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21 FEBRUARY 2019 PREPARED ON BEHALF OF VICINITY CENTRES & ISPT

KAUFLAND STORES - VICTORIA ADVISORY COMMITTEE 1158 NEPEAN HIGHWAY MORNINGTON ECONOMIC IMPACT EXPERT WITNESS STATEMENT

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CONTENTS

URBIS KAUFLAND MORNINGTON_ECONOMIC STATEMENT_FEB 2019.DOCX

TABLE OF CONTENTS

Introduction ........................................................................................................................................................ 1 1. Development Context ........................................................................................................................... 5 1.1. The Subject Site .................................................................................................................................... 5 1.2. Proposed Development ........................................................................................................................ 7 1.3. The Introduction of Kaufland ................................................................................................................. 8 2. Trade Area Analysis ............................................................................................................................ 10 2.1. Definition ............................................................................................................................................. 10 2.2. Population and Spending .................................................................................................................... 12 3. Retail Hierarchy .................................................................................................................................. 14 3.1. Shire of Mornington Peninsula Activity Centre STrategy .................................................................... 14 3.1.1. Purpose of Activity Centre Strategy .................................................................................................... 14 3.1.2. Existing Centre Hierarchy ................................................................................................................... 15 3.1.3. Key Issues for the Mornington Major Activity Centre .......................................................................... 16 3.1.4. Activity Centres within Kaufland Trade Area ...................................................................................... 16 3.2. Proposed Developments .................................................................................................................... 17 3.3. Supermarket Provision........................................................................................................................ 17 4. Economic Impacts and Effects ........................................................................................................... 19 4.1. Trading Impacts .................................................................................................................................. 19 4.1.1. Methodology ....................................................................................................................................... 19 4.1.2. Calculated Impacts - Kaufland ............................................................................................................ 20 4.1.3. Calculated Impacts - Cumulative ........................................................................................................ 20 4.2. Lost Economic Activity ........................................................................................................................ 21 4.3. Loss of Industrial Land ........................................................................................................................ 21 4.4. Economic Effects Summary ................................................................................................................ 23 Appendix A Curriculum Vitae

CONTENTS


INTRODUCTION 1

INTRODUCTION PLANNING PANELS EXPERT WITNESS STATEMENT 1. This report has been prepared by Rhys Matthew Quick, Director, Property Economics & Research,

Urbis Pty Ltd, 12th Floor, 120 Collins Street, Melbourne.

2. My qualifications and experience include a Bachelor of Economics (Honours) from Monash University, together with over 20 years’ experience in Property Economics and Research consulting, with my specialisation being the preparation of Economic Impact and Supply and Demand Assessments relating to the development of property. My Curriculum Vitae is attached as Appendix A.

3. Assistance in undertaking some of the analysis in this report has been provided by Rhett Nothdurft, Consultant with Urbis.

4. I was engaged in January 2019 by Rigby Cooke Lawyers, who acts on behalf of Vicinity Centres and ISPT, owners of Mornington Central Shopping Centre.

5. I received formal written instructions in this matter from Ms Rhodie Anderson, Partner at Rigby Cooke Lawyers, detailed in a letter dated 15 February 2017 as follows:

You are instructed to review Vicinity’s submission, to consider the proposal and relevant economic matters, and to prepare and present economic evidence at the Advisory Committee hearing commencing on 25 February 2019. You would be required to attend the hearing on 20 March 2019 to present your evidence.

We ask you to consider whether the proposal is appropriate having regard to:

• any regulatory framework applicable to the proposal which is within your expertise to examine and comment on;

• your own judgement and experience; and

• any other matter which you regard as relevant to the formulation of your opinion, stating clearly the basis of your views.

6. In preparing this report, I have had reference to documents provided to the Advisory Committee to this time relating to the preparation of the Amendment and the Kaufland application.

7. I, Rhys Matthew Quick, hereby adopt this Expert Witness report as my evidence and state as follows:

• the factual matters stated in this report are, as far as I know, true;

• I have made all the inquiries that I believe are desirable and appropriate and no matters of significance which I regard as relevant have to my knowledge been withheld from the Panel;

• the opinions stated in this statement of evidence are genuinely held by me;

• the statement of evidence contains reference to all matters that I consider significant; and

• I understand the expert’s duty to the Panel and have complied with that duty.

Rhys Quick Signed: Director, Property Economics & Research Urbis Pty Ltd Dated: 20 February 2019

2 INTRODUCTION URBIS

KAUFLAND MORNINGTON_ECONOMIC STATEMENT_FEB 2019.DOCX

SUMMARY OF OPINIONS 8. Based on the analysis presented in this statement, the following points represent the summary of my

opinions in this matter:

• The proposed development would see the development of a 7,584 sq.m building, including 6,082 sq.m of leasable space for use by a Kaufland supermarket and a small number of ancillary retail uses. This will be developed on a site currently zoned Industrial 3 and in an out-of-centre location.

• The results of a ‘Sequential Test’, considering if there were alternative in or edge of centre sites suitable and available for development of a Kaufland store, appear not to have been provided by the applicant. This would typically be required to justify an out-of-centre development.

• The Shire of Mornington Peninsula Shire Activity Centre Strategy was released in May 2018. The subject site was not included within a designated centre in the hierarchy of activity centres. The Mornington Homemaker Centre which is just to the south of the subject site was specifically excluded from the centre designation, with discussion around the risk proposed by the introduction of traditional retail uses in out-of-centre locations.

• The provision of supermarket floorspace is currently in line with the metropolitan average. However, the introduction of Kaufland, on top of other proposed supermarket developments including the development of a large Coles supermarket on a former Masters site (again out-of-centre) will result in a significantly above average provision of supermarket floorspace. This will impact the operation of existing supermarkets and the centres within which they operate.

• The direct impacts on the Mornington Major Activity Centre from the development of Kaufland in the proposed location are estimated to be -$14 million or -4.3%.

• The greatest impacts will be felt by the other supermarkets in Mornington, in turn impacting the performance of the centres containing supermarkets by even more (i.e. Mornington Central and Mornington Village).

• Critically, the impacts on Mornington derived from Kaufland’s development will be on top of the impacts from other retail developments proposed in the area, including the introduction of a large supermarket on the former Masters site.

• The cumulative impact on Mornington Central in this context is -$11 million from current levels, despite growth in the market. This is more than a 12% impact.

• While there will be some economic benefits and employment generation from the addition of Kaufland, that benefit would be magnified if the store were to be co-located within an existing activity centre. The proposed development in this location represents a potential loss of economic value for the municipality.

• There is a limited supply of industrial land within the Shire of Mornington Peninsula. The conversion of the subject site zoned Industrial 3, from industrial to retail will see more land removed from the available supply, impacting on the ability of the Shire to provide a diverse range of employment.

CONTENTS


INTRODUCTION 3

SOURCES OF INFORMATION 9. This statement draws on a variety of information and sources provided to this office, the most

important of which are:

• Town Planning Assessment, Kaufland Supermarket Network – Victorian Entry Proposal, Part 7, 1158 Nepean Highway Mornington, Planning & Property Partners

• Kaufland Australia Proposed Store, Mornington, Melbourne, Economic Impact Assessment, December 2018

• Shire of Mornington Peninsula Activity Centres Strategy, Essential Economics, May 2018

• Urban Development Program, Metropolitan Melbourne Industrial 2017, DELWP

• Small area population forecasts prepared by forecast.ID (SAFi)

ABBREVIATIONS ABS Australian Bureau of Statistics DELWP Department of Environment, Land, Water and Planning ERP Estimated Resident Population GLA Gross Leasable Area GST Goods and Services Tax IN3 Industrial 3 Zone LGA Local Government Area MAC Major Activity Centre SA2 Statistical Area 2 (ABS geography) UDP Urban Development Program


DEVELOPMENT CONTEXT 5

1. DEVELOPMENT CONTEXT 1.1. THE SUBJECT SITE 10. The subject site is located on the south-east corner of the intersection of Nepean Highway and

Oakbank Road. The land is currently used for the manufacturing of shoes by Bata, with associated at-grade car parking and landscaping.

11. Located along the Nepean Highway, the site receives good exposure to vehicle traffic with the Nepean Highway forming one of two major arterials (Moorooduc Highway the second) into and out of Mornington. Peninsula Home, a homemaker centre with an Aldi store, Bunnings and other big box retailers, is just to the south of the site. Other surrounding uses generally comprise residential development, some industrial uses and educational facilities to the west (see Map 1.1).

12. The site is zoned Industrial 3 (IN3), isolated from any Commercial 1 or 2 zoned land. The proposed use is a permit required use as the supermarket exceeds the 1,800 sq.m limit applicable for as-of-right supermarkets in an industrial zone.

13. The Mornington Activity Centre is approximately 3km by road to the south west of the site. As discussed below, the Mornington Activity Centre is designated in the Mornington Peninsula Activity Centre Strategy (2018) as one of only three Major Activity Centres in the municipality, and is the only centre recognised within the Strategy within 5km of the subject development site. The Peninsula Homemaker centre is mentioned in the Activity Centre Strategy, but is not recognised as an Activity Centre.

14. The Activity Centre includes a range of strip retail facilities, along with enclosed centres such as Mornington Central (owned by Vicinity and ISPT) anchored by a Coles and Target, and Mornington Village with Woolworths and Aldi.

6 DEVELOPMENT CONTEXT URBIS KAUFLAND MORNINGTON_ECONOMIC STATEMENT_FEB 2019.DOCX

Proposed Kaufland Development Site Map 1.1



1.2. PROPOSED DEVELOPMENT 15. The proposed development is described in the planning report supporting the application as follows:

Use and development of the planning unit for 7,584 sqm building with the proposed supermarket located at first floor, accessed via the ground floor car park and internal travellator at the buildings entrance, with the upper level containing the following, inter alia:

- 3,610 sqm of supermarket floor area;

- 354 sqm liquor;

- Mall and food hall and ancillary retail tenancy areas;

- Associated inhouse facilities including back of house and service areas, and administrative spaces.

- Loading area.

- Associated signage (refer details below).

- 36 bicycle spaces.

- The removal of vegetation to the extent necessary to facilitate development and access.

A total of 420 car parking spaces to be allocated as follows:

- 393 general spaces;

- 8 accessible spaces;

- 13 family spaces;

Town Planning Assessment, Kaufland Supermarket Network – Victorian Entry Proposal, Part 7, 1158 Nepean Highway Mornington, Planning & Property Partners, Section 3.2

16. I note the supermarket floor area described above relates only to the selling area. As shown in the plans below, this figure excludes the back of house (1,222 sq.m), administration areas (342 sq.m), a food hall area (278 sq.m) and two tenancies totalling (276 sq.m). All those areas would typically be included as part of the quoted Gross Leasable Area (GLA) of a retail store. Total leasable area shown on the plans is 6,082 sq.m.

17. As a single tenancy building, it could be argued the entire building (including the “mall area” which is essentially circulation space adjacent to the supermarket selling area, entry and services and amenities) should be part of the GLA calculation. The GLA could therefore be considered to be the total building area of 7,584 sq.m.

18. For the purposes of analysis in this report, I adopt 6,082 sq.m as the GLA where necessary, noting this definitional discrepancy has no influence on my estimates of total turnover of the centre, nor therefore the impact of development on other centres.

8 DEVELOPMENT CONTEXT URBIS KAUFLAND MORNINGTON_ECONOMIC STATEMENT_FEB 2019.DOCX

Figure 1 – First Floor Plans – Kaufland Mornington

Source: Leffler Simes

1.3. THE INTRODUCTION OF KAUFLAND 19. The application documentation submitted in support of the application for Kaufland at Mornington,

including the Economic Impact Assessment prepared by Dimasi & Co., details the nature of the proposed stores the Schwarz Group intend to develop in Australia. This includes their “very large footprint” relative to existing Australian supermarket operators such as Coles or Woolworths; the wide range of fresh food, groceries and non-food items; a combination of national and international branded products along with Kaufland’s private label brands; the inclusion of ancillary retail services such as cafes; and a comfortable shopping experience facilitated by the large footprint.

20. Kaufland intend to develop these large stores in a consistent format, seeking to maximise turnover and visitation. The range, and therefore turnover captured, will extend beyond traditional supermarket categories to a broad range of product categories and services. In turn, the range of retail categories impacted by the introduction of Kaufland could be broad.

21. The introduction of Kaufland will bring positive competition to the supermarket sector and generate additional jobs, as outlined in the application documentation. However, their introduction to Australia, just as would be expected in any new country they expanded to, should be consistent with the established planning regime which has been designed to ensure the orderly delivery of retail facilities. While I support the introduction of Kaufland to Australia and recognise some of the economic benefits this will bring, it should be in the right locations supporting growth in established retail precincts.

22. I note the proposed Amendment prepared on behalf of the Minister for Planning has been justified in this case by references to the difficulties faced by new retailers gaining a foothold in the Australian market and “the challenges associated with sourcing a 25,000 sq.m site in existing activity centres”.

23. As an economic and retail expert, there are relevant considerations in relation to this justification that fall under my area of expertise.

24. Firstly, the concept of beneficial competition in economic theory assumes a level playing field for all. Retailers in Victoria operate under an established set of rules, including where they are encouraged to operate, to ensure the playing field is level for all retail participants. Changing those rules for an individual retailer tilts the playing field.



25. Secondly, I have seen no evidence presented as part of this application in Mornington to support the contention that there are no other suitable sites that could accommodate Kaufland in or adjacent to an existing activity centre. In my 20 years of preparing Economic Impact Assessments of retail developments, typically where development was proposed in an out-of-centre location, a “Sequential Test” has been required to establish no better situated sites were available. A Sequential Test requires applications for retail development out of Activity Centres to demonstrate firstly there were no suitable or available sites in centre, then that there were no suitable or available sites in edge-of-centre locations. Only then should the out-of-centre location be considered. The results of any sequential test appear not to have been presented here.

26. Thirdly, in the Sequential Test methodology, it is not the view of the retailer that determines which sites are “available” or “suitable”. Most retailers will have a model of their preferred store configuration and amenity. However, they need to adjust to what is possible in appropriate locations. While Kaufland are ideally seeking a 25,000 sq.m site for a standalone store, there are likely to be other configurations and arrangements that could see them operate very successfully within Activity Centres. Although not part of their preferred model, they could operate within traditional shopping centres like other supermarkets or discount department stores do.

27. Although Aldi eventually had planning controls in Victoria adapted to their needs so they could operate in industrial zones, they altered their preferred approach of free-standing stores when they entered the Australian market to operate in centres. It does not appear that Kaufland has exhausted all avenues available before seeking an out-of-centre location.

28. Finally, in an economic sense, the in-centre versus out-of-centre debate is not simply about planning rules. Kaufland will generate economic activity and employment generation in the proposed location. However, that benefit would be magnified if they were within an Activity Centre.

29. In the proposed location, they are not connected to or supporting any other retail facilities. When located in a centre, the economic benefits of agglomeration kick in – the combined economic output is increased through efficiencies of colocation. A critical mass of retail facilities draws more people and supports a greater level of economic activity. The shopper traffic generated by Kaufland could support the operation of a broader range of retail goods and services with more local specialty shops.

30. Instead, the proposed development is isolated and intended to operate as a standalone operation. The economic value created by Kaufland is not maximised in the proposed location.

10 TRADE AREA ANALYSIS URBIS KAUFLAND MORNINGTON_ECONOMIC STATEMENT_FEB 2019.DOCX

2. TRADE AREA ANALYSIS 31. This section will provide an overview of the current population and retail spending market for a

derived trade area for the new Kaufland store.

2.1. DEFINITION 32. An indicative trade area based broadly on a 10-minute drivetime has been derived for the new

Kaufland store in Mornington. While there is no evidence to date as to how Kaufland will draw business in Australia, a large 6,000-7,000 sq.m store could reasonably be expected to attract trade from a relatively broad area.

33. Access arrangements, major competition and physical barriers such as railway lines, major roads and non-residential (open space, recreation, industrial land) have been considered to some degree. The defined catchment aligns with ABS Statistical Area 2 (SA2) boundaries.

34. Broadly, it is expected the trade area for Kaufland will align with Mornington Central’s trade area which has been established by Urbis through use of available customer information available to Vicinity. I note that Mornington Central does draw some business from south of Dromana and into Rosebud given the broad role and offer of the Mornington Activity Centre. I have not included this area within Kaufland’s catchment for the purposes of this analysis. While most of the business will be drawn from the defined catchment, as with any retail development of scale, a proportion of turnover will always be derived from residents living beyond the local area.

35. Map 2.1 shows the indicative catchment for the proposed new Kaufland store.


TRADE AREA ANALYSIS 11

Kaufland Indicative Catchment and Nearby Retail Facilities Map 2.1

12 TRADE AREA ANALYSIS URBIS KAUFLAND MORNINGTON_ECONOMIC STATEMENT_FEB 2019.DOCX

2.2. POPULATION AND SPENDING 36. Based on the Kaufland trade area described above, the current and future population has been

estimated to 2028 as shown in Table 2.1. For this exercise, we have applied forecast.ID’s small area forecasts (SAFI) released in 2018 which are broadly consistent with the forecasts prepared by forecast.ID on behalf of the Shire of Mornington Peninsula.

37. The trade area has a current population of 64,650 and is forecast to grow to 70,100 by 2028. This reflects an average annual growth of 0.8% per annum.

Current and Future Population Kaufland Trade Area 2018-2028 Table 2.1

38. Per capita retail spending levels are derived from the MarketInfo 2012 small-area retail spending estimates model that Urbis subscribe to. MarketInfo is a generally accepted industry standard for estimating retail spending for areas of Australia at a detailed product category level.

39. As shown in Chart 2.1, residents of the trade area spend on average just over $15,000 annually on retail goods and services, some 8% above the Melbourne average. Spending on Food Retail (take-home food, liquor and groceries), the category of most relevance to supermarkets, is estimated at almost $6,500 per capita, 7% above the Melbourne average.

Per Capita Annual Retail Spend and Variation Kaufland Trade Area vs. Melbourne Average, $2018 including GST Chart 2.1

2013 2018 2023 2028 18-23 23-28 18-23 23-28

Kaufland Mornington 60,600 64,650 68,050 70,100 680 410 1.0% 0.6%Source: ABS; forecast.ID SAFi

PopulationAnnual Population

Growth (no.)Annual Population

Growth (%)

6,474$ 1,877$ 1,528$ 1,178$ 1,905$ 1,768$ 597$ 8,351$ 6,976$ 15,327$

Source: ABS; MarketInfo 2012; Urbis

+7%

-3%

+7%

+3%

+23%

+13% +13%

+5%

+12%

+8%

FoodRetail

FoodCatering

Apparel Homewares BulkyGoods

Leisure/General

RetailServices

Food Non-Food Total Retail

Varia

tion

from

Mel

bour

ne

Aver

age


TRADE AREA ANALYSIS 13

40. When per capita spending estimates are combined with population forecasts, trade area total spending is forecast to grow from just under $1 billion in 2018 to $1.2 billion ($2018) by 2028. This reflects an average annual growth rate of 1.8% over this period. The food retail category, including food and groceries, which is of most relevance to the market Kaufland competes in, is expected to grow slightly slower at around 1.6% per annum over the 10 years.

Size of Retail Spending Market Kaufland Trade Area 2018-2028 ($2018, including GST) Table 2.2

41. These trade area spending forecasts form the basis of the trading impact calculations presented in Section 4 of this report.

Food Retail

Food Catering Apparel Home-

waresBulky Goods

Leisure/General

Retail Services

Total Retail

Annual Growth = Pop

Growth +Per Cap Spend

Growth

2018 419 121 99 76 123 114 39 991

2023 458 138 109 86 136 126 43 1,097 2.1% 1.0% 1.0%

2028 491 153 118 96 148 137 46 1,189 1.6% 0.6% 1.0%Source: ABS; MarketInfo 2012; Urbis

14 RETAIL HIERARCHY URBIS KAUFLAND MORNINGTON_ECONOMIC STATEMENT_FEB 2019.DOCX

3. RETAIL HIERARCHY 42. In this section I detail the currently defined Mornington Peninsula Activity Centre hierarchy, other

proposed developments in the area that will influence the performance of Mornington retailers, and consider the current and future provision of supermarket floorspace.

3.1. SHIRE OF MORNINGTON PENINSULA ACTIVITY CENTRE STRATEGY 43. The hierarchy of local retail and activity centres within the municipality is outlined in the Shire of

Mornington Peninsula Activity Centres Strategy prepared by Essential Economics in May 2018. This sub-section provides an overview of the Strategy, in particular any statements of relevance to the proposed development of Kaufland on the site at 1158 Nepean Highway Mornington.

3.1.1. Purpose of Activity Centre Strategy 44. The significance of an activity centre strategy as a policy tool to guide and support the ongoing

performance of centres. As the Strategy states, an Activity Centres Strategy can:

• Highlight locations where private sector investment and new business activity is encouraged,

• Identify where new and expanded public infrastructure is required,

• Implement a policy framework that supports economic development and efficient use of land, and

• Identify opportunities to expand the level and quality of service to the surrounding community.

An Activity Centres Strategy also provides policy guidance to ensure that the current and future needs of the community are met by informing the provision of commercially-zoned land and the appropriate development of commercial and retail floorspace across Mornington Peninsula’s Activity Centres.

Activity centres on the Mornington Peninsula must evolve in order to continue to meet the needs of the community and visitors from the wider region, thus ensuring that the significant economic benefits to local businesses and the community are maintained and further enhanced.

Source: Shire of Mornington Peninsula Activity Centres Strategy, Essential Economics, May 2018, pp.9-10

45. The Strategy has also identified a number of key trends impacting the future performance of centres, such as consumer behaviour and demographic changes, new forms of retail and commercial activity, the rise of local convenience centres, impact of online retailing, etc.

46. The Strategy highlights the role which ‘homemaker centres’ can play in attracting and clustering large-format retail developments outside of designated activity centre hierarchy, and the potential for these centres to complement the success of the activity centre hierarchy. However, it also recognises the risk of major out-of-centre locations extending their range of offer, conflicting with the role that centres within the hierarchy play and disrupting the trading performance of existing or future retail outlets.


RETAIL HIERARCHY 15

3.1.2. Existing Centre Hierarchy 47. Table 3.1 below summarises the existing activity centre hierarchy, locations of centres and the

corresponding retail floorspace for each activity centre type. Of the 296,000 sq.m of retail floorspace identified in the Strategy, around 228,300 sq.m of floorspace is within the designated centre hierarchy.

Existing Activity Centre Hierarchy Shire of Mornington Peninsula, 2015 Table 3.1

48. The Mornington Homemaker Centre, despite the Strategy being developed just last year, is not recognised as a centre for the purposes the Activity Centre Hierarchy. It accounts for some 13,900 sq.m or 5% of the total retail floorspace within the Shire. This is considered a significant share of retail space for a single centre outside of the hierarchy.

49. Any addition of retail floorspace (such as the proposed Kaufland development) would further strengthen the clustering of both the scale and range of retail offer within proximity to the homemaker centre, causing potentially greater disruption to the established hierarchy. Given the competitive nature of the proposal (i.e. a supermarket), the impact on the Major and Large Township Activity Centres in particular, could be significant.

Centre Type Location

Major Activity Centre Mornington, Rosebud, Hastings 118,900

Large Township Somerville, Rye, Mt Eliza, Bentons Square, Dromana 63,900

Small Township Sorrento, Balnarring, Mt Martha, Martha Cove, Baxter, McCrae 18,200

Local Centre Capel Sound, Blairgowrie, Portsea, Tyabb, Bittern, Crib Point, Red Hill South, Flinders 18,900

Convenience Centre

Humphries Rd, Mountain View Rd, Beleura Hill Rd, Robertson Drive, Wilsons Rd, Dava Drive, Walara Drive, Boundary Rd, McCrae, Waterfall Gully Rd,

Illaroo St, Tootgarook, Dundas St, Disney St

8,400

Sub-total 228,300

Out-of-Centre Retail

Mornington Homemaker Centre 13,900

Other 53,800

Total 296,000Source: Essential Economics

Retail Floorspace (sq.m)


3.1.3. Key Issues for the Mornington Major Activity Centre 50. As one of the three identified Major Activity Centres (MACs) within the municipality, Mornington’s

higher-order role is recognised. As detailed in the Activity Centre Strategy:

These are the higher-order activity centres serving the Mornington Peninsula, and which provide a wide-range of retail, commercial and community services to a broad geographic region, as well as visitors and non-permanent residents. These centres are a particular focus for public and private investment, and are vital in supporting economic activity and meeting the diverse needs of the community. Typically, these centres provide a selection of major national brand retailers, including supermarkets and discount department stores.

In combination, the Major Activity Centres ensure that all residents of the Mornington Peninsula do not need to travel outside the region in order to meet their normal retail, commercial and other day-to-day needs.

Source: Shire of Mornington Peninsula Activity Centres Strategy, Essential Economics 2018, pp.26. Emphasis added

51. To ensure that such its role is maintained, the Strategy has identified key issues for the Mornington Major Activity Centre. It highlights the need to reconcile ‘Relationship with the homemaker retailing and mixed business areas located east of the Nepean Highway’ (p. 33), in particular given that small supermarket and shop-based developments are now allowed for out-of-centre retail development. It did not consider large supermarket developments, presumably because such developments are not allowed in out-of-centre locations

52. In response, the Strategy recognises that,

A more robust policy is required in relation to the role and function of out-of-centre retail development, and the relationship with activity centres. Guidance in relation to future out-of-centre development outcomes on the Shire is necessary to assist in the future Council decision-making.

Source: Shire of Mornington Peninsula Activity Centres Strategy, Essential Economics, May 2018, p. 65

53. In this context, this report considers the impact the proposed Kaufland development is likely to have on the retail hierarchy, taking into account both existing and future developments within the catchment which is presented in the subsequent sub-section.

3.1.4. Activity Centres within Kaufland Trade Area 54. The centres that are relevant to the proposed Kaufland development in the defined trade area are

shown in Map 2.1 and summarised in Table 3.2 below.

Trade Area Activity Centres Activity Centres within Defined Kaufland Trade Area Table 3.2

Retail (sq.m)

Non-retail (sq.m)

Vacancy (%)

Mornington Central Target, ColesMornington Village Woolworths, Aldi

Mt Eliza Large Township Mt Eliza Village Woolworths, Ritchies Mt Eliza 11,640 2,260 1%

Bentons Square1 Large Township Bentons Square SC Woolworths, Dan Murphy's 8,860 540 1%Mt Martha Small Township Mt Martha Village Supa IGA 3,250 550 0%Total 71,050 13,050 2%1. Estimated vacancy based on the Strategy statement on vacancy whereby 'only one' tenant is vacant.Source: Essential Economics; Urbis

ShopfrontActivity Centre TypeLocation Key Retail Centres Key Retail Tenants

Mornington Major Activity Centre 47,300 9,700 3%


RETAIL HIERARCHY 17

3.2. PROPOSED DEVELOPMENTS 55. In addition to the Kaufland proposal, there are a number of other proposed retail developments

within proximity to Mornington that will have an impact on the operation of centres in this area in future. Some of these proposals are expansions within existing activity centres, while others introduce further out-of-centre competition:

• Former Masters Site, Mornington (Cnr Tyabb and Dunns Roads) – The site of the former Masters store is to be converted to a range of retail uses, including bulky goods, but most relevantly for Mornington Central, including a new large format Coles supermarket of 4,250 sq.m. I note that the Panel formed to consider the approval of Masters stores in Victoria considered potential uses on each site at great length to ensure sites were only used for bulky goods retailing.

• Mornington Village (Main Street, Mornington) – The other major centre along with Mornington Central within the Mornington Activity Centre is proposed to be expanded by up to 3,000 sq.m, including changes to the supermarket offer.

• Martha Cove Village – A small retail centre of around 2,500 sq.m is proposed in Martha Cove, including a small supermarket.

56. These developments are taken into account in the next section when considering the cumulative impact of the Kaufland proposal on top of other approved developments.

3.3. SUPERMARKET PROVISION 57. Chart 3.1 summarises an assessment of supermarket supply (floorspace per 100 residents) for the

Kaufland trade area. This assessment considers all stores within the trade area, but also makes a proportionate allowance for major stores just outside the area which draw a share of their business from the trade area..

58. Currently, the provision of supermarket floorspace within the Kaufland trade area is just below the Melbourne average at 30 sq.m per 100 residents.

59. However, in addition to Kaufland, over the next 3-4 years there are expected to be a number of other competitive developments including supermarkets that will have a cumulative increase in the supply of supermarket floorspace to well above average levels. The other proposed developments include:

• Former Masters Site, Mornington – includes a 4,250 sq.m Coles supermarket in another out-of-centre development.

• Mornington Village (Main Street, Mornington) – The supermarket is proposed to be expanded as set out above.

• Martha Cove Village – includes a small supermarket assumed to be around 1,000 sq.m.

60. These developments are shown earlier on Map 2.1.

61. If an allowance is made for the addition of Kaufland and even just the addition of Coles at the Masters site, the supply would increase substantially to 44 sq.m per 100 residents, well above the Melbourne average. In fact, the addition of either Kaufland or Coles in isolation would take the provision of space over the Melbourne average.

62. As discussed in the following section, it is not simply the impact of Kaufland on the supermarkets and ultimately total retail offer of Mornington and surrounding centres that is of some concern, but the cumulative impact of all developments in the pipeline. The area will be oversupplied with supermarket space, and this has potential to undermine the operation of the Mornington Major Activity Centre with the supermarkets a key part of the offer.


Major Supermarket (>400 sq.m) Floorspace Per 100 Residents Kaufland Trade Area 2018 & 2022 (Sq.m Per 100 Residents) Chart 3.1

Source: Urbis

30

44

2018 2022

Existing Supermarkets With Kaufland

With Former Master's Site Supermarket Melbourne Average: 32


ECONOMIC IMPACTS AND EFFECTS 19

4. ECONOMIC IMPACTS AND EFFECTS 64. In this section I consider some of the likely impacts of the proposed Kaufland development, including

direct impacts on trading levels, cumulative effects of multiple developments, lost economic activity and the removal of industrial land from the available stock.

4.1. TRADING IMPACTS 65. I note that in the Economic Impact Assessment prepared by Dimasi & Co. and submitted with the

Kaufland application, only a very high-level analysis of trading impact is undertaken. Only the average impact on retailers who share the retail spending of trade area residents has been considered. There is no analysis of any impacts on specific centres within the Activity Centre Strategy. This has the potential to hide where the key impacts from the proposed development will be felt.

66. I consider here the direct trading impact on the Mornington Major Activity Centre as the closest centre in the hierarchy. I have broken the impact down by the components of the Mornington MAC, including Mornington Central, Mornington Village and the balance of retail space in the Activity Centre.

4.1.1. Methodology 67. For the purposes of this statement, Kaufland is assumed to open in 2021 with the subsequent first

full year of trade for modelling purposes assessed in 2022.

68. Given the location, size of the market and competitive environment and extensive ranging to be provided within the 6,000+ sq.m store, we estimate a turnover potential of circa $50 million including supermarket, liquor and ancillary retail sales. This turnover is in constant $2018 terms and inclusive of GST.

69. As Kaufland is a new entrant to the market, it is difficult to determine with accuracy the potential turnover level to be achieved. As such, the above turnover represents an indicative estimate with regard had to overseas results and general market expectations in the absence of an Australian comparison. I note this is broadly consistent with the analysis of potential turnover presented in the Dimasi & Co. Economic Impact Assessment.

70. With the estimated turnover level representing substantially less than $10,000 per sq.m, this average trading level is considered low relative to the performance of other supermarkets in Australia. I note in the Economic Impact Assessment prepared by Dimasi & Co., the average trading level for existing supermarkets in Australia is confirmed at around $10,500 per sq.m, consistent with my expectations. Turnover levels for Kaufland could well be higher than projected, which in turn would increase the impact on competitive locations.

71. In assessing the likely impact to turnover of the proposed Kaufland store, my approach has been as follows:

• Performance data for Mornington Central has been provided for the year ending November 2018. Estimates of turnover levels for Mornington Village and then the Balance of the Mornington Activity Centre have also been prepared based on my observations of the mix and scale of retail space. This enables assessment of impacts on the Activity Centre as a whole.

• Turnover for each component of the Mornington Activity Centre has then been forecast to the year ending 2022, allowing for other competitive developments. A base case forecast assuming Kaufland is not developed is prepared first, before modelling the impact of Kaufland’s introduction on Mornington’s turnover.

• The distribution of turnover for Mornington Activity Centre across the Kaufland trade area and beyond has been estimated to allow calculation of current market shares for the centre.

• Next, the turnover distribution for the new Kaufland store across the trade area has been estimated.

20 ECONOMIC IMPACTS AND EFFECTS URBIS KAUFLAND MORNINGTON_ECONOMIC STATEMENT_FEB 2019.DOCX

• Trading impacts have been assessed for the major tenants, mini majors and specialties by product group, before being summarised to consider the total impact on the Activity Centre and its components.

• Impacts have been assessed in 2022, the assumed first full year of trade, and are inclusive of GST. In general terms, the impact on Mornington has been calculated by assuming the market share of the centre will be reduced in proportion to the market share capture by Kaufland. For example, if Mornington Activity Centre’s market share across the trade area was previously 20% and Kaufland came in and captured a 10% share, the centre’s market share would fall to 18% (20% x (1- 10%).

• Recognising the different role played by centres and the different mix of tenants in each, the pro-rata market share impacts described above have been adjusted up or down to reflect the extent to which Kaufland will be more or less directly competitive with the centre and tenant categories.

4.1.2. Calculated Impacts - Kaufland 72. Table 4.1 following shows the impacts to Mornington Activity Centre in $2018 and inflated dollar

terms, inclusive of GST. Overall, the forecast impact to turnover for Mornington Activity Centre has been assessed at -$14.1 million or -4.3% of total retail turnover in constant dollar terms (last two columns), relative to the expected turnover of the centre in 2022 following development of other competitive centres in the area (including the Mornington Village expansion).

73. The largest impact will be on the supermarkets within Mornington Central and Mornington Village, estimated in the order of 10%. Hence the impacts on the centres in the Activity Centre containing supermarkets will be greater again. For example, Mornington Central is estimated to be impacted by -$4.9 million or -5.5%. While impacts on major chain stores may not be a concern for their sustainability, if they are attracting less customers, then the local retailers supported by them will be impacted beyond the direct transfer of business to Kaufland.

Turnover Impacts on Mornington Activity Centre Direct Kaufland Impacts and Cumulative Impacts, 2018 vs 2022 (constant $2018, including GST) Table 4.1

4.1.3. Calculated Impacts - Cumulative 74. It is also important to consider the impact of Kaufland on the established major activity centre in the

context of the range of other developments that are expected to be delivered in coming years. The expansion of Mornington Village will mean that turnover will grow for the Activity Centre, although very marginally from $311 million to $313 million.

75. The impact on Mornington Central as a major component supporting the Activity Centre will however be significant. Even if Kaufland is not developed, but assuming all major competitive developments detailed earlier are developed by 2022, Mornington Central’s turnover will fall in constant $2018 terms. The analysis in Table 4.1 indicates the centre’s estimated fall is from $95.6 million currently to $89.2 million in 2022 without Kaufland being added to the mix.

76. The largest impact aside from the Kaufland development is the redevelopment of the Masters site, including a Coles supermarket in another out-of-centre location not previously offering core retail

Current Centre TO

(2018)

Without Kaufland TO

(2022)*

With Kaufland TO

(2022)*($M) (%)

Total Retail Turnover:

Mornington Central 95.6 89.2 84.4 -4.9 -5.5%

Mornington Village** 80.1 100.7 94.2 -6.4 -6.4%

Balance of Mornington Activity Centre 135.1 137.2 134.5 -2.7 -2.0%

Total Mornington Activity Centre 310.9 327.1 313.1 -14.1 -4.3%* Turnover excludes retail price inflation** Mornington Village turnover for 2022 includes allowance for extension of centre.Source: Urbis

Kaufland Impact



facilities. Given Mornington Central already offers a Coles store for shoppers in this region, that store, and in turn the centre, could be impacted quite heavily. We have estimated the impact from the Masters site redevelopment at between $7m-$7.5m on Mornington Central. Other competitive developments could capture a further $4m-$4.5m of Mornington Central’s turnover combined.

77. Therefore, the cumulative impact on Mornington Central from current turnover levels will be quite considerable, with a total reduction in turnover once Kaufland is allowed for of -$11.3 million in 2022 or a 12% reduction. Impacts of this magnitude have the potential to undermine the role played by Mornington Central as a key component supporting the operation of the Mornington MAC.

4.2. LOST ECONOMIC ACTIVITY 78. As discussed in Section 1, Kaufland will generate economic activity and employment generation in

the proposed location. However, that benefit would be magnified if the store was located within an Activity Centre. As such, development of Kaufland in the proposed location has the potential to represent a loss of potential economic activity.

79. The proposed Kaufland store location is detached from the existing shopping and activity centres. There will be limited cross-shopping opportunities for other retailers to benefit from the activity generated by Kaufland. There is no other specialty space provided with the development that might have allowed local business to benefit from Kaufland’s introduction, aside from some ancillary retail spaces in store that I expect they will operate.

80. When located in a centre, the economic benefits of agglomeration take effect such that the combined economic output is increased through efficiencies of colocation. A critical mass of retail facilities draws more people and supports a greater level of economic activity. The shopper traffic generated by Kaufland could support the operation of a broader range of retail goods and services with more local specialty shops.

81. As a standalone operation, the economic value created by Kaufland is not maximised in the proposed location.

4.3. LOSS OF INDUSTRIAL LAND 82. The Department of Environment, Land, Water and Planning (DELWP) publishes an annual Urban

Development Program (UDP) report providing information on the supply of, and demand for, residential and industrial land across Victoria. The UDP defines industrial land as being either unavailable or supply/available land based on aerial photographic assessments.

83. The 2017 UDP indicates Mornington Peninsula Shire contains 348 gross ha of land zoned to allow industrial use without a permit (Industrial 1, Industrial 2, Industrial 3, Commercial 2)1. The land recorded as vacant or ‘available’ supply in the UDP is 63 gross ha across the Mornington Peninsula Shire.

Zoned Industrial Land1 Mornington Peninsula Shire Table 4.2

Status Gross Hectares

Unavailable Land 285

Supply 63

Total Industrial Land 348 1. Industrial Land includes Industrial 1, Industrial 2, Industrial 3 and Commercial 2 zoned land, but excludes industrial land controlled by the Commonwealth. Source: UDP 2017; Urbis

1 There is a large area of land zoned Special Use 1 near Hastings to allow for industrial uses associated with the port activities, however we have not considered this for the purpose of our analysis as uses are required to be aligned with the Port.

22 ECONOMIC IMPACTS AND EFFECTS URBIS KAUFLAND MORNINGTON_ECONOMIC STATEMENT_FEB 2019.DOCX

84. In assessing the demand for industrial land, Urbis have used the UDP information from two time periods (2011 and 2017) to estimate the past take-up of industrial land in Mornington Peninsula Shire.

85. Average annual consumption of land zoned for industrial purposes between 2011 and 2017 was recorded in UDP at around 5 hectares (refer Table 4.3). The majority of this was taken up in the suburbs of Mornington and Hastings.

86. Given continued strong population growth across Greater Melbourne, it is reasonable to assume that annual consumption of land zoned for industrial purposes could increase in general. As a result, I have conservatively allowed for increased consumption rates. In total, across the Mornington Peninsula Shire I have allowed for between 5-6 gross hectares of industrial land to be consumed annually in future, as shown in Table 4.3.

Consumption of Industrial Land1 Mornington Peninsula Shire Table 4.3

Industrial Land Gross Hectares

2011 Unavailable Land 257

2017 Unavailable Land 285

Net Absorption 2011-2017

Total 28

Average (ha/year) 5

Assumed Future Consumption 5-6 1. Industrial Land includes Industrial 1, Industrial 2, Industrial 3 and Commercial 2 zoned land, but excludes industrial land controlled by the Commonwealth. Source: UDP 2011 & 2017; Urbis 87. Based on the estimated historical absorption rate of industrial land between 2011 and 2017, the

future supply of 63 ha of industrial land is modest, and would be able to meet the demand across the municipality for the next 10 to 14 years or so.

88. The subject site currently represents approximately 2 ha of occupied (unavailable) industrial land. Should the site become vacant, total available industrial supply would increase by around 6 months. However, if the entire 2 ha of land is converted to retail use and removed from the industrial market, total zoned industrial land within Mornington Peninsula Shire will be reduced.

Future Industrial Land Supply Pipeline Mornington Peninsula Shire Table 4.4

Gross Hectares

Future Supply (gross ha) 63

Assumed Future Consumption (gross ha/year) 5-6

Total Available Supply (years) 10-14

1. Industrial Land includes Industrial 1, Industrial 2, Industrial 3 and Commercial 2 zoned land, but excludes industrial land controlled by the Commonwealth. Source: UDP 2011 & 2017; Urbis



4.4. ECONOMIC EFFECTS SUMMARY 89. The analysis in this section results in the following conclusions:

• The direct impacts on the Mornington Major Activity Centre from the development of Kaufland in an out-of-centre location are estimated to be in the order of -$14 million or -4.3%.

• The greatest impacts will be felt by the other supermarkets in Mornington, in turn impacting the performance of the centres containing supermarkets by even more (i.e. Mornington Central and Mornington Village).

• Critically, the impacts on Mornington derived from Kaufland’s development will be on top of the impacts from other retail developments proposed in the area, including the introduction of a large supermarket on the former Masters site, another out-of-centre development.

• The cumulative impact on Mornington Central in this context is -$11 million from current levels, despite growth in the market. This is more than a 12% impact.

• While there will be some economic benefits and employment generation from the addition of Kaufland, that benefit would be magnified if the store were to be co-located within an existing activity centre. The proposed development represents a potential loss of economic value for the municipality.

• There is a limited supply of industrial land within the Shire of Mornington Peninsula. The conversion of the subject site, zoned Industrial 3, from industrial to retail will see more land removed from the available supply, impacting on the ability of the Shire to provide a diverse range of employment.

APPENDICES URBIS

KAUFLAND MORNINGTON_ECONOMIC STATEMENT_FEB 2019.DOCX

APPENDIX A CURRICULUM VITAE

RHYS QUICK DIRECTOR

“I find it exciting being involved from the early stages in significant property projects, watching as they develop and are finally delivered, ultimately changing the way people live, work and play.”

SERVICES

Economics

Research

SECTORS

Mixed Use

Retail

Tourism and Leisure

QUALIFICATIONS

Bachelor Economics, Hons

(Monash University)

AFFILIATIONS

Past Committee Member,

Property Council of Australia

Retail Committee.

Member, Victorian Planning

and Environmental Law

Association.

CONTACT

T +61 3 8663 4937

M +61 413 565 571

E [email protected]

Rhys Quick is an economic property consultant specialising in economic supply and demand analyses in the retail, entertainment and leisure, and mixed use sectors. He has consulted for many of the major property groups in Australia and New Zealand, including shopping centre owners, retailers, entertainment providers and property developers in all sectors. He also has experience working with various government authorities in delivering significant infrastructure projects and community outcomes. He is expert at undertaking market demand studies, forecasting inputs to development feasibility, and assessing the economic impact of new developments. Since he joined Urbis in 1999, Rhys has been a key consultant on the development of the Chadstone Shopping Centre; this work is a long-term highlight of his career. Other achievements include advising on the 10-year, $11 billion Melbourne Metro Rail Project and delivering the industry standard Urbis Shopping Centre Benchmarks on an annual basis. Rhys also regularly acts as economic expert witness before Victorian planning tribunals and panels, and the Victorian Commission for Gambling and Liquor Regulation.

PROJECTS Chadstone Shopping Centre Development Potential – Retail, Hotel & Office

Concordia – a proposed residential & leisure-oriented development near the Barossa Valley Coronet Bay Resort Economic Benefits Assessment Economic Impact Assessments for numerous hotels and clubs. Melbourne Metro Rail Project Business Case Development & Retail Strategy Old Royal Adelaide Hospital Mixed Use Redevelopment The Future of the Central Melbourne – a review of land use and community facility requirements Urbis Shopping Centre Benchmarks – annual review of performance of shopping centres and the uses within them.

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