SA’s grocery retail sector will continue to face wide scrutiny, as the Competition Commission’s inquiry into the sector’s operations is still on-going.

The inquiry, which was first announced in May 2015 by Economic Development Minister Ebrahim Patel in his budget vote, will examine the dynamics of the grocery retail sector and competition among retailers. The inquiry’s recommendations are expected to be concluded in May 2017.

Announcing the draft statement of issues on Tuesday, the inquiry’s chairman Halton Cheadle says the commission has a reason to believe that “there exist features or a combination of features in the sector that may prevent, distort or restrict competition. The inquiry will allow us to properly understand the grocery retail sector.” Cheadle is one of the three panellists in the inquiry along with Lulama Mtanga and Lumkile Mondi.

The inquiry will look at the general state of competition in the grocery retail sector without necessarily mentioning the conduct of specific retailers.  

This is not the first time that the competition watchdog has probed the conduct of retailers. In 2009, the commission launched an investigation into retail heavyweights Pick n Pay, Shoprite/Checkers, Woolworths and Spar as well as wholesale retailers, Massmart and Metcash – which were later cleared of anti-competitive behaviour and price fixing.

Submissions/comments by the public and various parties to the commission’s inquiry are open and the final report and recommendations are expected to be completed by May 2017.  The panel will be supported by a team of investigators comprising the commission’s economists and lawyers, and expert consultants.

The Competition Act which was amended in 2009, and took Parliament about seven years to bring into force, gave the Competition Commission more power. The commission has also launched a probe into the private health market – which is still on-going.

Small retail players

Small and independent grocery retailers will take centre stage in the grocery retail inquiry’s six objectives. Underscoring this, the inquiry will examine the impact of national supermarket chains moving into townships, peri-urban and rural areas on small and independent retailers.

Over the past ten years, SA’s national grocery retailers have been rolling out new stores in township and rural areas – markets which were historically viewed as undersupplied in terms of retail space. Growing access to credit and a burgeoning middle-class in township areas created a fertile ground for national retailers to grow their market share and earnings.

While national retailers moved into underserviced areas, some research has shown that small and independent retailers have suffered from high attrition rates. Other issues that the inquiry will examine include the dynamics related to competition between foreign and South African-operated small and independent retailers; the impact of regulations, municipal town planning and by-laws on small and independent retailers; and the impact of buyer groups and value chains on the operation of small and independent retailers.

In making recommendations to Patel, the commission will have to walk a tightrope of promoting competition and public interest goals – largely providing consumers with competitive prices and product choice-  and promoting the participation of small enterprises in the economy.

Exclusivity clauses

But the most contentious issue to be examined in the inquiry is the use of exclusive lease agreements by big grocery retailers in shopping malls. These retailers implement restrictive clauses in their lease agreement, which prevents other grocery competitors from opening stores in a particular shopping mall to protect their investments. Supermarket chains and property developers enter into long-term exclusive leases, which are typically valid for ten years, with renewal options up to 40 years.

This has been more evident in the public and legal spat between Shoprite and Massmart-owned Game Stores. Shoprite launched a court bid in 2013 to halt Game stores from selling perishable foods at the CapeGate Shopping Centre in Brackenfell, Cape Town. Shoprite won an interdict prohibiting Game stores from doing so, as the retailer had an exclusivity clause in its 15-year lease agreement with property group Hyprop Investments.

In 2014, the South African Property Owners Association (Sapoa) asked the commission to investigate the broader prohibitive practice of long-term exclusive leases in shopping malls. In a complaint, Sapoa named Pick n Pay Group, Shoprite Group and Spar Group as parties in the conduct of exclusive lease agreements.

“Exclusivity clauses harm competition to the clear detriment of consumers. They restrict entry into the market by competing retailers, especially when a retailer’s entry strategy requires scale of activity and buying, distribution and selling networks, noted Sapoa CEO Neil Gopal at the time.

“Besides excluding potential new market entrants, including independent and small retailers, long-term exclusive leases also reduce competition between supermarkets and broader competitors. The anti-competitive effects and outcomes, including higher prices, are to the detriment of consumers,” he adds.

If the Competition Commission’s recommendations to Patel conclude that one retailer conducted in anti-competitive behaviour, Cheadle says then the commission in terms of the Competition Act is “entitled to investigate that specific conduct and can refer the matter to the Competition Tribunal for further prosecution.”