Both consumers and suppliers should welcome the Competition Commission’s Market Inquiry into the Grocery Retail Sector. The Commission has recently published draft Terms of Reference for public comment.
The inquiry aims broadly to understand different aspects of the grocery market, 90% of which is dominated by four large supermarket chains according to the Commission. The balance consists of local and foreign owned informal businesses and independent retailers.
Scope of the draft Terms of Reference
The anticipated scope of the inquiry is very broad. It ranges from assessing the dynamics of specific features of competition in the market to investigating the impact of existing regulations on the market.
The risk associated with such a broad scope is that the resources and time of the panel will no doubt be spread thinly, leading to a shallow inquiry on a wide range of aspects of the market, with little to show in the shopping basket as the end of the day.
Consider for instance the difference between understanding the potential competitive dynamics of exclusion of Walmart controlled Massmart stores from key markets, against the possibly dynamite topic of foreign owned small retailers excluding local rivals in the informal economy.
An alternate solution to altering the scope entirely, we suggest, may be to divide the substance of the scope as proposed into the following two phases:
First, an investigation into the impact of:
- the growth of the supermarket chains on small and independent retailers and the informal economy;
- long term exclusive leases between landlords or developers and supermarket chains on competition in the sector;
- buyer groups on small and independent retailers and the informal economy; and
- identified value chains on the operations of small and independent retailers and the informal economy.
Following any findings and recommendations made in this first phase, the panel could then consider the second set of identified issues, which include the dynamics of competition between local and foreign owned small and independent retailers and the impact of regulations on the market.
This two phase approach would allow for a more focused initial phase, including publication of any recommendations of the panel following that phase. It may also assist in relation to ensuring efficient and realistic allocation of resources and timing.
The draft Terms of Reference do not propose a timeframe within which the actual market inquiry will be completed. This may be an oversight to be remedied by the Commission in the final Terms of Reference.
It is important for the Commission to set reasonable time frames within which the inquiry will be conducted and concluded. The first market inquiry into the Private Healthcare sector is well behind schedule and the second, into the LPG market, is moving ahead slowly.
Exclusivity clauses in lease agreements
The inquiry proposes to reconsider the impact on competition of long term exclusive leases between landlords or developers and supermarket chains. This aspect of the inquiry is of significance and welcomed by the property industry specifically.
In its previous investigation of the supermarket industry which closed in January 2011, the Commission found long term exclusive leases to be of great concern and could result in anti-competitive effects in circumstances where the supermarket chains have market power within the relevant local markets.
Supermarket chains and property developers enter into and enforce long-term exclusive leases through so-called 'anchor tenancy'. Typically, these leases are of a minimum period of ten years and, with renewal options, could last up to 40 years.
In addition, competing firms may be excluded from particular shopping centres by ‘Use and Exclusiveness’ clauses in lease agreements. Specialist stores selling liquor, fruit and vegetables as well as full-line grocery stores may be excluded in shopping malls where any one of the main supermarket chains is the anchor tenant.
The inquiry will examine the effect of these restrictions on competition and consumer welfare.
Reconsideration of anchor tenant agreement no doubt stems from a number of recent complaints in the industry in this regard, including complaints by the South African Property Owners Association (SAPOA) and Massmart, following Massmart’s attempt to introduce its fresh food range into Game stores around the country.
While anchor tenants argue that these exclusivity clauses are essential for investment recoupment purposes and key to retail developments, others contend that the result of the clauses is that competition in offering of products and services to consumers is generally harmed to the clear detriment of consumers.
Interested parties have been invited to comment on the draft Terms of Reference, which we expect will be revised before being finalised.