On 29 June 2009 the Competition Commission (the "Commission") initiated an investigation against the four major supermarkets in South Africa, Pick n’ Pay, Shoprite/Checkers, Woolworths and Spar as well as the wholesale/retailers, Massmart and Metcash (the "supermarket investigation") for alleged contraventions of the Competition Act, No.89 of 1998 (as amended) (the "Competition Act"). The Commission initiated the supermarket investigation after preliminary research in this sector highlighted certain issues of concern including (i) long term exclusive lease agreements; (ii) information exchange; (iii) category management; and (v) concentration of buyer power.
Following the announcement on 27 January 2011 that the Commission has concluded its supermarket investigation in part, ENS invited Keith Weeks (Manager : Enforcement Division) and Hardin Ratshisusu (Advisor to the Deputy Commissioner) of the Commission to present to ENS’s clients on the Commission’s findings to date and to set out the process going forward. The pertinent aspects of the Commission’s presentation are set out below.
- Concentration of buyer power
Concerns were raised that supermarket chains may be abusing their buyer power by the imposition of onerous trading terms on suppliers, especially small suppliers. These trading terms include practices such as exclusive supply arrangements, listing fees, slotting allowances, payment policies, return policies, promotional discounts and other rebates.
The supermarket investigation, however, uncovered no evidence to suggest that supermarkets were abusing their buyer power in contravention of the Competition Act and the Commission has decided not to pursue this conduct further.
However, during its presentation the Commission highlighted that while the supermarket investigation uncovered no contravention of the Competition Act as far as abuse of buyer power is concerned, it intends engaging with the supermarket chains in an attempt to create more favourable trading conditions for smaller suppliers.
- Category management
Category management refers to decisions on product placement, promotion and stocking executed by a "category captain" appointed from the ranks of the largest manufacturers. The Commission was concerned that the activities of category captains, combined with the potentially sensitive competitive information at their disposal, could facilitate collusion and/or competitive exclusion.
The supermarket investigation, however, uncovered no evidence to suggest that the practice of category management contravenes the Competition Act and the Commission has decided not to pursue this matter further. Importantly, during its presentation the Commission emphasised that its findings on category management are limited to the products considered during the supermarket investigation (and cannot be seen as a blanket ruling that category management, particularly by a dominant supplier, will never be problematic from a competition law perspective).
- Information Sharing
The Commission did not find evidence of exchange of information between the supermarkets chains and has decided not to pursue this matter further in relation to the retailers.
However, the Commission noted that third parties like AC Nielsen and Synovate collect scanner data from supermarkets which they disseminate to suppliers. This dissemination of highly disaggregated information by retailers to suppliers may chill competition as between suppliers.
Importantly, during its presentation the Commission made it clear that it will take a robust approach in relation to the sharing of highly disaggregated sensitive competitive information as between competitors. It appears from the Commission’s presentation that the Commission will treat any instance of information sharing (even where such information exchange takes place via an independent third party such as AC Nielsen) as between competitors that replaces their "rational independent market and pricing decisions" as problematic from a competition law perspective (even in the absence of an agreement between the competitors). The Commission did, however, concede that this approach is yet to be tested before the Competition Tribunal (the "Tribunal").
- Exclusive long term lease agreements
The Commission has found that the exclusive lease arrangements entered into between supermarket chains and landlords may result in anticompetitive effects in circumstances where the supermarket chains have market power within the relevant local markets. The Commission believes that exclusive lease arrangements in these local markets are not justified and that they result in anticompetitive outcomes, such as enabling supermarkets to maintain their position of market power. Furthermore, independent and small retailers are excluded from entering certain shopping malls where the main supermarket chains are anchor tenants.
Exclusive lease arrangements arise from an industry wide practice and the Commission has decided to engage all relevant stakeholders (supermarkets, property developers and financial institutions) with a view to finding a constructive solution to this problem.
During its presentation the Commission made it clear that when engaging with stakeholders its position will be that, as a general rule, exclusivity must be excluded from long term lease agreements and that in those exceptional circumstances where exclusivity provisions are included the onus will be on the parties to convince the Commission that such exclusivity is justified. In this regard, the Commission appears to be of the view that if landlords make rational decisions in relation to the range of tenants in their shopping centres then exclusivity provisions in long term lease agreements are unnecessary. The Commission aims, though agreement with the stakeholders, to eradicate exclusive lease arrangements of this nature completely, even in those circumstances where the provisions of the Competition Act do not require such result.
Whilst engaging with the parties, the Commission’s investigation of this issue will continue and, if a solution cannot be found through constructive engagement with stakeholders, this matter will most likely be referred to the Tribunal.
During its presentation the Commission reiterated that –
- its current primary focus area is cartel conduct (i.e. price fixing, market division and collusive tendering) as between competitors.
- it remains focussed on the food and agro-processing sectors, which comprise a part of the Commission’s publicised list of focus industries.
The Commission warned that it will aggressively prosecute any firms found to have engaged in cartel conduct and strongly recommended that all South African businesses conduct the necessary competition law compliance audits to assess whether or not they have engaged in conduct in contravention of the Competition Act.
The Commission highlighted that if a firm independently conducts a compliance audit that uncovers cartel conduct the firm in question will have the opportunity (to the extent that immunity is still available) to rely on the Commission’s corporate leniency policy to escape prosecution.
The Commission added that, even in instances were immunity is not available, firms that proactively come forward and co-operate with the Commission will receive more lenient treatment than firms that are exposed as a result of complaint proceedings instituted by third parties and/or the Commission.