On 12 June 2015, the Competition Commission published its draft Terms of Reference for the Grocery Sector Market Inquiry.  This is the Commission's latest foray into the retail sector in respect of which it hasexpressed concern about food prices for some time.  The market inquiry will examine whether there arefeatures of the grocery retail sector, which lessen, prevent or distort competition.  The inquiry is initiated in terms of Chapter 4A of the Competition Act, 89 of 1998 as part of the Commission's statutory mandate to "implement measures to increase market transparency."

The Terms were open for public comment until 3 July 2015.  Once finalized, a panel of experts will be appointed to head up the inquiry, key stakeholders will be consulted and public hearings will be held.  This market inquiry will run concurrently with similar inquiries into the private healthcare and LPG sectors.  The inquiry comes in the wake of the Commission receiving complaints about restrictive long-term leases containing exclusivity provisions and involving financiers, developers and the large supermarket chains.  Although the Commission previously considered the exclusivity provisions in long-term retailer leases in shopping centres, this inquiry reopens that issue and will reconsider theseleases and their effect on the entry into and expansion of small, independent and informal retailers in the retail grocery sector.  According to the draft Terms:

“The exclusive clauses in the lease agreements may be causing distortions in the grocery retail sector.  In general, the exclusive clauses restrict the landlord from leasing out space in the same shopping centre to potentially competing retailers…These restrictions tend to mostly affect small and independent retailers who may not be in a position to attract customers if located outside the shopping centre or mall…In general, the exclusive clauses may affect customers' choice in terms of product range, quality and ultimately affect competition.”

The four largest supermarket chains in South Africa account for over 90% of the retail grocery market.  The Commission's focus on consumer welfare which, in the context of the retailers' significant market share, includes their power to set food prices together with on-going complaints about retailer leases have clearly been important contributing factors to the establishment of this inquiry.

That the lease issue is just one of the Commission's concerns in relation to the sector is clear from the Terms of Reference.  Their scope extends to:

  1. the impact of expansion, diversification and consolidation of national supermarket chains on small and independent retailers;
  2. the impact of long term exclusive leases on competition in the sector;
  3. the dynamics of competition between local and foreign-owned small and independent retailers;
  4. the impact of regulations, including municipal town planning and by-laws, on small and independent retailers;
  5. the impact of buyer groups on small and independent retailers; and
  6. the impact of identified value chains on the operations of small and independent retailers.

The Commission's Terms say that, amongst other things, the market inquiry will have a close look at competition dynamics in the grocery retail sector, including pricing practices, the extent of consumer choice and innovation.  The use by supermarket chains of franchise structures will also come under the spotlight with the Commission considering the impact of franchise retailers on small and independent retailers in townships, peri-urban areas, rural areas and the informal economy.  Another crucial focus area is the causes and impact of the decline in small and independent retailers in townships, peri-urban areas, rural areas, and the informal economy.

The likely participants in the inquiry are large supermarket chains, small, informal and independent retailers, FMCG companies, and in the case of all retailers and FMCG companies, firms at all levels in their respective supply chains, property developers, buyer groups, financial institutions, trade unions, government departments, regulatory bodies, consumers and consumer groups. 

If the Commission believes that the Terms of Reference should be amended in any way, either through adding new matters or excluding current concerns, the Terms may be amended in terms of section 43B (5) of the Competition Act