South Africa: Competition Commission Prepares To Formally Initiate Another Inquiry

Last Updated: 18 May 2016
Article by Wade Graaff

Most Read Contributor in South Africa, September 2016

The Competition Commission (the "Commission") has published its draft terms of reference ("Terms of Reference") for the third market inquiry it intends to launch since the promulgation of the market inquiry provisions of the Competition Act, No. 89 of 1998 (as amended) (the "Competition Act") in April 2013. The Commission will once again focus on the grocery retail sector, after its previous investigation into supermarkets and exclusive leases, in what it is calling the "grocery retail sector market inquiry" (the "Inquiry").

According to the Terms of Reference, the Commission plans to initiate the Inquiry because it has reason to believe that there are features in the sector that may prevent, distort, or restrict competition. In particular, the Commission has identified, inter alia, that the four largest supermarket chains operating in South Africa, collectively account for more than 90% of the market and that these firms are able to operate as grocery anchor tenants in shopping centres and malls of various sizes. The Commission has also identified that the movement of national supermarket chains into townships, peri-urban and rural areas, mainly through the construction of shopping centres has affected, for example, the profitability of small, informal and independent retailers which has led to a decrease in the number of informal businesses. This declining number of small informal businesses is thus likely to have an adverse effect on employment, income levels and the spread of ownership in the sector. The Commission also expressed the need to examine the dynamics of competition between local and foreign owned small and independent retailers.

The Commission is also taking another bite of the exclusive leases cherry as it has noted increasing concerns by certain market participants including the South African Property Owners Association and certain grocery retailers themselves. In January 2014, the Commission concluded its investigation into exclusive leases in the grocery retail market and found that there was insufficient evidence to meet the tests set out in the Competition Act for demonstrating anti-competitive effects. Although the Commission found that there were insufficient grounds to prosecute the supermarkets concerned, the Commission remained concerned about the barriers to entry in the grocery retail industry and the negative effects of exclusive leases on small competitors and potential competitors. According to the Terms of Reference, exclusive leases may affect customers' choice in terms of product range, quality and ultimately affect competition, and the quality of services (including pricing and promotions) can be expected to be better where there are competitors at the same shopping centre.

The scope of the Inquiry will, this time around, include:

  1. the impact of the expansion, diversification and consolidation of national supermarket chains on small and independent retailers in townships, peri-urban and rural areas and the informal sector;
  2. the impact of long term exclusive leases entered into between financiers, property developers and national supermarket chains on competition in the grocery retail sector;
  3. the dynamics of competition between local and foreign owned small and independent retailers in townships, peri-urban and rural areas and the informal economy;
  4. the impact of regulations, including municipal town planning and by-laws on small and independent retailers in townships, peri-urban and rural areas and the informal economy;
  5. the impact of buyer groups on small and independent retailers in townships, peri-urban and rural areas and the informal economy; and
  6. the impact of certain identified value chains on the operations of small and independent retailers in townships, peri-urban and rural areas and the informal economy.

The Commission indicated that it may also probe:

  1. the competition dynamics in the grocery retail sector, including pricing practices, extent of consumer choice and innovation;
  2. the impact of franchise retailers on small and independent retailers in townships, peri-urban areas, rural areas, and the informal economy; and
  3. the causes and impact of the decline in small and independent retailers in townships, peri-urban areas, rural areas, and the informal economy.

The initiation of this Inquiry appears to be in line with the Commission's 2015 - 2020 Strategic Plan and Annual Performance Plan 2015 – 2016 (the "Plans"). This Inquiry is an example of a case where the Commission is concerned with barriers to entry and the effect that certain industry practices have on small firms. According to the Plans, the Commission intends to initiate numerous (with increasing frequency) market inquiries by 2020.

While we are yet to see which industry participants commented on the Terms of Reference (the deadline for comment was 3 July 2015), the loudest commentary so far has come from the Congress of South African Trade Unions ("COSATU"). COSATU has indicated that the Inquiry can assist in alleviating South Africa's triple interrelated challenges of poverty, unemployment and inequality caused by high concentration in various sectors of the economy.

Similar to the healthcare inquiry, we can probably expect the Commission to extensively consider the industry and keep firms in the sector busy in the coming months. Unlike the previous supermarket inquiry, the amended Competition Act now provides the Commission with the opportunity to gather much more information and ultimately make recommendations to the Minister of Economic Development. Such recommendations may be similar to those recommendations made in the UK's Grocery Market Investigation where the UK Competition Commission opted not to prohibit exclusive lease agreements, but rather to allow them for a maximum period of five years. They also placed an obligation to apply the competition test during the planning process of new stores and required grocery retailers to relinquish control over land sites in highly concentrated markets.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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