there is less availability of suitable sites,” the report says.
“Merchants told us the primary purpose of store covenants is to stop a competitor from establishing itself near a merchant’s planned or existing store. They consider this is justified, as it provides them with the necessary confidence that they will make a return on the investment associated with developing a new store. We consider that these claimed benefits for many store covenants and exclusive leases are unlikely to negate the competitive harm caused by the reduced availability of sites.”