Evidence about the Retail Industry - Peter Leyshon
181Leyshon correctly observed that the overtly retail component of the CWDCP business opens into an internal mall within the bulky goods shopping centre. The pharmacy component of the store contained the full range of products likely to be found in a traditional pharmacy, and he thought the business had a decidedly "discount" feel to it, as the result of the use of reasonably closely-placed semi-industrial style racking approximately 1.8m in height, and extensive use of internal signage to point shoppers to particular discounts. Leyshon would regard what is occurring as "a relatively intense retail function".
182He considered the SEE, Council's development assessment report, and Pikes' letter of 31 March 2009, which expressed the opinion that condition 4 was superfluous and unnecessary, and he opined that the retail pharmacy component of the business, taken in isolation, constitutes a "shop" under LEP 1996.
183In s 3.2 (p10), Leyshon expresses the opinion that "selling by retail" means the transfer of goods to purchasers or customers who are not themselves engaged in on-selling the products, or otherwise in the retail trade. Selling by retail essentially involves a transaction and the delivery of goods to the customer.
184It follows from his opinion that even if part of the premises is used for the distribution of goods purchased by customers over the internet or by mail order, it would nevertheless be still involved in selling goods by retail. The mere fact that goods might be ordered on the internet by ordinary customers, does not change their status as retail transactions. The Australian Bureau of Statistics classifies sales by organisations via the internet as retail transactions, a type of "non-store retailing". Hence, any purchases made by customers from CWDCP, via the internet, is a retail activity, because it involves the delivery of goods to customers, and, if the internet orders processed by CWDCP are registered on a computer server in the premises, it is involved in both components of a retail transaction. He acknowledged that it was commonplace for a wholesaler to sell a product manufactured by another and direct the manufacturer to supply the product directly to the retail customer. "In a sense the wholesaler is acting as an agent for the manufacturer" (Tp120, LL4-5).
185The LEP definition of "shop" does not describe the physical building, but the function performed in it. The existence of mail-based ordering services and internet purchasing does not automatically mean that the premises are not operating as a "shop", as traditionally understood in town planning (s 3.3, p12).
186In respect of internet transactions, he accepted that Australia and New Zealand have adopted a standard classification system for business, which would classify such transactions as "retail" (Tp127, LL22-29, and Exhibit A3). Customers make their purchases via the internet, but the goods are delivered by CWDCP. It is a common situation that a purchased good comes directly from a manufacturer, rather than a retailer, but it still closes the retail purchase "circle". Australia Post, used by CWDCP, is purely a facilitator, earning a fee for transportation. The retail "circle" must be completed by having the goods delivered to the customer. Leyshon's definition of "selling" is a transaction followed by an exchange of goods (Tp132, LL11-14).
187Leyshon explained (Tp136, LL11-18):
...wherever ePharmacy has their server located it generates an order electronically which comes to those screens we saw, or the other people saw when they went on the view, to the four terminals which sit behind the dispensary area. I am assuming, and perhaps you can say this is not correct, that it is somehow electronically linked to the server so that orders generated which are relevant to the Penrith store are transmitted electronically to those screens so that the staff can pick the goods off the shelves, put them in boxes and post them out.
188For the record, Exhibit A3, to which I referred above (in [186]), is an extract ("Division G - Retail Trade") from the "Australian and New Zealand Standard Industrial Classification 2006", a document issued by the Australian Bureau of Statistics classifying business for reporting purposes.
189The document states:
The Retail Trade Division includes units mainly engaged in the purchase and/or onselling, the commission based buying, and the commission based selling of goods, without significant transformation, to the general public. The Retail Trade Division also includes units that purchase and onsell goods to the general public using non-traditional means, including the internet. Units are classified to the Retail Trade Division in the first instance if they buy finished goods and then onsell them (including on a commission basis) to the general public.
Retail units generally operate from premises located and designed to attract a high volume of walk-in customers, have an extensive display of goods, and/or use mass media advertising designed to attract customers. The display and advertising of goods may be physical or electronic.
...
While non-store retailers, by definition, do not possess the physical characteristics of traditional retail units with a physical shop-front location, these units share the requisite function of the purchasing and onselling of goods to the general public, and are therefore included in this division.
A unit which sells to both businesses and the general public will be classified to the Retail Trade Division if it operates from shop-front premises, arranges and displays stock to attract a high proportion of walk-in customers and utilises mass media advertising to attract customers.
190The document goes on to distinguish wholesale units and manufacturing units. At p2 it says:
wholesale units also engage in the buying of goods for resale, but typically operate from a warehouse or office and neither the design nor the location of these premises is intended to solicit a high volume of walk-in traffic. In general, wholesale units have large storage facilities and small display area, while the reverse is true for retail units.
191Turning his attention, next, to the other operations housed at, or contemplated for, CWDCP, Leyshon observed that:
(1)"Blue Cross" manages residential communities in Victoria, with some 1,500 residents living in various forms of care. Unless Chemist Warehouse provided medications to the Blue Cross Group at wholesale prices, that distribution activity would also be retailing in nature. "Even if Blue Cross charges residents a 'handling fee' or is able to negotiate a discount from Chemist Warehouse for bulk orders, the transactions are, in my opinion, still likely to be retail in nature" (s 3.4, p12). He noted that there is no suggestion in the SEE that Blue Cross is purchasing medications and on-selling them at a margin.
(2) the "Samples Plus" service would be in the nature of a "warehouse", as defined by the LEP.
(3) the "Home Medication Review" service would be in the nature of "office premises" (or a "professional services" activity), as defined and contemplated by the LEP, and
(4) the "My Home Health" service could be classified as "bulky goods" under the LEP (see [60] above).
192Leyshon says that, apart from defining principal c.f. ancillary uses on the basis of sales data, it can be done by analysis of floor area.
193He studied Plan SK2A, which showed the "warehouse" area at the front as having an area of 261.7m2, and the "distribution" area 331m2. He opined that the latter appeared to include the dispensary which he understood to occupy approximately 39.14m2. The dispensary and the warehouse areas are directly engaged in pure retailing, and represent 50.7% of total floorspace. Taking the public, or retail pharmacy section as excluding the dispensary, and, therefore, having an area of 261.7m2, or 44.2% of total floorspace, Leyshon says that that area is "patently greater than a mere token provision of retail space designed to meet the licensing requirements of the Commonwealth Government".
194He respectfully disagrees with the conclusion of the Council officers that the proposed use is "innominate", and, therefore, permissible. It is his firm opinion, based on the information available to him, that the use of the premises should be correctly classified as a "shop".
195Gance said (at par 61 of his affidavit 4 June 2010) that, when deciding on the location of the development of a Chemist Warehouse, he took into account "workability considerations in regards to logistics and roadways access". Leyshon infers this to mean a focus on distribution, rather than retail. The fact is, however, that the premises ultimately occupied is a retail premises located in a major retail precinct in the Penrith Local Government Area. The SupaCenta is surrounded by major retail traders, and contains itself a range of bulky goods tenants, with further expansion proposed. A large amount of retailing is conducted from the SupaCenta - "a very prominent retail destination in Penrith" (Tp142, LL25-26) - so it is a major shopping centre in which to locate a distribution business. If logistics and road access were major considerations, there are other industrial areas of Penrith which would provide equal, if not better, accessibility, and probably at lower rental. Other locations within the Sydney region would have been more suitable than Penrith, in Leyshon's opinion, for distributing to the group's stores.
196Prior to the establishment of Tenancy 230, the group did not have a retail operation in Penrith, or in Sydney west region, generally, and Leyshon refutes the submission that Gance's business case envisaged the development which has become the subject of these proceedings. The business case described a distribution centre with a floorspace of 1,000-1,200m2 , and no retail function was mentioned. It proposed a rental figure typical of a light industrial sub-region of Sydney. It concluded that even larger premises than Tenancy 230 (say 1,500-1,750m2) should be sought. Leyshon concluded that what has been developed in Tenancy 230 to date is quite different from the traditional distribution centre described in the business case.
197In his second affidavit, Leyshon dealt with the trading figures and their segmentation, and concluded (par 48) that:
the existing shopfront component of the Penrith business is not commercially dependent for its success on the operation of either the epharmacy business (which is effectively a retail internet shop) or the distribution business conducted by Mr Gance from the same premises. That is, it is capable of operating as a shop in its own right.
198In his oral evidence, Leyshon maintained his scepticism about the Gance-projected growth of internet sales to $100M per annum. "It becomes mathematically more difficult every year to sustain such growth rates" (Tp111, LL34-35). This retail group is within the top twenty retailers in Australia, and he would expect that "a group with that sophistication should be able to relatively straight forwardly produce a split between retail sales, ePharmacy transactions, and distribution activity" (see Tp112, LL15-30).
199In cross-examination, Leyshon said (at Tp120, LL18-24):
my point is that in terms of a retail transaction there is essentially three steps to it, the offering of goods at a price, the closing of the deal as it were, that is, some sort of monetary transaction, and then the closing of the circle which is handing the goods to the customer and that's why I said a component of the business is directly involved in selling, offering for sale by retail goods as set out, they are not a traditional shop and I've recognised that but they are involved in the retail transaction.
200The cross-examination continued (at Tp122, LL17-39):
Q. ... the assumption that you've made ... is that there is a commercial transaction between the end customer and Chemist Warehouse Penrith isn't it?
A. No I don't think so. What I was really saying was, I suppose I go back a step here, customers, as I think Mr Stubbs said, don't know really when they purchase things over the internet who they're actually dealing with, they see the banner headline ePharmacy so they assume they're dealing with ePharmacy. What I was trying to get across here was that the Penrith facility is a retail activity because it is an essential part of closing that transaction. Just let me clarify. I'm not assuming that people out there think they are dealing with the Penrith facility because I don't think they know who they're dealing with, but what I'm saying is, in practice at a practical level this facility is involved in closing the retail transaction.
Q. But so was the wholesaler in the manufacturer/wholesaler/retailer chain isn't he? He's involved in closing the transaction?
A. No not really because a traditional wholesaler is simply involved in placing goods on the retailer shelves. The real transaction then becomes, if you think about a traditional model, the wholesaler sells goods to a pharmacist based in Blaxland or Katoomba or somewhere else, they put it on the shelf, a customer comes in, sees the price, is happy, pays the money, takes the goods away from the shop. So the role of the wholesaler really comes before, in my opinion, that retail transaction.
201Leyshon's overall conclusion was that the CWDCP operation is "primarily engaged in retail activities" (Tp141, L21), including ePharmacy, the distribution component, and the warehouse and dispensary operations.
202After the conclusion of Gance's evidence, Leyshon was recalled (see Tp307-315). He declined to defer to Gance's expertise on the retail sector, but he acknowledged that "he's obviously part of a very successful operation" (Tp314, LL11-26). Leyshon said that he was not diverted from any of the opinions that he had earlier expressed, but, in the end analysis he accepted Mr Tomasetti's analysis of the ePharmacy distribution arrangements as separate from the retail elements of ePharmacy.
203He was also asked a number of questions about the trading results and projections. He opined that, to get a proper picture, one would need "a full year's sequential supply of data to calculate some sort of moving average over that period" (Tp308, LL22-23). Such an analysis would "smooth out the peculiarities that might have occurred in a particular week such as a flu outbreak, and people stocking up on sunscreen for summer or things like that. There are always seasonal variations" (Tp308, LL40-44). In any event, growth rates of 400% or 600%, such as the respondents suggested, are "very difficult to accept" (Tp308, L49).
204Returning to Gance's projected growth of internet sales to $100M per annum, out of Penrith over the next 5-10 years, Leyshon adhered to his view that that projection was "very optimistic" (Tp312, L17) as it involves an annual compound growth rate of over 60%. Mr Leyshon said (at Tp312, LL23-40):
Not necessarily, having regard to the partial data I've been shown today. The criticism I had was or the issue that I raised is I know statistically it is very difficult to maintain growth rates as the base grows so when you get to $50 million a year in sales it's a huge ask to be adding 25, $26 million a year in sales to a base that high in what is now becoming a more mature industry. I'm not saying it's a mature industry but Australia has a very high penetration of home - you know, compared to OECD countries of people who are connected to the internet at home so it's not like we're a country with - you know, that is very low down the world rankings. We have the sophisticated banking system etcetera so I think all of those indicators suggest to me that it's going to be hard to maintain very very high levels of the growth of the kind that you would need. In Australia in 2009 the ABS reckoned or estimated that 62 per cent of Australian households had broadband internet which placed us well up - there's only countries like Korea, Iceland, Norway, Sweden and Finland above us in terms of internet access to the home so as internet costs come down and service providers get more slick you know you would expect that somewhere along the line it's going to be very hard I suggest to maintain growth rates of the order that are required to get to $100 million a year sales out of the Penrith facility.
205When questioned regarding a press release dated 17 December 2008, concerning the operations of "Australia Pharmacy Online" (Exhibit R2), which quoted a growth rate of 66% per annum for three years, Leyshon said he would not be surprised by that sort of growth in the early start-up stages, but it "will be difficult to sustain" (Tp313, LL14-15). He observed that Australia Pharmacy Online had not suggested a growth of 60% per annum continuously since its establishment in 1998.