Analysis: Labour’s support package for new supermarket entrants would be expensive but effective in attracting a player of scale to such a small market, according to an analyst, though others warn of unintended consequences.

At the Auckland City Mission yesterday, Labour’s commerce spokesperson Dr Duncan Webb committed the party to backing a credible third player if re-elected.

“This could include finance, making sure land is available, regulatory changes, incubating innovation and accelerating competition,” he explained.

Of those, land availability could be a major problem, considering the strong geographic monopolies formed by the existing supermarket duopoly.

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Budget supermarket firm Aldi is the most commonly talked about new entrant, including by Grocery Commissioner Pierre van Heerden, who believes their smaller footprint and aggressive competition is what the country needs.

Though small, Aldi’s real estate guidelines for the United States say it looks for a store space of about 1600 square metres with a minimum of 85 dedicated parking spaces.

It targets sites with a daily traffic count in excess of 20,000 vehicles every day.

Unlike New Zealand’s incumbent supermarkets, Aldi has a preference for owning its properties, rather than renting them.

Labour commerce spokesperson Dr Duncan Webb at The Auckland City Mission yesterday. Photo: Andrew Bevin

Since its Australia market entry in 2001, the German supermarket chain has opened 588 locations, owning the majority of them outright.

According to its US guidelines, the company can develop its preferred layout on a roughly 10,000 square metre site.

This is more nimble than the likes of Woolworths and Foodstuffs, whose supermarkets (excluding Metro options) tend to vary from 3500 square metres to over 8500 square metres for a Pak’nSave.

Crown land?

The government doing away with supermarket chains’ anti-competitive land covenants made it easier to secure sites, and it would presumably also make an easier pathway for any serious entrant through the Overseas Investment Act, but in order to entice a serious competitor, many sites would need to be available, and the real estate market is still tight.

Beyond land covenants, when asked how Labour planned to make land available, Minister Webb said land could be made available from significant land holdings around New Zealand or consenting could be fast-tracked for new supermarkets.

A quick scan of Crown land in major centres shows up very few suitable sites that aren’t already a school.

There are eight Woolworth’s supermarkets, with little competition, within 3km of the author’s house.

And any entrant would be looking for many sites in each locale.

Hexis Quadrant managing partner and analyst Nick Hogendijk, who looks at supermarkets on both sides of the Tasman, says Aldi works in a cluster model, with each warehouse servicing 40 to 60 stores. “That’s where they hit their real economies of scale with their volumes and operating costs.”

Hogendijk says retailers he’s spoken to in Australia about a New Zealand entrance aren’t keen on tapping the duopoly wholesale, so it isn’t only Aldi that would need scale to enter New Zealand.

Building a network

“If the government is going to put their money on the table to support this, they’re going to need to be able to provide a significant number of sites or assist with accessing a significant number of sites, whether that’s Crown land or otherwise,” Hogendijk says.

This would require a significant investment. “The challenge the government will face is that they need to bring competition into a small market. Retailers are not actively looking at New Zealand due to its small population and the barriers to enter the market.

“This means the government is going to need to incentivise or persuade retailers to come to New Zealand rather than the retailers identifying New Zealand as a destination to build a business. Not saying it can’t work, just that the government’s bargaining position in this instance is weakened by the circumstances and therefore likely to be an expensive initiative that will take several years of investment.”

Firm details haven’t been put out, and would probably be bespoke to any third entrant, but Webb said the financial support could come as a loan.

Eric Crampton, the New Zealand Initiative think tank’s chief economist, welcomes the commitment to easing the path for new grocers, but warns against subsidising entry.

“If regulatory entry barriers are eased, grocers like Aldi or Lidl will come here if they find it profitable to do so,” he says.

“But dangling a promise of government-subsidised financing or other sweeteners would have perverse consequences. Retailers who would come here anyway may hold out in hope of subsidy. And others who enter only because of a subsidy are likely to demand ongoing subsidies.”

Andrew Bevin is an Auckland-based business reporter who covers major industries, markets, regulation, aged care and fisheries.

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