South Africa: The Grocery Retail Sector Market Inquiry Preliminary Report On Exclusive Lease Agreements

Last Updated: 29 July 2019
Article by Njabulo Mazibuko

On 30 October 2015 the Competition Commission established the Grocery Retail Sector Market Inquiry (the "Inquiry") with the purpose to assess amongst others, the impact of long-term lease agreements entered between property developers and national supermarket chains. 4 years on, the Inquiry has published preliminary findings and recommendations.

The Inquiry found that the existing features in the grocery retail sector distort competition between national supermarket chains, wholesalers and independent retailers. In particular, the significant buying power that national supermarket chains have over property developers and suppliers places them in strong positions to influence the terms of agreements, such as demanding exclusive leases, low rentals, and rebates which only they qualify for. Furthermore, it was established by the Inquiry that the level of concentration in the formal retail sector that national supermarket chains have is reinforced by the high levels of barriers to entry that appear to exist in the value chain, such as the access to property for business purposes. According to the Inquiry it is common cause that entry into this sector requires access to property in order to operate a successful and profitable business, and that the current structure of the broader retail market involving all its stakeholders is not competitive, dynamic and fair.

In response to its findings, the Inquiry formulated several prohibitions and recommendations that according to the Inquiry, would facilitate the entry and expansion of specialist and emerging retail chains in shopping malls nationwide. The remedial action set out by the Inquiry would be reflected in a voluntary industry code of conduct that would apply to the national supermarket chains, their subsidiaries and successors in title immediately and in future. Although the dominant supermarket chains; Shoprite, Pick n Pay, Woolworths and Spar, were specifically named, the application of the remedial action should be understood to apply generally. You can read our summary of the Inquiry recommendations and their effects here.

There exist several concerns with the approach which the Inquiry has opted for and the direction which the recommendations appear to be geared towards, least of which is the significance of the complexities in analysing exclusive lease agreements and the blanket approach the Inquiry seems to have adopted. The above slant is challenging particularly because exclusivity clauses fall within the ambit of Section 5 and 8 of the Competition Act, 89 of 1998 ("the Act"), which provide that an agreement will only be prohibited if its net effect is anticompetitive. Thus, exclusivity clauses will only be problematic from a competition law perspective if any anti-competitive effects are not outweighed by pro-competitive gains.

We had hoped that during the preparation of the final report, the consultations that were scheduled to take place in the preliminary stages would be accommodating enough to consider all perspectives before the report is finalised. This hope has since become a reality. On Friday, 5 July, the Inquiry rolled back on their hard-line position to force the dominant supermarket chains to cease entering into exclusive lease agreements, on the foot of submissions received following the release of the preliminary report. The extent of the representations given was substantial enough to cause the Inquiry to also extend the deadline for the final report to November this year.

Now that we have an indication of the receptive nature of the Inquiry, it would be reasonable to expect a final report that is considered and sensible. To the extent that the report is concluded in a less favourable manner, we remain hopeful that an ombudsperson as well as a new regulatory framework will foster an environment where legitimate concerns are considered and addressed with the level of fairness we have come to expect from our competition authorities. For everything in between, we invite you to contact us for any competition law related matters in general or for advice on the specific impact that the Grocery Retail Market Inquiry could have on your business.

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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