CompCom puts an end to big supermarkets’ unfair practices

Grocery Market Inquiry finds that exclusive clauses, unfair trading practices and regulatory support are areas that need immediate intervention.
The Competition Commission established the Grocery Market Inquiry headed by Professor Halton Headle in 2015. Image: Moneyweb

Exclusivity clauses in leases that allow the big four national supermarket chains to operate within shopping malls without competition must come to an end.

This is one of the findings made by the Competition Commission’s Grocery Market Inquiry, which looked into the general state of competition within the grocery retail sector, where the participation of small and independent retailers has steadily diminished over the years. 

Read: SA’s big supermarkets told to drop exclusivity clauses in mall leases

Shoprite, Pick n Pay, Spar and Woolworths have been given six months to voluntarily agree to comply with the inquiry’s framework for eliminating these leases – or face more stringent regulations. 

Other recommendations made by the inquiry pertain to trade agreements with suppliers and rebates. It called for more transparency and equal treatment on trade terms and rebates, after finding that national supermarkets receive bigger rebates than small buyers and wholesalers without any “obvious rationale”. Additionally, the inquiry called for better regulations and government support for spaza shop owners who are also being pushed out by bigger players. 

Big four: You can’t sit with us

In essence, the exclusivity and tenant mix clauses in long-term lease agreements between landlords and supermarkets create a barrier for emerging supermarkets, small retailers and speciality stores to gain access into shopping centres. This is because they restrict landlords from introducing competitors who trade in some of the products provided by anchor tenants, usually one of the big four supermarkets, including dictating where these competitors can be located and the size of their stores.

There are over 2 000 shopping malls and centres in South Africa which account for half of all grocery sales across the country – and “well over 70% of these shopping centres are subject to exclusive lease agreements”.

Shoprite, Pick n Pay and Spar were the main culprits, with the vast majority of their leases containing long-term exclusivity provisions. While Woolworths’s leases did not contain “explicit” clauses that speak to exclusivity, they include clauses that have an impact on letting and usage. 

Because financers require property developers to secure national supermarkets as anchor tenants that will occupy the development during the typical loan repayment period of ten years, the grocery chains “took advantage” of this requirement and bargained for exclusivity.

The explanation was that national grocery chains were taking a risk by locking themselves into these long-term leases without knowing if the centre or mall would be successful.

But the pattern persisted because, as leases expired, the anchor tenants would renew them, together with the exclusivity clauses – and “some of these contracts could endure for at least 30 years”. 

Stop

The inquiry, headed by Professor Halton Cheadle, found that the agreements keep competition out and hinder emerging players – such as butchery chain OBC, Food Lover’s Market, Fruit and Veg City, and Choppies – from gaining traction in the shopping malls where the majority of consumers do their monthly or weekly shopping.

“These agreements not only hinder competition, but they also deny opportunities for SMMEs [small, medium and micro-sized enterprises] and historically disadvantaged entrepreneurs to participate in the economy, and they deny consumers the benefit of a broader product choice,” said Cheadle on Monday, as the inquiry tabled its 600-page report. 

The inquiry has recommended that the enforcement of already-existing exclusive clauses should end “immediately” and that they be phased out within the next five years.

The commission’s chief economist James Hodge explained that the five-year period was selected because the bulk of the most offensive leases with exclusivity clauses fell within that timeframe.

Does this change anything?

The inquiry found that the industry’s approach to these clauses is already beginning to change, with support for the exclusivity leases starting to diminish and, in some instances, national supermarket chains beginning to waive the enforcement of these provisions. 

Interestingly, the relaxation of these clauses has not necessarily resulted in greater competition from emerging challenger retailers such as OBC, Fruit and Veg City or Liquor City, which have little to no presence in shopping centres.

“This may be because they lack the negotiating power to force entry into larger malls in competition with the anchor tenant,” says the report. “Or a more deliberate strategy by the current dominant chains to keep such emerging challenger retailers [out] by denying them entry specifically.”

Where food retailers such as Food Lover’s Market and Fruit and Veg City have been able to enter the sector, it has mainly been in outside shopping centres. But this only serves to “effectively maintain the incumbency of the national supermarket chains in the shopping centres and retail supermarket trade more generally given the importance of shopping centres for consumer shopping expeditions”. 

A little too late? 

Investment analyst and market commentator Chris Gilmour said the recommendations will have “precious little impact” now, as the major supermarkets are already established – and, in a stagnant economy, where property developers have put further developments on ice, there is a limited chance for any significant retail space to open. 

“I don’t think this is going to make much of an impact because, to put it crudely, the damage has already been done,” said Gilmour.

“It might have an impact if you assume that the economy is going to grow significantly over the next five years, and I am not confident that is going to happen.” 

However, he said the inquiry was correct in a “very broad sense” in that emerging food retailers like Food Lover’s Market present a clear and present danger to the established chains, which would not exist if the status quo that prevents them from gaining a presence in the shopping centres persists.

“There is a move away from prepackaged to fresh food, particularly among millennials, and Food Lover’s is the epitome of that,” said Gilmour. 

He added that where the competition authorities got it wrong is by only focusing on retailers and not food producers, which is “where the real inefficiencies lie”.

Using Tiger Brands as an example, Gilmour said the producer of Oros, Koo, Ace maize meal and Tastic Rice has a strong “intransigence” about making private label products (no-name brands).

Read: Consumers are getting comfortable with ‘no-name brands’

Companies like Libstar show a higher degree of entrepreneurship and innovation than Tiger Brands, which “churns out these well-known, boring brands with very little innovation,” said Gilmour. 

“If they had to compete against their own internally-produced private label brands, that, by definition, would make them very efficient,” he said. He explained that this would result in more competitive pricing for consumers as seen in the US and Europe, where private labels are prolific in grocery stores and trade at the half the price of the national brand.

“That’s what scares Tiger Brands off,” said Gilmour. “It doesn’t want to get into the fray. It doesn’t want to cannibalise its own products.”

Read: Long road ahead for SA retailers

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The CompCom screwed up the construction industry, are they now going to do the same with the supermarkets as well??

Clearly the CompCom have no idea how these developments work. The developer needs an anchor tenant before they even “turn a sod” – with this ruling large shopping centres could be something of the past

Food Lovers Market vegie prices only appear to be on par with those of Shoprite but when you check closely, the bag of beetroot weighs less than its Shoprite counterpart.

One thing about veggies is the likelihood of finding one or more rotting items in the bag. This risk is unfortunately never measured when comparisons are done. These days even “reliable old Woolies” is among the candidates. This used to be one of the reasons for paying the premium. Alas things are deteriorating all round. Makes shopping difficult.

Another point which should be pushed by consumer protection agencies is that of the price disclosure. Most do indicate what the price per kg is, but not all. – This makes it easier to compare packs of 200gm ve 400gm vs 650gm etc – BUT it is printed in such small print that one needs to get on one’s knees using a magnifying glass to make it out. (Well not all of us are blessed with perfect eyesight).

These are textbook arguments from academics and researchers who have never run a business of their own in their lives. If you are the developer of a mall who invested R700 million in the construction, you obviously would like to sign up a national tenant for 5 years (at least) who can (1) guarantee the full 5 year lease if business dries up and (2) who can afford to add the leasehold improvements like sprinklers and aircon etc to the building. A bunch of fruit hawkers who will disappear when times get tough. A national retailer can cross subsidise. Secondly if you are a food retailer, the worst thing possible is to put an “out of stock notice” on the shelves. Will the small guys have stock on the shelves for 52 weeks of the year – not every other Monday, Wednesday and then again maybe Tuesday next week. Will the consumer really be better off or not?

The ANC just make no sense to me. Focus on creating industry, not tearing them down. I’m sure there is some political agenda here but I don’t see a ton of private supermarket players complaining about exclusive leases.

The most useless government on earth, just a ridiculous group of administrators taking a free ride.

If my business has to form the anchor of a new mall development and pay millions a month to the developer to enable him to make it worth while develop the mall, at least I must get some advantage out of the deal, rent wise, square meter rate etc etc – at least i must be able to and the developer will certainly understand that i do not want a p-willy business next to mine which can screw up my own business while my business indirectly forms the anchor for him to do his business. it is certainly not the big 4’s fault to get bigger discount from wholesalers – the smaller one failed to negotiate for it – at the end of the day it just makes business sense that that larger quantities requires less extra costs. Won’t mention names and not one the big 4, but +/- 20 years ago this small / minute little business was started in a double story garage size building (durban area) but through the owner’s business ability is in almost every mall nationwide today, (some the anchor business), in some cases he is the owner of the building himself so: think again before pointing to the big 4 – what will the comment be – one has a mall littered with small ineffective businesses and right next to it the 4 big ones in their own building????

It is the competition between the big boys that keep prices low and when you start meddling with that the outcome could go in the wrong direction.

CompCom should leave their socialist paws off the market lest they destroy another industry.
There is a need for less regulation across the board in south africa, not merely in one segment.

Hierdie kwepers sal nie ophou met twak aanjaag totdat hulle nie alles wat nog werk tot stilstand gedwing het nie. Sien die DRC vir ‘n goeie voorbeeld van wat kom!!!

The CompCom (usually well-intended) goals, may end up with unintended consequences: beware not to kill off innovation & entrepreneurship in this sector.

Over-regulation is one aspect that constrains business/the free market. In the end, the customer will carry the cost of inefficiency in the retail-chain.

Find it interesting that most comments are negative and that the angle that most people take are that this is an anti-freemarket development.

The Economist magazine (pretty much the guardian of free markets) however has taken the view that lack of competition and oligopolistic behaviour is the main threat to capitalism. Markets controlled by a few big players are not all that different from markets that are contolled by the state.

Smaller businesses leads to lower prices for consumers as there are more competition and prices are set on an arms length basis as opposed to what is happening at the moment were retailers, mall owners and food producers divy up the value chain between them – farmers get virtually nothing, because farmers are fragmented and have no buying power.

Small business also enables people to pull themselves up by the bootstraps as we often implore people to do…

Small business creates more employment opportunities

One only has to look at the margins and profitability of SA retailers compared to their global peers to see that competition is stiffled. The world largest retailer, Wallmart has been unable to penetrate food retail in SA.

ANC has basically done everything wrong, but this is not one of those instances. Monopolies cannot be allowed to operate in free markets

Who Owns “the guardian of free markets”

Or

To get the real picture have a look who owned it say ten years ago.

Is a net profit of 3%-5% really such a big sin considering all the hard work of trading 7 days per week 8am -8pm?

Have been an owner of a big four supermarket for over 15 yrs. Competitors in my centre normally only focus on the high margin opportunities, ie they cherry pick profits, not willing to invest in the other (also important) commodities/services, normally low margin, supplied by the anchor. Should this (ie competition) be allowed to happen at will, my store will be unable to generate the type of returns required to meet the cost of capital to build the supermarket. This will force me in future to look at other avenues to deploy my capital – at the end of the day, it remains a capital allocation decision.

End of comments.

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