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CompCom clamps down on the use of long-term exclusive lease agreements

Names Shoprite, Pick n Pay, Woolworths and Spar as the biggest culprits in using these agreements to restrict the entry of emerging retail chains.

The Competition Commission has found that the sustained use of long-term exclusive lease agreements between grocery retail giants Shoprite, Pick n Pay, Woolworths and Spar and owners of large shopping malls restricts competition to the detriment of consumers, thus contravening the Competition Act.

The competition watchdog is so concerned about these agreements that it has recommended that their use by the big four retailers cease with “immediate effect” and be phased out within three years.

Long-term exclusive lease agreements between retailers and shopping mall owners, which can be in force for as long as 45 years, allows retailers to be the only seller of specific goods to protect their turf. The agreements also include restrictions on the type of non-supermarket tenants that mall owners can allow to trade, thus restricting the entrance of competitors.

A blow for mall owners

The Competition Commission’s recommendation is a blow for shopping mall owners, who have vociferously argued that entering into an exclusive lease agreement with retailers is necessary as it allows them to secure a large tenant that pays higher rentals for a long period.

Its recommendation also potentially brings an end to a more than 40-year practice of shopping mall owners enforcing exclusive long-term lease agreements at a time when they are battling to secure high paying tenants due to SA’s struggling economy and a glut of competing shopping malls.

The recommendation on long-term exclusive lease agreements emerges from the Competition Commission’s grocery retail market inquiry provisional report, which was released on Wednesday. The inquiry has probed the impact of the entry of national supermarket chains into townships, peri-urban areas, rural areas, and the informal economy. The inquiry also probed the extent to which long-term exclusive lease agreements, regulations and by-laws have impacted on grocery retail sector competition.

Retailers given a month to comment

The competition watchdog’s recommendations do not come into effect immediately, but only after it has completed and adopted a final report. The Competition Commission has given the big four retailers a month to comment on the provisional report.

Thereafter, it can uphold its provisional recommendation that no new leases or extensions to leases by grocery retailers may incorporate exclusivity clauses or clauses that restrict product lines, store size and location of other stores selling grocery items in a shopping mall.

Shoprite, Pick n Pay, Woolworths and Spar were found to have enforced exclusive lease agreements to restrict the trade of not only their larger competitors but also their smaller counterparts, including Food Lover’s Market, Fruit & Veg City, Choppies and others.

Abuse of clout

Inquiry panel member Lulama Mtanga says the use of exclusivity clauses by the big four grocery retailers, which have a collective market share of 72%, promotes a level of concentration and restricts the entry and expansion of emerging retail chains into shopping malls nationally.

“These emerging challenger retailers and independent stores have been forced to seek alternative avenues in order to compete in the South African grocery retail sector,” she says. “The inquiry finds it concerning that their growth and competitive ability has been substantially limited because of exclusion from the shopping malls.” 

Mtanga believes the cessation of exclusivity agreements is warranted given that “these restrictions have serious detrimental effects on broadening the participation in the economy by SMEs [small and medium enterprises] and firms owned by historically disadvantaged persons”.

Shoprite was not immediately available to comment when reached by Moneyweb. Spar and Woolworths said they were studying the recommendations of the provisional report.

David North, Pick n Pay’s group executive for strategy and human resources, said the retailer will engage constructively with the inquiry team.

“This includes areas where we believe that their findings are based on errors of fact or interpretation, and where their draft recommendations would damage the interests of consumers and the stakeholders the Commission is seeking to protect.”

This is not the first time that exclusive leases have come under the spotlight.

 
In November 2017, the Constitutional Court denied Pick n Pay an interdict to stop Game from selling fresh food at Capegate Shopping Centre in Cape Town. Pick n Pay initially went to the High Court on the basis that Game’s food offering was an unlawful interference in its exclusive lease agreement with Capegate’s owner Hyprop Investments.
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More forced social engineering to create an “even” society where everybody is equally mediocre. Sandton city and Canal Walk don’t need more spaza shops who have a very limited range of products. The fact is that with their buying power, the big 4 can get the lowest prices which spaza shops can’t. If PnP or Checkers makes a 5% operating profit for all their hard work, then I can live with that.

jnrb : I don’t think anybody thinks a small general retailer would survive in a mall. But one weird impact of our concentration is up the supply chain. If you produce whether it is eggs & fresh produce all the way through DIY & clothing: you are forced to one set of buyers and that gets tough unless you happen to be Unilever or P&G size

I’d prefer to shop at a ‘mall’ that has a butcher, Baker, fishmonger, tailor, hardware guy, farmer market, etc. full circle to the 50’s

From the mall owners: “it allows them to secure a large tenant that pays higher rentals for a long period.”

That is blatantly untrue. The groups pay a third of what a small guy pays (per sqm)

But it is tough one. The mall needs an anchor to get feet that the other retailers also need. But maybe this is part of why South Africa is the mall capital of the world. Every supermarket needs a mall instead of 3 in one?

Nonsense – the big guys pay much higher rentals than line shops – in rands, not rands per sq meter.

Malls are developed, and REITs pay out in rands. Not metrics.

If the CompCom go this route there will be no more large malls. Not a single mall will survive if the concentration is on small line shops – scale gets you better prices. My experience line shops are a dime a dozen and most fail within 24 months of opening. Geo-mapping is an important aspect in determining which anchor tenants the mall attracts and taking a 25 year lease is hugely risky as the demographic can change significantly.

What a load of garbage. They are not even aiming their ill conceived rhetoric at the right industry.
Who draws up the lease agreement? Not the chain store but you have to target them and not the property owner because else you have no case. No collusion. Why is it done in this way? Certainly not to keep the Somali and Pakistani tuck shop owner out. It is about the reduction of risk. Risk comes at a premium. The CompCom obviously has a political agenda in line with current government practice that destroys everything they touch. The construction industry being one example. Has construction cost reduced? You can not even fine a proper contractor anymore. That helps a lot.
So you increase the risk to the retailer and then expect prices to come down.
The psychology and logic of this argument is seriously challenged and must be a result of incompetent cadre deployment and certainly not anything else.

Nice pun “You can not even fine a proper contractor anymore”.

But I agree with your sentiments. Has the bread or bicycle price come down?

What has Compcom to show for its years of meddling in the economy?

It enriched the officials, lawyers and economists but cannot prove how the economy has benefitted. Compcom has helped to destroy the construction sector.

Companies are being charged on rules that did not exist in the past, without Compcom proving what damage these companies have done, and found guilty on the razor thin yardstick of “on a balance of probabilities”.

Ever since Sandton City was built Liberty had a policy to object to ANY new retail development within a radius of 20km (to the old Jhb CBD) and this too is non-competitive.
The City of Johannesburg’s town planning policies on objection allow for non-competitive practices.

If you take the entire retail space in SA, about 80% resides in the hands of the six largest property groups and this is non-competitive as well, meaning the town planners have to democratize the issuing of bulk rights and not just allow the large scale developers to monopolize the owing of commercial leases.

It is a multi-directional street.

I don’t believe your argument is accurate regarding Liberty’s restrictive policy – they and Sanlam were and probably still are the largest real estate owners. Sandton was built in the mid 70’s and is nothing like its original footprint – in fact what is Sandton Square today was an open dusty parking space

The CompCom is too slow to Act. They should have done this long ago. If u look at any mall in SA – Only JSE listed companies mainly dominate the tenancy. I dis agree with some of the above comments – I think small and medium size companies must be give a fair chance to compete for market share – coz today many consumers in the 456 lsm range also shop at malls because of the poor state of our towns and cbd’s – I don’t think malls should become the exclusive domain of the wealthy. And the excessive rentals must also fall.

Good thinking Comrade Bobby. That will work for sure.

If wishes were horses, Bobby, beggars would ride. Utter claptrap.

Yes Bobby I agree, all comrades shall have decolonized Ferrari’s !

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