Kaufland Pakenham

Sean Andrew Stephens B. Econ (Honours)

Kaufland Tranche 3 Ministerial Advisory Committee November 2019

Contact details

For further details please contact Ethos Urban Pty Ltd at one of our offices:

Ethos Urban Pty Ltd ABN 13 615 087 931

Level 8, 30 Collins Street 173 Sussex Street Level 4, 215 Adelaide Street Melbourne VIC 3000 Sydney NSW 2000 Brisbane QLD 4000

(03) 9419 7226 (02) 9956 6962 (07) 3852 1822 [email protected] www.ethosurban.com Our Reference: 3190196

Contents

Introduction 1 Details of The Proposal 3 Context for Kaufland 5 Pakenham Store Assessment 11

Response to Submissions 23 Summary and Conclusions 26 ATTACHMENT: Sean Andrew Stephens CV 27

Kaufland Pakenham – Expert Witness Statement, Sean Andrew Stephens

Introduction

Professional Details

My name is Sean Andrew Stephens and I practice as a Group Director of Economics at Ethos Urban Pty Ltd of Level 8, 30 Collins Street, Melbourne VIC 3000.

I hold the degree Economics with Honours from the University of Newcastle. A copy of my CV is attached to this statement.

Area of Expertise

My area of expertise is urban economics and the assessment of economic impacts on local and regional economies associated with urban development projects, and I have worked in this field since 2000.

An area of special professional activity is -economic analysis. This includes the preparation of retail strategies for metropolitan activity centres, town centres and regions, and the assessment of economic impacts associated with proposed new or expanded retail developments. I have undertaken retail assessments nationally for State Government, local Councils and private sector clients.

Instructions

I have been instructed in this matter by Planning & Property Partners, lawyers acting on behalf of Kaufland Australia Pty Ltd.

My instructions in this matter are as follows: (a) To examine the proposed development of Kaufland stores at various locations across Melbourne and Geelong; (b) To provide an overview of the Kaufland business model and its context relative to the operation of contemporary and the wider industry; (c) To prepare an independent assessment of each store with reference to analysis undertaken on behalf of Kaufland Australia by Tony Dimasi; (d) To provide economic evidence on any further matters relevant to consideration of the proposed Kaufland stores, including a response to any relevant submissions; and (e) To prepare this Expert Witness Statement.

Preparation

In preparing this statement: (a) I have been instructed by Planning & Property Partners that, as a witness giving evidence (by report, or otherwise) in a proceeding as an expert, I have a duty to assist the Advisory Committee and that this duty overrides any obligation that I may have to any party to the proceeding or to any person who is liable for my fee or expenses in this matter; (b) I have neither received nor accepted any instructions to adopt or reject any particular opinion in preparing this report; (c) I have made all the enquiries which I believe are desirable and appropriate and that no matters of significance which I regard as relevant have, to my knowledge, been withheld from the Advisory Committee;

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(d) I have considered the relevant documents disclosed by the parties to the proceeding and the documents listed in this report; and (e) I was solely responsible for the preparation of this Statement, although had assistance on background tasks by staff members of my firm.

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Details of The Proposal

This Chapter considers the background to the Kaufland stores proposal and my own involvement as an independent witness.

Proposed Kaufland Store Rollout

Kaufland is a supermarket chain based in who is entering the Victorian (and Australian) retail market.

Part of the Schwarz Group, Kaufland control three sites in Melbourne and Geelong which are now being proposed for new supermarket stores and are the subject of a Ministerial Advisory Committee. Previously, a Ministerial Advisory Committee provided the Victorian Minister for Planning guidance on relevant matters associated with the location and development of six proposed Kaufland supermarket stores throughout metropolitan Melbourne. In February 2019, the Committee recommendation for the the first tranche of stores (Chirnside Park, Dandenong and Epping) was released with all stores supported for approval. In May 2019, recommendations by the Committee were released for the second tranche of stores (Oakleigh South, Coolaroo and Mornington), with support for the Oakleigh South and Coolaroo stores.

A further Advisory Committee process was established by the Minister for Planning on 11th December 2019. The Advisory Committee will be considering proposed Kaufland stores in a ‘third tranche’ of hearings.

The three relevant sites to the current third tranche of stores being considered by the Ministerial Advisory Committee are as follows: - 795 Princes Highway, Pakenham - 140-156 Colac Road, Highton - 81-85 Ashley Street, Braybrook

The relative location of these stores is shown in Map 2.1.

The Terms of Reference for the Advisory Committee indicate that expertise related to ‘retail planning analysis’ is required. This is part of my own professional expertise and is the primary subject of this expert witness report.

Context for Economic Peer Review

In preparing this expert witness statement I have undertaken my own necessary investigations and analysis related to each relevant store. However, my instructions are that in developing my opinion I have reference to retail and economic evidence prepared by Tony Dimasi of Dimasi & Co and provided to me prior to preparing this statement.

Where appropriate, this witness statement identifies where my opinions have been informed by the economic analysis of Mr Dimasi, including areas of agreement and disagreement.

I have had no contact or communication with Mr Dimasi in relation to the preparation of my analysis and peer review for this matter.

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Map 2.1 Kaufland Stores, Victorian Locational Context (Tranche 3 Stores in Bold)

Source: Ethos Urban using Mapinfo and Bing Maps

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Context for Kaufland

This Chapter outlines the context for Kaufland in terms of the contemporary supermarket sector in Australia and Victoria.

About Kaufland

Background

Kaufland is part of the privately-owned Schwarz Group which is the fourth largest store- based retailer in the world by sales value at $174 billion in 2019 figures. In contrast, Australia’s largest retailer by sales value is Woolworths Limited with equivalent retail sales of approximately $44 billion within Australia.

The Schwarz Group also operate the brand which is a discount supermarket model similar to . In contrast, Kaufland uses a ‘hypermarket’ model which is effectively a large- format and full-range supermarket – see my further description of the Kaufland model below.

At present, Kaufland operate approximately 1,300 stores in: - Germany - - - - - - - .

The Lidl brand is present in a further 22 countries primarily in Europe, with the exception of the United States where the brand also operates.

As part of their store network development plans, Kaufland have identified Australia as a preferred location for international expansion. To this effect, a head office has been established in Melbourne with state-based offices in Adelaide, Brisbane and Sydney.

Kaufland are seeking freehold locations where stores can be planned, developed and operated directly. This is in contrast to many other major retail chains which typically operate with a high share of leasehold premises, most often within shopping centres. However, the direct ownership model is also regularly used by chains such as McDonalds which is understood to own the majority of store sites from which primarily franchisees operate.

Kaufland Store Model

The Kaufland store model proposed to be delivered in Australia is expected to range in size from 4,500m2 to 7,000m2 in size (gross leasable area) and with some limited additional ancillary retail uses including café. In my experience, most Kaufland stores being proposed in Australia (including in Victoria, South Australia, New South Wales and Queensland) are in the order of 5,300m2 to 5,800m2 in size.

The overall scale of the typical Kaufland store will be significantly larger than a typical full- line supermarket operated by Coles and Woolworths (and in some instances other

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independent operators) which is most often between approximately 3,000m2 to 4,000m2 in size, although some stores are up to around 4,500m2 in floor area (and in some very limited instances larger).

A summary of the Kaufland store model relative to other formats in the contemporary retail sector is shown in Table 3.1.

Table 3.1 Comparison of Store Types

Kaufland Full-line Store format ALDI (indicative) supermarket

4,500-7,000m2 Floorspace (GFA) 3,000-4,500m2 1,300-1,800m2 14,000m2

≈70-120 EFT ≈60-80 EFT ≈20-30 EFT 275 EFT Employees (90-140 total) (120-160 total) (30-50 total) (375 total)

≈40,000+ Product line/SKUs ≈30,000 ≈1,400 ≈4,500

No Membership? No No Yes

Shopping Centre/ Free Standing Primary Location Shopping Centre Free Standing Free Standing $40-50m Total turnover $25-60m $12-20m $150m+

Population 70,000+ persons 8,000+ persons 25,000+ persons 700,000+ persons catchment

Source: Ethos Urban Note: These are indicative estimates; substantial variation can exist for individual stores

Given the relative scale of the Kaufland store model, the site size requirements are also relatively extensive given the need for customer parking, store deliveries, amenities and public areas, landscaping, utilities etc. According to information on the Kaufland website, the minimum site requirement is 1.7 hectares (17,000m2) with a preferred site area of 2 to 3+ hectares.

Quite clearly, in the core retail areas of an activity centre the physical scale of a Kaufland store means that finding appropriate and available locations will often be very difficult or simply impossible. This is particularly true when this is combined with the preference of Kaufland to have freehold ownership of the site.

Further locational requirements for Kaufland relate to considerations such as: - A site layout able to accommodate the preferred Kaufland store floorplate (effectively a site that is sufficiently wide and deep); - Competitive land and development costs which underpin the price competitive Kaufland model (described further below); and - Accessibility and exposure of the site to potential shoppers, and direct access to local road and transport networks.

I have been provided with a Kaufland company presentation which provides high-level guidance on the nature of the in-store shopping experience for consumers, and additional information on the Kaufland business. Further, in October 2018 I visited three stores in Germany which were identified to me by Kaufland as being of a similar scale to the stores now proposed for Melbourne and Geelong. Further clarification on specific matters relevant

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to my expertise and consideration has been provided by Kaufland, as appropriate and consistent with commercial-in-confidence requirements.

On the basis of these investigations, I make the following comments of relevance to understanding the nature of the Kaufland retail in-store offer.

Kaufland operates with the following customer commitment: - Simplicity. Shopping at Kaufland is simple. - Quality. I can rely on Kaufland. - Price. At Kaufland, I really do save money. - Variety. Kaufland has everything that customers need.

The product mix within a Kaufland store will be relatively familiar to the Australian consumer, with a comprehensive range of grocery products and household convenience items of the type often stocked in full-line supermarkets. This includes a mix of: - Dry and packaged groceries; - Dairy produce; - Frozen goods; - Hot chicken and poultry department; - Delicatessen; - Fresh seafood counter; - Fresh meat; - Bakery; - Fresh fruit and vegetable display and sales area; - Pharmaceutical groceries; and - Basic household goods (such as cleaning products and some general merchandise).

The significant scale of a Kaufland store allows consumers to be able to access a relatively wide range of products, brands and sizes within the above broad grocery categories. I observed at stores in Germany an extensive range of products in categories such as baby goods (including food), pharmaceutical groceries, fresh fruit and vegetables, confectionary and other typical grocery lines which was more extensive in terms of both floorspace and range relative to a typical full-line supermarket in Australia.

I am informed that although the stores which I observed in Germany are a good comparison to the expected format of stores in Melbourne and Geelong, local stores will have some adaptation to the local market in terms of product display and product mix. For example, key brands and specialised products suited to local consumer requirements will be available in Kaufland Australia stores.

A typical Kaufland store is uncluttered by contemporary supermarket standards with relatively wide aisles and a generous overall scale which allows for easy customer flow. Fixtures and fittings are relatively simple, although product display is superior to a typical ALDI store and generally comparable with a major chain full-line supermarket.

An important element of the Kaufland offer which I observed during the site visits is the store layout which includes aisles oriented both lengthways and width ways to the shop footprint. This reflects the large physical size of the typical Kaufland and that it is not feasible to have individual product aisles running the significant length of the store. In contrast, the layout of

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Australian supermarkets predominantly has aisles running lengthways through the store reflecting the smaller overall store footprint.

In addition to traditional grocery items, the larger size of a Kaufland store allows for a greater range of complementary non-food items often sold in very limited amounts within full-line supermarkets. Examples include: - Crockery, cooking and general kitchen items; - Electrical products (heaters, toasters, hairdryers etc); - Clothing, linen and haberdashery; - Toys and giftware; - Stationary and printed media; and - Various baby and children’s products.

In keeping with international practice for supermarkets, and a trend that is increasing within Australia, Kaufland operates with a high share of private label brands. However, Kaufland still retains a supply chain and product offer that also values well-known brand names.

In addition to the proposed supermarket component of the proposed Kaufland stores, a small range of complementary retail is also provided typically including a liquor store, café/food hall and other complementary retail.

I have also read the evidence of Mr Dimasi in relation to the nature of the Kaufland store model, and generally agree with his description.

Supermarket Industry Overview

As identified in the evidence of Mr Dimasi, the supermarket industry forms one of the most important components of the overall retail sector in Australia. I am in general agreement with the evidence of Mr Dimasi in relation to trading and operational characteristics of the supermarket sector in both Melbourne and Australia. Where the data sources quoted by Mr Dimasi differ from my own understanding, the differences are very minor and of no consequence to my own opinions or to the considerations of the Advisory Committee.

In relation to the supermarket sector, I note the following in general agreement with Mr Dimasi based on our own internal data sources and IbisWorld data: - Industry Size. The size of the supermarket and grocery store industry as defined by the ABS is substantial in the context of the overall Australian economy representing total revenue of approximately $109 billion. - Employment. At present, the supermarket and grocery store industry in Australia is estimated to employ approximately 349,000 people and generate wages income of $11.1 billion. - Market Share. Approximately 67% of total supermarket and grocery store sales are captured by the two largest industry players Woolworths (37%) and Coles (29%). ALDI has increased market share in recent years and is now the clear third largest player with a 9% market share ahead of Metcash (IGA/Foodland etc) with 7% market share. Other players in the industry include and various independent food stores.

Even with the introduction of ALDI into the Australian market in 2001, the supermarket sector in Australia has experienced a period of consolidation arising from the growth of Coles and

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Woolworths as dominant market participants, at the expense of chains such as Franklins, Flemings and Jewel which are no longer present in Australia.

However, over the past 17-years ALDI has demonstrated that consumers are responsive to new and innovative grocery concepts in the Australian-context, with ALDI now operating over 520 stores. In more recent times, the entrance of Costco with a unique membership- based model which serves a mix of business and household customers, has further demonstrated the positive response of consumers to additional choice in the wider grocery sector.

The above factors indicate to me the continued opportunity for additional choice and competition within the supermarket industry, such as through the introduction of Kaufland to the local retail sector.

Importance of Supermarkets to Community Well-Being

Economic Links

In addition to understanding the broad metrics of the supermarket industry, it is also useful to understand at a more fundamental level the importance of the industry to general community well-being.

Most importantly, supermarkets are an important means of distributing a wide range of consumer goods through the community. For industries such as dairy, meat and livestock, food processing, fruit and vegetable wholesaling etc, supermarkets are the primary means of distributing products to their end user, the household consumer.

This is reflected in the fact that approximately 70% of the sales revenue generated by supermarkets is the wholesale cost to the store of the products sold. This also includes support for the freight and logistics sector which is an increasingly important component of the Victorian and Australian economy.

In this respect, a strong network of supermarkets meeting consumer needs has significant flow-on effects to other sectors of the economy and generates a range of wider economic and social benefits.

Consumer Benefit

Supermarkets are a critical component of the retail sector in terms of meeting the most basic food, grocery and other household needs required to support a contemporary lifestyle in Australia.

The above importance of the supermarket sector for the consumer sector is reflected by: - Approximately 75% to 80% of sales on fresh food and groceries in Australia are directed to supermarkets; - No other retail format is visited more often by a higher share of the population than supermarkets; and - Supermarkets provide for the basic living needs of the general population and in their own right are an important element of community infrastructure.

Further, the extensive geographic network of supermarkets means that they are an important source of local employment and economic well-being. This includes providing a

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diverse range of full-time, part-time and casual positions which allows people with various levels of personal commitments to participate in paid employment.

Further, the retail sector generally, and in particular supermarkets, are a well-recognised employment gateway for young people.

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Pakenham Store Assessment

This Chapter of my statement considers the proposed Kaufland store in Pakenham, including a review of the economic and land use context.

Project Location and Context

Kaufland Pakenham is proposed for 795 Princes Highway, Pakenham approximately 50km south-east of the Melbourne CBD.

The proposed store will occupy a currently vacant site on the Princes Highway with access through to Thewlis Road. In effect, the site wraps around an adjacent corner block which does not form part of the application. Immediately to the east is the Pakenham Lifestyle Centre bulky goods precinct, while on the south side of the Princes Highway is the Lakeside Village shopping centre.

The Princes Highway is a key east-west road link serving the urban corridor extending from Pakenham in the east to Berwick in the west. Approximately 34,000 vehicles per day pass the site, with this expected to grow over time as urban development across the corridor proceeds.

Access to the proposed store offers strong levels of accessibility and exposure to the surrounding region. Site visibility is strongest for traffic travelling east along the Princes Highway, although is still reasonably strong for traffic travelling west, in addition it is proposed for there to be access to the store from Thewlis Road.

The proposed development scheme includes: - A total site size of 3.3 hectares - A Kaufland store of approximately 5,600m2 - Tenancies totalling approximately 470m2 - Parking for 415 vehicles - Public amenities and other service areas.

The subject site is in the Urban Growth Zone – Schedule 1 (UGZ1) of the Cardinia Planning Scheme. I note that the site forms part of the Lakeside Boulevard / Princes Highway NAC, and is specifically identified as a ‘Peripheral Commercial Area’. A supermarket is a permit required use within a Peripheral Commercial Area.

Pakenham Town Centre, the traditional higher-order centre serving the region is located approximately 3km south-east of the Kaufland Pakenham site and includes the Pakenham Place Shopping Centre. The Pakenham Town Centre is identified in the Plan Melbourne metropolitan strategy as a ‘major activity centre’, major activity centres are a focus for future development, including retail, commercial and residential uses.

In my view, the site is well-suited to the proposed use as a Kaufland supermarket. The site accommodates the significant land requirements of a Kaufland store, while also providing a location with high levels of exposure and accessibility to potential customers. Further, the location integrates with an existing commercial precinct and is in proximity to complementary retail facilities. Generally, the proposed store will add further to the overall range and scale of retail facilities available in Pakenham and accessible to current and new residents of the surrounding urban development area.

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Map 4.1 Kaufland Pakenham Locational Context

Source: Ethos Urban with Mapinfo, Street Pro, Bing Maps

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Trade Area Review

Trade Area Definition

A ‘trade area’ is an analytical tool often used by retail economists, including myself, to represent trading patterns and, in particular, to define the geographic area in which residents are a source of regular and significant sales to a particular store or retail centre.

In effect, a trade area provides a geographic reflection of the area from which significant and consistent trading patterns are generated by a retailer or retail centre.

A trade area does not reflect an ‘exclusive catchment’ in that a store relies on attracting all the relevant sales from within that geographic area.

In defining a trade area, a retail analyst will typically utilise any available customer origin data and/or analyse relevant factors such as competition, presence or otherwise of natural or physical barriers, typical trading characteristics and any other relevant factors likely to influence trading patterns.

Although some general principles are common to trade area definition, it is important that trade area analysis is undertaken on a case-by-case basis to reflect the factors relevant and unique to that locality.

This is because trading patterns are influenced by a wide range of factors that require identification and analysis that reflects local conditions. Alternative forms of analysis such as ‘retail gravity modelling’ are ill-suited to assessing likely trading characteristics for specific sites as they cannot accurately reflect the wide variation in local circumstance that occurs in a -world setting.

When considering the likely trade area for a Kaufland store, it is important to recognise that at present no similar outlet is operating within Australia. As such, any trade area drawn at the current time represents a general expectation of trading patterns only. However, my experience as a retail analyst does provide the basis for having a realistic view of expected trading patterns.

I am also of the view that Mr Dimasi is a retail analyst of extensive experience and with the ability to make a realistic determination of likely trading patterns for Kaufland.

On this basis, I have reviewed the trade area for the proposed Pakenham Kaufland store and largely agree that it represents a realistic basis for considering the economic context for the proposed store. This view is based on: - Pakenham Town Centre: The proposed Pakenham store benefits from exposure to the wider customer generated by the major activity centre. - Prominent Site: The subject site is a prominent location with strong access to the surrounding local road networks specifically the Princes highway. - Kaufland Unique Offer: The extensive and unique product offering and shopping environment provided by Kaufland can be realistically expected to attract patronage and sales from across a relatively broad geographic area relative to traditional full-line supermarkets, and that an 8 to 10-minute drive time is a reasonable basis to guide (although not determine) likely trading patterns.

An overview of the trade area for the proposed Kaufland store in Pakenham is provided in Map 4.2. Although some minor variation from the Dimasi trade area is apparent, this reflects the statistical boundaries defined by the ABS which have been used in my own trade area

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definition which include largely rural and sparsely populated areas outside of the urbanised core which Mr Dimasi has defined.

Trade Area Demographics

I have prepared a summary of socio-economic characteristics of the trade area population using our own internal demographic template. Although some differences are apparent with some of Mr Dimasi’s figures, these are relatively minor in nature.

Overall the trade area population is characterised by: - Income levels broadly in-line with the metropolitan Melbourne benchmark; - A lower than average share of population overseas born; - A high share of families -particularly families with children; and - Higher than average share of homes owned with a mortgage.

Table 4.1 Kaufland Pakenham Trade Area Socio-Economic Characteristics, 2016

Kaufland Greater Category Pakenham Melbourne Trade Area Income Median household income (annual) $76,080 $80,990 Median individual income (annual) $35,580 $35,100 Age Structure Median Age (years) 31 36 Country of Birth Australia 77% 65% Overseas 23% 35% Other Major English Speaking Countries 8% 7% Other Overseas Born 14% 28% Household Composition Couple family with no children 24% 24% Couple family with children 39% 35% Lone person household 19% 23% Tenure Type (Occupied Private Dwellings) Owned outright 19% 31% Owned with a mortgage 50% 37% Rented 30% 31% Source: ABS 2016 Census of Population and Housing

Of particular relevance to the Kaufland proposal is that trade area residents include a high proportion of families with children with a home mortgage. As such, for these people in particular, access to competitively priced supermarket and grocery facilities is of importance to their lifestyle and general well-being.

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Map 4.2 Kaufland Pakenham Trade Area and Competition

Source: Ethos Urban, Bing Images, Mapinfo

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Population Trends and Forecasts

In 2019, the population of the trade area is estimated at 73,270 persons. This represents an increase of +33,210 persons on the 2011 population, as shown in Table 4.2.

By 2022, the population of the Kaufland Pakenham trade area is forecast to be 88,070 persons based on current trends, and consultant estimates with reference to official projections contained in the Forecast Id., October 2019 as well as other relevant background data I regularly utilise in my work. Beyond 2022, continued population growth is forecast to at least around 2031 when I forecast the trade area population to be 128,370 persons.

Table 4.2 Kaufland Pakenham Trade Area Population Trends and Forecasts, 2011 to 2031

2011 2016 2019 2022 2026 2031 Population (no.) Kaufland Pakenham Trade Area 40,060 59,700 73,270 88,070 107,560 128,370 Average Annual Growth (no.) Kaufland Pakenham Trade Area 3,930 4,520 4,930 4,870 4,160 Average Annual Growth (%) Kaufland Pakenham Trade Area 8.3% 7.1% 6.3% 5.1% 3.6%

Source: Ethos Urban, Forecast Id. 2019 and other relevant sources

Quite clearly the proposed Kaufland Pakenham is located in a rapidly growing urban development of Melbourne experiencing high rates of population growth, and with substantial further growth forecast over the coming decade and beyond.

Competitive Context

An existing framework of centres operates in the region surrounding the proposed Kaufland Pakenham site. This includes a number of centres within the trade area, as well as centres located beyond the trade area boundary.

A summary of each of these centres and supermarket tenants is shown in Table 4.3. The location of these centres and stores is also shown in Map 4.2.

The Pakenham Town Centre (Major activity centre) includes the Pakenham Place Shopping Centre which incorporates Coles; and Pakenham Marketplace which contains a Woolworths supermarket. A main-street style precinct also operates in the centre, focussed on Main Street and John Street. Prepared in 2017, the Pakenham Structure Plan guides the planning and development of this centre.

A number of supermarket-based centres also operate in the trade area, including Cardinia Lakes (Coles) in the east, Heritage Springs (Coles) in the south, Arena Shopping Centre (Woolworths) and Lakeside Square (Woolworths) to the west.

The Officer Town Centre is proposed for a location approximately 3.5km to the west of the subject site. This centre will develop as a Major activity centre over coming decades.

I estimate total supermarket floorspace in the trade area is currently approximately 25,000m2.

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Table 4.3 Kaufland Pakenham Competition

Selection of Major Distance from Subject Site Supermarkets

Within Trade Area Lakeside Shopping Centre 0.5km Coles (2,450m2), ALDI (1,500m2) Arena Shopping Centre 1.0km Woolworths (3,900m2) Lakeside Square 2.0km Woolworths (3,900m2) Pakenham (Henry Rd) 2.5km Pakenham Place Shopping Centre 3.0km Coles (3,000m2) Pakenham Central Market Place 3.0km Woolworths (3,970m2) Heritage Springs 3.0km Coles (3,200m2) Cardinia Lakes 5.0km Coles (3,000m2) Beyond Trade Area Beaconsfield (Princes Hwy) 6.0km Woolworths, ALDI Emerald 14.5km Woolworths Koo Wee Rup 16.0km Woolworths Source: Ethos Urban with published sources

Market Assessment

Retail Spending

Per capita retail spending by residents of the trade area has been estimated with reference to the MarketInfo retail spending model. MarketInfo is a micro-simulation model which uses data from the ABS Household Expenditure Survey, the ABS Census of Population and Housing, ABS Australian National Accounts, and other relevant sources.

Estimates of average per capita retail spending in 2019 for residents in the Trade Area are shown in Table 4.4 and are compared with the metropolitan Melbourne average.

The retail spending data is presented in four major spending category groupings: - Food, Liquor and Groceries (FLG), which includes fresh food, groceries and take- home liquor and is the category of most relevance to Kaufland. - Food Catering, which includes cafes, restaurants and takeaway food. - Non-Food, which includes apparel, homewares, bulky merchandise and general merchandise. - Services, including hairdressers, beauty salons etc.

Overall, average per capita retail spending by trade area residents is estimated at $13,680 which is approximately 6.1% below the Metropolitan Melbourne average.

Spending levels of FLG, which is of most importance to the proposed Kaufland Pakenham, is estimated at $5,900 per capita, which is in-line with the Metropolitan Melbourne average.

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Table 4.4 Kaufland Pakenham Trade Area Per Capita Retail Spending, 2019 ($2019)

Food, Liquor Food Non Trade Area Services Total Retail and Groceries Catering Food Per Capita Spending ($2019) Kaufland Pakenham Trade Area $5,900 $1,620 $5,750 $420 $13,680 Greater Melbourne $5,900 $1,970 $6,160 $530 $14,570 Variation from Greater Melbourne average Kaufland Pakenham Trade Area 0.0% -17.8% -6.7% -20.8% -6.1% Source: Ethos Urban with MarketInfo

Estimates of total retail expenditure by Trade Area residents are shown in Table 4.5 and have been calculated by applying the average per capita spending levels described in Table 4.4 to the population estimates described in Table 4.2.

Forecasts of retail spending have been prepared to 2031 with the application of real growth in spending per capita. Real growth in spending assumptions are based on historical growth rates in retail spending over the past 20 years as derived from ABS Australian National Accounts data.

Note that all figures are represented in constant 2019 dollars and therefore the effects of price inflation are excluded from the analysis.

Total spending by Kaufland Pakenham trade area residents is forecast to increase from $1,002.6 million in 2019 to approximately $1,237.5 million in 2022 and $1,957.5 million by 2031 (in constant 2019 dollars). This represents very strong average total growth in retail spending of 5.7% per annum between 2019 and 2031.

Table 4.5 Kaufland Pakenham Trade Area Retail Spending Forecasts, 2019 to 2031 ($2019)

Average Retail Category 2019 2022 2026 2031 Annual Growth Kaufland Pakenham Trade Area FLG $432.4m $524.2m $647.4m $783.6m 5.1% Food Catering $118.4m $144.4m $179.9m $220.2m 5.3% Non-Food $421.0m $530.7m $690.6m $892.3m 6.5% Services $30.8m $38.2m $48.7m $61.4m 5.9% Total Retail $1,002.6m $1,237.5m $1,566.7m $1,957.5m 5.7% Source: Ethos Urban with MarketInfo

Total spending by trade area residents on FLG products is estimated at $432.4 million in 2019 and is expected to increase to $524.2 million by 2022 and $783.6 million by 2031.

Forecast Sales and Market Share

In assessing the trading impacts and other economic implications of the proposed Kaufland store in Pakenham, obtaining a realistic assessment of total sales and the geographic origin of those sales is of particular importance.

Ethos Urban Pty Ltd 18 Kaufland Pakenham – Expert Witness Statement, Sean Andrew Stephens

As identified in the evidence of Mr Dimasi, preparing an accurate sales forecast for the proposed Kaufland stores in Victoria is difficult in the context that: - Kaufland do not have a trading history in Australia from which to draw comparable sales estimates and other information; - The Kaufland model differs from that adopted by other supermarket brands in the Australian context (see also Chapter 2); - Kaufland are expected to include a larger than normal share of non-food merchandise in their product range, and non-food retailing tends to trade at a discount to food-based retail; and - An ‘establishment effect’ is likely for Kaufland in Australia, whereby initial sales levels are modest as consumers become familiar with the unique Kaufland model and adapt it into their own shopping patterns.

I am also of the view that a realistic expectation for Kaufland is initial sales levels of between $40 million and $50 million per store in metropolitan areas, as identified by Mr Dimasi. This takes the above factors into account and my own investigations in relation to contemporary supermarket trading levels, observations of the Kaufland model during site visits and other relevant considerations.

It is my expectation that the most likely outcome is that the Kaufland model is embraced by Australian consumers, and that sales levels will be at the upper end of this band. That is, in the order of $45 million to $50 million per store on average.

Note that some additional sales will also be generated by other small shop tenancies. I consider that these sales are ancillary to the operation of the Kaufland supermarket. For practical purposes these sales are irrelevant from an impact perspective given their modest scale and that they will primarily comprise eat on premises or takeaway food and beverage sales, rather than take-home supermarket grocery sales.

It is on this basis that I have undertaken an estimate of the likely market share for the proposed Kaufland at Pakenham assuming total sales of $50 million in 2022, as shown in Table 4.6.

I have undertaken my assessment of market share differently to Mr Dimasi in that I have simply used the Food, Liquor and Grocery spending market as the basis for assessing market share. As I identify earlier, this is the market of most relevance to supermarket sales and from a demand and impact perspective is of most relevance. Again, I wish to emphasise that this represents a different way of undertaking the analysis to Mr Dimasi, rather than any point of disagreement on how Mr Dimasi has undertaken his own analysis.

With total sales for the Kaufland Pakenham store of $50 million in 2022, I estimate that: - A total of 80% of sales will be in FLG product categories, with the balance of 20% of sales in non-food, food catering or services categories. - Of the 80% of sales in FLG product categories (or $40 million), approximately 80% will be generated from trade area residents – this is equivalent to $32 million or 64% of total store sales. The balance of $8 million in FLG sales will be generated from non-trade area residents.

Ethos Urban Pty Ltd 19 Kaufland Pakenham – Expert Witness Statement, Sean Andrew Stephens

On this basis, the market share of FLG spending will be 6.1% in 2022, representing $32 million of sales from a total spending market of $524 million at this time (see also my Table 4.5).

Table 4.6 Kaufland Pakenham Forecast Sales and Market Share Turnover FLG Spending Market Share Turnover ($m) Distribution ($m) (%) (%) Trade Area FLG Sales $32 m 64% $524 m 6.1% FLG Beyond Trade Area $8 m 16% 20% Plus Non Food Sales $10 m 20% Kaufland Pakenham Total Sales $50 m 100% Source: Ethos Urban Note: Figures subject to rounding

On the basis of the above, I estimate that Kaufland Pakenham will generate a 6.1% market share of FLG spending by trade area residents in 2022. In general terms, this means that other existing supermarkets serving trade area residents would experience an average reduction in sales equivalent to approximately 6% of their sales in 2022 if Kaufland Pakenham had not proceeded at this time.

I agree with Mr Dimasi that the competitive trading impacts arising from the development of the proposed Kaufland Pakenham will be due to the potential for the retail spending of consumers to be diverted from alternative shopping destinations. I also agree that the trading impacts on some stores will be higher than others dependent upon a range of factors related to location, competitive context, trading patterns etc.

A retail impact assessment examines the potential competitive impact of a development proposal, although it is important to appreciate that the actual impacts will depend to a large degree on the circumstances of individual businesses and their response to the introduction of competition.

For example, in the retail industry a common response of competing centres and retailers to new competition includes: - Refurbishment and other improvements to facilities and presentation - Re-investment and expansion of centres and stores - Re-positioning through changes in product mix and retail offer (e.g. focussing on a key target market).

Ethos Urban Pty Ltd 20 Kaufland Pakenham – Expert Witness Statement, Sean Andrew Stephens

Marketing and promotions activity, including enhanced price competition and use of customer loyalty programs to reach consumers is also of importance, noting the popularity amongst consumers of the Coles Fly Buys and Woolworths Every Day Rewards programs.

A broad examination of the impact of the proposed Kaufland Pakenham over time is shown in Table 4.7. This Table shows how the proposed store is expected to change the distribution of FLG spending by trade area residents.

Table 4.7 General Impacts Kaufland Pakenham, 2019 to 2031 ($2019) 2019 2022 2026 2031 Kaufland Pakenham Kaufland Pakenham FLG Sales from Trade Area ($m)1 $32.0m $40m $48m Main Trade Area FLG Spending ($m) $432m $524m $64 m $784m FLG Sales to Other Retailers ($m)2 $432m $492m $608m $736m Change in FLG Sales to Other Retailers Relative to 2019 ($m) +$60m +$175m +$303m Change in FLG Sales to Other Retailers Relative to 2019 (%) 14% 41% 70% Source: Ethos Urban 1. Assumes constant market share 2. Excluding Kaufland

In 2019, trade area residents generate approximately $432 million of FLG spending, all of which is currently directed to other supermarkets and grocery retailers (see also Table 4.5).

With the proposed Kaufland Pakenham in 2022, an estimated $32 million of trade area FLG spending – out of $524 million in available spending – will go to the new store. The balance of Trade Area spending, or $492 million, will be available to all other retailers.

In 2022, this spending available to other centres and retailers will be approximately +$60m million higher than current levels or 14% higher relative to currently available spending, or 6% down relative to spending otherwise available in 2022 (see my Table 4.6).

Overall, the assessment considers that the average impact on supermarkets serving the Kaufland Pakenham trade area is likely to be in the order of a 6% reduction in sales in 2022 relative to sales which might have been achieved in that year without Kaufland Pakenham proceeding. However, overall sales for these supermarkets is likely to increase significantly on average from current 2019 trading levels based on the analysis in Table 4.7.

The above general expectation of trading impact in 2022 on other supermarkets is consistent with that identified by Mr Dimasi in his own economic impact assessment.

I am in agreement with Mr Dimasi that the supermarkets at Lakeside Shopping Centre, Arena Shopping Centre and Lakeside Square are likely to experience a trading impact greater than the average of -6% in 2022. In indicative terms this might be a trading impact in the order of -8% to -10%.

Any such impact will not undermine the viability of the relevant traders (Woolworths, Coles and ALDI) and in particular be of marginal impact to the overall role and function of the centres. This is particularly true in an environment of very rapid population and spending growth in the surrounding region over the next 12-years and likely beyond.

I am also in agreement with Mr Dimasi that the balance of relevant supermarkets in the surrounding region are likely to experience an impact of sales in 2022 below the average impact. This is well within the normal bounds of a competitive retail sector and I have no

Ethos Urban Pty Ltd 21 Kaufland Pakenham – Expert Witness Statement, Sean Andrew Stephens

concerns that the role and function of the surrounding centres hierarchy will be undermined by this level of impact.

Beyond the initial trading impact associated with Kaufland Pakenham in 2022, future spending growth will be available for all relevant supermarkets and other retailers. By 2026, the increase in FLG spending available to other traders will be +$175 million higher than current levels.

Therefore, although the proposed Kaufland Pakenham store will generate some moderate trading impacts on some existing supermarket operators, these are well within then normal bounds of a competitive retail sector. Ongoing population and spending growth in the trade area ensures that any initial trading impacts are temporary, and that supermarkets and other competing traders will soon return to overall sales growth.

From a strategic land use policy perspective, the proposed Kaufland Pakenham store will not undermine the role and function of other centres in the hierarchy.

Net Community Benefit Considerations

On the basis of my investigations, I make the following comments in relation to net community benefit considerations relevant to the proposed Kaufland Pakenham: - Consumer Choice. The proposed store will add significantly to the range and availability of grocery products available to consumers in the trade area and beyond. - Competition. Additional competition in terms of price and the range/quality of product offerings will also be of benefit not only to Kaufland shoppers, but also to people who choose to stay loyal to their existing supermarket stores and who benefit from more competitive pricing. - Employment. The proposed Kaufland is expected to support approximately 100 ongoing positions once the store is operational. Additional employment will also be generated through the construction phase of the project. Some additional flow on employment will also occur through supplier industries, including wholesale business and primary producers selling their goods at Kaufland. - Sub-regional Activity Centre. The proposed Kaufland store directly integrates into a Sub-regional Activity Centre and supports the role and function of Pakenham as the higher-order centre serving the central southern suburbs of Greater Geelong. - Trading Impacts. It is forecast that the proposed Kaufland Pakenham will have relatively modest trading impacts on existing competitors. In indicative terms, the proposed Kaufland will generate average sales impacts on supermarket competitors equivalent to -6% of sales in 2022 relative to sales in that year which might otherwise have been achieved, with the potential for a 14% average increase in sales relative to current 2019 sales levels. By 2026, overall supermarket sales could be 41% higher than current levels for other supermarket and grocery stores even with the proposed Kaufland Pakenham proceeding. - Strategic Land Use Policy. The proposed Kaufland Pakenham delivers a new and innovative form of retailing in the Australian context to a rapidly growing urban area where retail choice and broader service delivery is a key policy objective. Although the site is located in a precinct identified as a ‘Peripheral Commercial Area’, the potential for a supermarket exists subject to a planning permit. The proposed store in practical terms will be integrating into an existing retail and commercial precinct on a site able to accommodate the unique operational requirements of Kaufland.

Ethos Urban Pty Ltd 22 Kaufland Pakenham – Expert Witness Statement, Sean Andrew Stephens

Response to Submissions

I have had the opportunity to review submissions made in relation to the proposed Kaufland store at Pakenham. Comments in relation to these submissions are limited to matters of direct relevance to my expertise.

P06 Cardinia Shire Council

The Cardinia Shire submission identifies supermarkets as a core ‘anchor’ tenant for activity centres. Although I am in general agreement with this principle, in my view the Council submission provides limited weight to the unique scale and nature of the Kaufland retail offer.

An overly prescriptive approach to activity centre planning has the potential to undermine new and innovative forms of retail which would otherwise generate a net community benefit. This reason of itself is part justification for the planning zones reforms undertaken in recent years which accommodate considerably more flexibility and discretion in relation to the uses (including supermarkets) allowed in Commercial and some Industrial zones.

The reality is that notwithstanding the location of the proposed Kaufland Pakenham in a precinct identified as a Peripheral Commercial Area, the store itself: - Is within the Lakeside Boulevard/Princes Highway activity centre identified in the Cardinia Road Precinct Plan; - Has its own walkable catchment given the proximity of nearby housing; - Is immediately adjacent to other large-format commercial uses; - Delivers a form of retail not currently present in the region; - Does not deliver an extensive range of supporting retail (such as specialty shops) or commercial uses (office, medical etc) likely to undermine the broader role and function of the core retail area of the Lakeside Boulevard NAC – the proposed shops (470m2) are clearly ancillary uses to the supermarket.

I see no merit in the argument of Council that the “the proposal has the potential to function as a standalone internalised quasi-activity centre and does not respect this activity centre hierarchy”. This is inconsistent with the locational context for the proposed store, and does not reflect a realistic view of the role and function to be served by the proposed Kaufland Pakenham which I describe earlier in this witness statement (in particular Chapters 3 and 4).

Council in the submission state that “the development would have an overall negative impact on the economy and on the viability of future and existing activity centres”. The basis for this view is not adequately supported in the balance of the submission. In my view, contrary to Council’s assertion, the Dimasi Economic Impact Assessment clearly identifies the overall nature and timing of future residential development, and that the overall growth in demand within the region allows the Kaufland Pakenham to be delivered without undermining the opportunity for both current and future activity centres (most notably Officer Town Centre) to provide the role and function expected by centres policy. This view of Mr Dimasi is also supported by my own analysis.

Where Council have identified overlapping 5km trade area catchments, the analysis does not acknowledge that: - The overlap of trade areas is a typical outcome in retail analysis, as people will shop at various retail destinations for a wide range of needs - The proposed Kaufland Pakenham cannot seriously be considered to be of a scale and nature which replaces or duplicates the much more diverse and higher-order role and function served by the Pakenham Major Activity Centre and future Officer Town Centre

Ethos Urban Pty Ltd 23 Kaufland Pakenham – Expert Witness Statement, Sean Andrew Stephens

- The overall growth in population and spending identified in the Dimasi and my own economic analysis means that Council’s conclusion that these overlapping catchments will prejudice the “future viability and developability” of the Officer Town Centre is not reasonable.

For example, even with the Kaufland Pakenham store proceeding sufficient demand growth exists to support at least four and possibly five or six additional major supermarkets by 2031.

I further note, that despite Council making mention of the importance of supporting locations in activity centres, the most recent Pakenham Structure Plan provides no obvious scope for Kaufland to be accommodated in the Pakenham Major Activity Centre. Further, the Officer Town Centre UDF also provides a planning framework not favourable to accommodate the unique requirements of a Kaufland store.

P07 Allens on behalf of QACPF Pakenham Place Pty Ltd

I disagree with the interpretation of the submission that the proposed Kaufland Pakenham represents an ‘out-of-centre’ development and/or represents a new neighbourhood activity centre. My understanding is that the proposed store and location forms part of the wider Lakeside Boulevard/Princes Highway activity centre, and in my own view as an economist clearly integrates with adjacent commercial uses and generates the synergies of co-location and shared infrastructure which are sought by centres policy.

I further disagree with the assertion that no demonstrable need for the project has been identified. As the economic analysis of Mr Dimasi and myself shows, the proposed new Kaufland Pakenham is supported by available retail spending and delivers for the community a new supermarket shopping format which will generate significant benefit for the community.

I again emphasise the limited policy support to accommodate a Kaufland offered by both the Pakenham Structure Plan and the Officer Town Centre UDF. Notwithstanding this, the proposed development of Kaufland Pakenham demonstrates the achievement of a net community benefit and on that basis should be accommodated by the relevant planning mechanisms relevant to that location.

PO8 ISPT Pty Ltd

The ISPT submission is general in nature given that no centre of relevance to the Kaufland Pakenham proposal is owned by the submitter.

In relation to the matters raised by ISPT, I have made more detailed comment in my expert evidence for Kaufland Highton and Kaufland Braybrook where ISPT do control relevant centres.

For the Kaufland Pakenham proposal, I simply wish to re-affirm: - The proposed location engages with the wider Lakeside Boulevard/Princes Highway activity centre and cannot be considered out-of-centre; and - The supermarket size issue is one in which I have broad agreement with ISPT and have generally adopted in my own analysis (as has Mr Dimasi).

P09 Roberts Day on behalf of Pioneers Market Place Pty Ltd

The proposed development and imminent consideration by VCAT is noted. In my view, the economic impact assessment of myself and Mr Dimasi has demonstrated substantial additional retail demand above and beyond that which will be supported by the proposed

Ethos Urban Pty Ltd 24 Kaufland Pakenham – Expert Witness Statement, Sean Andrew Stephens

Kaufland Pakenham. In the future this may, or may not, include retail on the site at 900 Princes Highway.

I do not consider this specific 900 Princes Highway proposal as directly relevant to my own Kaufland Pakenham considerations and opinions.

Ethos Urban Pty Ltd 25 Kaufland Pakenham – Expert Witness Statement, Sean Andrew Stephens

Summary and Conclusions

Kaufland is part of the privately-owned Schwarz Group and uses a ‘hypermarket’ model which is effectively a very large-format and full-range supermarket. Kaufland have identified Australia as a preferred location for international expansion.

The overall scale of the typical Kaufland store will be significantly larger than for a typical full- line supermarket operated by Coles and Woolworths (and in some instances other independent operators). The core retail areas of an activity centre the physical scale of a Kaufland store means that finding appropriate and available locations will often be very difficult or simply impossible.

The significant scale of a Kaufland store allows consumers to be able to access a relatively wide range of products, brands and sizes within the typical grocery categories sold in supermarkets. In addition to traditional grocery items, the larger size of a Kaufland store allows for a greater range of complementary non-food items.

Supermarkets are a critical component of the retail sector in terms of meeting the most basic food, grocery and other household needs required to support a contemporary lifestyle in Australia. In this respect, the proposed entry of Kaufland into the Australian market is expected to generate considerable community benefit, as has the previous entry of ALDI, through additional levels of service, choice and price competition.

In reviewing the economic implications of the store at Pakenham I have defined a Trade Area that broadly reflects the trade area used by Tony Dimasi of Dimasi & Co. The trade area is a reasonable reflection of likely trading patterns for the proposed store and the relatively broad geographic draw likely to be generated by Kaufland Pakenham. Substantial population and spending growth is expected to 2031 and beyond.

A review of spending levels for the Trade Area shows that despite slightly differing demographic profiles, the proposed Kaufland store will likely generate a market share of approximately 6% of food, liquor and grocery spending. This reflects the available market demand for the proposed store, and also indicates that trading impacts will be relatively moderate and spread across a wide range of supermarkets and other primarily grocery retailers (including online stores) serving residents of those trade areas.

Although individual trading impacts will vary by store and centre, the proposed Kaufland store will not be generating trading impacts with the potential to undermine the role and function of other centres in the hierarchy. This includes the future Officer Major Activity Centre and the Pakenham Major Activity Centre.

In summary, it is my opinion that the proposed Kaufland store at Pakenham is consistent with the achievement of a net community benefit, including significant consumer benefits, project investment and ongoing employment.

Declaration I have made all the inquiries that I believe are desirable and appropriate and no matters of significance that I regard as relevant have to my knowledge been withheld.

Sean Andrew Stephens Group Director Ethos Urban Pty Ltd 27 November 2019

Ethos Urban Pty Ltd 26 Kaufland Pakenham – Expert Witness Statement, Sean Andrew Stephens

ATTACHMENT: Sean Andrew Stephens CV

Ethos Urban Pty Ltd 27 Sean Stephens Director, Economics — B.Econ (Hons)

Sean has over eighteen years’ experience in Jurisdictions in which Sean has provided expert undertaking economic assessments associated witness services include: with urban development projects and economic • ACT Supreme Court development. • Land and Environment Court (NSW) Sean has an Honours Degree in Economics from the University of Newcastle. He is a member of • Planning and Environment Court (QLD) the Victorian Planning and Environmental Law • Planning Panels (VIC) Association (VPELA) and the District Council of • VCAT (VIC) the Urban Land Institute (ULI). • Environment, Resources, Development Court He has particular expertise in undertaking (SA) market assessments, location analysis and • SA Licencing Court impact assessments for retail and commercial developments, and brings a detailed knowledge • WA Liquor Commission of the Australian property market to projects. • Tasmanian Planning Commission Sean is a property economist with experience • Tasmanian Magistrates Court working on a diverse range of projects across (Administrative Appeals Division). Australia for high profile clients. He has worked Sean has also presented at numerous on market feasibility assessments for major conferences and industry events across retail developments and also provides strategic Australia and overseas. property advice to property owners, industry and government departments and agencies. A particular focus of Sean’s work is providing client advice which adds value to decision- Sean’s relaxed manner and extensive industry making and incorporates leading practice urban knowledge means that he is in demand as a development principles. This capability has been conference speaker. He also delivers tailored developed through a genuine passion for urban presentations and workshops to large groups in economics and understanding the importance of the public and private sector. taking a highly practical and tailored approach As one of Australia’s most experienced urban to analysis. economists, Sean is regularly asked to appear in an expert witness capacity in planning and legal forums across Australia.