Planning adds to high costs

In July, the Australian Competition and Consumer Commission is due to report on grocery prices.

Groceries comprise about a fifth of the family budget.  Other retail goods have a slightly smaller share.

Regulatory arrangements are the best place to start looking for the causes of any excessive costs.

Unless regulation prevents new suppliers from entering a market, businesses will normally cut each others' throats to win business.  Competitors will be attracted to highly profitable sales opportunities like moths to an electric light.  And this will bring prices down.

A supplier shielded from rivals by government restrictions can raise prices and still retain customers.

Most of the price of goods in supermarkets is accounted for by wholesale costs with running costs and rents providing the rest.

There are many suppliers of grocery goods and they are largely free from regulatory supply limitations.  However, to obtain shopping centre sites, developers face tough regulatory barriers.

Governments seek to limit the availability of new centres.  Originally this was to ensure good transport links, but development restraints have become means by which shops and shopping centres are protected from competition.

Stringent approval processes create shortages of retail sites that best meet consumer demands.  As with the supply of any other good or service, shortages bring excessive prices.  And those excessive prices mean high rents for shopping centres and other retail outlets.

Twenty years ago, the Hawke government set out to reform and remove regulation.  Almost uniquely, planning approvals and zoning laws, including those covering shopping centre sites, were largely exempted from this reform program.

Governments mistakenly believed that the availability of shops was immune from the laws of supply and demand.  Zoning laws protected suppliers from rivals and limited customers' access to alternative outlets, failing to appreciate that this would bring higher prices.

For bulky and fashion goods, direct factory outlets have sprung up around all of Australia's major cities.  Like Melbourne's Tullamarine development, these have usually taken advantage of surplus Commonwealth airport land that was beyond the authority of restrictive state government planning laws.

Releasing that land has smashed state governments' planning restraints.  State governments and planners were furious at their consequent loss of control and its associated patronage from developers, but the upshot was a great service to the consumer in bringing about lower prices.

Unfortunately the sites close to airports, though ideal for fashion and bulky goods are less suitable for supermarkets.  Hence the regulatory scarcity created by planning restraints has continued to mean excessive rental costs for supermarket sites.

These higher costs are passed on to the consumer in grocery prices.  Some indication of the extent of this has been gathered by a developer association, the Urban Taskforce.

This shows that Australian shop rents add an extra 10 per cent to prices compared to overseas best practice.

After five years seeking planning permission, giant US grocery retailer, Costco, is getting close to opening a store in Melbourne.  That's great news for the consumer.

But the ACCC should investigate why this has taken so long and, in its July report, propose means of combating regulatory restraints on retail competition.

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