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 retail-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 supermarkets and the wider supermarket 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; Ethos Urban Pty Ltd 1 Kaufland Pakenham – Expert Witness Statement, Sean Andrew Stephens (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. Ethos Urban Pty Ltd 2 Kaufland Pakenham – Expert Witness Statement, Sean Andrew Stephens 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 Germany 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. Ethos Urban Pty Ltd 3 Kaufland Pakenham – Expert Witness Statement, Sean Andrew Stephens Map 2.1 Kaufland Stores, Victorian Locational Context (Tranche 3 Stores in Bold) Source: Ethos Urban using Mapinfo and Bing Maps Ethos Urban Pty Ltd 4 Kaufland Pakenham – Expert Witness Statement, Sean Andrew Stephens 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 Lidl brand which is a discount supermarket model similar to ALDI. 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 - Bulgaria - Croatia - Czech Republic - Poland - Romania - Slovakia - Moldova. 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 Ethos Urban Pty Ltd 5 Kaufland Pakenham – Expert Witness Statement, Sean Andrew Stephens 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 Costco (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.