Following its long term investigation into long-term supermarket lease agreements, the Competition Commission has announced it has concluded its investigation and has issued a notice of non-referral. This means that the respondents, Pick 'n Pay, Shoprite/Checkers and Spar will not be prosecuted by the Commission for contraventions of sections 5 and 8 of the Competition Act.
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The Commission explained, "The evidence gathered did not conclusively demonstrate that the anticompetitive effects of the conduct outweighed the efficiencies claimed. The strength of the evidence did not meet the tests required for prosecution and therefore the Commission has taken the decision not to refer the matter to the Tribunal."
The Commission did say that despite its conclusions it remained concerned about the widespread use of exclusive leases by the industry, as a whole, as this could restrict competition and raise entry barriers. The Commission also expressed concern about the duration of leases in instances unwarranted by the investments made by the supermarket.
The Commission said it would address any residual competition concerns arising from exclusive lease agreement through advocacy engagements with key industry stakeholders, including property owners and supermarkets.
"Over the past four and a half years, use limitation terms in supermarket anchor leases in shopping malls have been investigated by the Commission under the restrictive practices provisions of the Competition Act. In this time the Commission's managed its concerns through merger control by requiring that the merger parties agree to negotiate with the supermarket tenants to excise the exclusivity terms from the anchor leases. This approach was endorsed by the Competition Tribunal repeatedly, as it considered it to be in the public interest that smaller firms were not precluded from trading in popular retail space by reason of the contracted restriction," says Petra Krusche, director in the competition practice at Cliffe Dekker Hofmeyr.
Krusche explains that exclusivity clauses in supermarket leases typically prevent the landlord from letting space in a mall to other supermarkets, preclude tenancies of certain specialty stores, such as butcheries and bakeries, restrict the size or location of premises of certain co-tenants, and/or any combination of the previously mentioned.
Tenants manage risk
"A potential tenant will consider its risks and return on investment before establishing a business in a shopping mall, taking into account the proposed tenant mix, and negotiate lease terms to manage its risks as favourable to its business as possible in the circumstances. For example, the risks of and investment in a shopping mall designed to house more than one supermarket and an upmarket tenant mix in a highly concentrated middle-class area, will differ from an investment in a mall planned for discounters, big and small in the industrial outskirts.
"It will be interesting how the market will react to the Commission's preference that protection be negotiated if justified by investment and in order to recoup the initial investment only. In the end, it may be a question of who will pay for renovations and upgrades necessary after the elapse of the initial period of the lease - the landlord or the tenants.
No customer hardship
The remaining concerns of the Commission relate to the ability of firms to enter a local market that has limited retail space and a limited number of supermarkets.
"This was also the area of concern by the UK competition authority, on conclusion of its own investigation into supermarket practices in 2010; in the UK it was also established that the consumer was harmed through the higher profit margins national supermarkets earned on store specific offers in areas where they were protected.
"This is not the case in South Africa. It is clear that the Commission did not find hardship to the consumer, as the evidence during the investigation was that supermarket competition is strong and that customers of the national supermarkets pay the same price in any of the same brand stores in a particular region, irrespective of the particular supermarket lease terms," concludes Krusche.
