The South African Grocery Retail Market Inquiry ("Inquiry") published its preliminary report on May 29, 2019 ("Preliminary Report").
The broad finding of the Inquiry is that there is a combination of features in the South African grocery retail sector that may prevent, distort or restrict competition.
For an overview of the key preliminary findings of the Inquiry, please see our bulletin, Grocery Retail Marketing Inquiry: Key Preliminary Findings and Recommendations.
Stakeholders were invited to submit comments on the Preliminary Report by June 28, 2019 and the Inquiry is currently busy with further consultations and discussions with stakeholders.
The reaction by stakeholders on the key findings has been mixed – some positive and some negative. The purpose of this note is to briefly unpack one positive reaction and two possible areas of concern that will seemingly lead to objections being raised by stakeholders to the preliminary findings and recommendations of the Inquiry.
Support for ending the use of long-term exclusive lease provisions
It is noteworthy and apparent from reading the non-confidential parts of the Preliminary Report that the majority of property developers, financiers and shopping mall owners do not support the retention of exclusive lease provisions. Such provisions essentially ensure retailers, mostly supermarkets, that there will be no other supermarket, or even a similar speciality store (bakery, butchery or liquor store), in a shopping mall for long periods of time (in some instances up to 40 years).
In this regard, in order to remedy what the Preliminary Report describes as "the distortions to competition as a result of the use of long-term exclusive lease agreements", the Inquiry has recommended that the incumbent national supermarket chains and their successors (a) immediately cease enforcing any exclusivity provisions in their lease agreements against specialty stores; (b) not include exclusivity provisions in any new leases; and (c) phase out the enforcement of exclusivity provisions against other supermarkets within a three-year period.
Based on the non-confidential submissions made to the Inquiry, there is seemingly general support for this finding. An exception is the supermarkets, which understandably have vested interests in retaining the exclusivity provisions in their leases. It is unclear at this time what the approach of the supermarkets will be and it will be interesting to see what additional submissions the supermarkets will make to the Inquiry.
At this stage, it is unlikely that this will be the end of the use of exclusive lease provisions in South Africa.
Concerns about the finding of the Inquiry that the buyer power by the national chains results in smaller retailers bearing higher rental costs in shopping malls ("Rental Differentials")
One of the findings of the Inquiry has been that the buyer power by the national chains results in smaller retailers bearing higher rental costs in shopping malls, which hinders the participation of competing small grocery retailers and specialty retailers. The Inquiry found that, as an entrenched business practice, this would be hard to change without commercial disruption and it has called for submissions on possible solutions to this concern.
It is understood that developers and shopping mall owners have specific concerns about this finding. They submit that the determination of rentals depends on numerous commercial factors and that there is never a "one size fits all" approach that will address the Inquiry's concern. A landlord must assess the individual requirements of a tenant, the tenant's business model, affordability, and the merits of each tenant prior to entering into a lease agreement. Aside from the tenant mix, competing stores, proximity, space required by a tenant and the shopper catchment area are also relevant considerations.
Further arguments are that supermarkets usually occupy between 2,000 and 4,000 m2 of floor space while smaller tenants typically occupy less than 300 m2 of floor space, with the result that supermarkets and smaller tenants cannot be compared with each other. For example, if a supermarket is charged the same rent as a small retailer, there would be no anchor tenants.
A more fundamental issue raised in the submissions is that the finding affects normal commercial aspects of contractual freedom between parties and does not address actual competition concerns.
It will be interesting to see whether any of these submissions will have an impact on the conclusion of the Inquiry.
Market share concerns by the supermarkets
One of the main findings of the Inquiry is that the formal retail channel is highly concentrated, with the national supermarket chains, namely Shoprite, Pick n Pay, Spar and Woolworths, collectively accounting for 72% of turnover in 2015.
This finding was contested in an opinion article by David North, an executive of Pick n Pay, that appeared in Business Times on June 23, 2019. The article, which was titled "The 'big four' grocers are not guilty as charged", included the following passage:
One of our concerns about the commission's report, and Hodge's column [Mr. James Hodge is the Commission's chief economist], is that they rely on a fundamentally incorrect assertion that the market is "highly concentrated" with the "big four" supermarkets allegedly "accounting for more than 70% of sales".
In making this claim, the commission relies on a report published by Stats SA in 2015. Unfortunately, it has misinterpreted the data in that report. When it says the "big four" account for the 72% of sales, it has mistakenly included R15bn of sales in countries outside SA. It has also mistakenly included in the "big four's" grocery sales R14bn in turnover for furniture and building products.
The commission has also underestimated the size of the formal retail sector by almost 15% – excluding a category of general merchandise sales from non-specified stores that are part of the grocery retail sector.
David North's opinion is that the actual market percentage of the "big four" is less than 30%, which is well below the benchmarks used by the commission for identifying competitive markets.
It is noteworthy that this opinion article was published in the press and thus became public prior to the last date for furnishing comments (June 28, 2019). At this stage, it is unclear what the Inquiry's response will be. If the market share was indeed incorrectly calculated, the findings of the report may be materially affected.
It is anticipated that the Inquiry's final report will be published towards the end of the year and future developments will be quite interesting to monitor.
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