Restrictive covenants in the Norwegian grocery market: An empirical study

Abstract

The Norwegian grocery market has long been characterized by high concentration, posing significant barriers to entry, elevated prices, and limited product selections compared to other European countries (Norwegian Competition Authority, 2022). A key contributing factor to this phenomenon is the use of restrictive covenants by grocery chains, aimed at inhibiting the establishment of competing grocery businesses on certain properties, even following changes in ownership (Ministry of Industry and Fisheries, 2022). Motivated by the newly enforced ban on restrictive covenants issued for anti-competitive purpose, this thesis investigates the extent to which restrictive covenants were used by grocery chains and their impact on the structure of the Norwegian grocery market, focusing on market concentration at the local market level and store distances and turnover at the store level. To our knowledge, no other studies have empirically estimated the impact of restrictive covenants on the grocery market in Norway. Our thesis aims to provide empirical evidence relevant to this policy change, i.e., the ban on restrictive covenants. Using a dataset of covenants registered in the Norwegian land registration ("Grunnbok"), we identified 568 restricted locations covered under 215 registered documents that are relevant to one of the four main grocery chains. With these identified restrictive covenants, the study employs the Two-Stage Least Squares estimator to estimate the relationship between the number of restrictive covenants imposed by grocery chains within each local market and the market concentration level. Additionally, it uses the standard Ordinary Least Squares estimator to quantify the relationship between the number of same-chain restrictive covenants and store turnover, as well as between the number of same-chain restrictive covenants and store-to-competitor distances. Our models control for various factors related to market characteristics and store attributes. Our results indicate that a higher number of restrictive covenants is associated with higher market concentration and higher store turnover. However, we cannot draw conclusions about the impact of restrictive covenants on store distances.

The Norwegian grocery market has long been characterized by high concentration, posing significant barriers to entry, elevated prices, and limited product selections compared to other European countries (Norwegian Competition Authority, 2022). A key contributing factor to this phenomenon is the use of restrictive covenants by grocery chains, aimed at inhibiting the establishment of competing grocery businesses on certain properties, even following changes in ownership (Ministry of Industry and Fisheries, 2022). Motivated by the newly enforced ban on restrictive covenants issued for anti-competitive purpose, this thesis investigates the extent to which restrictive covenants were used by grocery chains and their impact on the structure of the Norwegian grocery market, focusing on market concentration at the local market level and store distances and turnover at the store level. To our knowledge, no other studies have empirically estimated the impact of restrictive covenants on the grocery market in Norway. Our thesis aims to provide empirical evidence relevant to this policy change, i.e., the ban on restrictive covenants. Using a dataset of covenants registered in the Norwegian land registration ("Grunnbok"), we identified 568 restricted locations covered under 215 registered documents that are relevant to one of the four main grocery chains. With these identified restrictive covenants, the study employs the Two-Stage Least Squares estimator to estimate the relationship between the number of restrictive covenants imposed by grocery chains within each local market and the market concentration level. Additionally, it uses the standard Ordinary Least Squares estimator to quantify the relationship between the number of same-chain restrictive covenants and store turnover, as well as between the number of same-chain restrictive covenants and store-to-competitor distances. Our models control for various factors related to market characteristics and store attributes. Our results indicate that a higher number of restrictive covenants is associated with higher market concentration and higher store turnover. However, we cannot draw conclusions about the impact of restrictive covenants on store distances.