Competition commission embarks on inquiry into grocers

Image source: Financial Mail

The regulatory body will be embarking on a market inquiry into the sector, and a full report is expected to be delivered to economic development minister Ebrahim Patel by this time next year.

However, this does not necessarily mean there will be a negative impact on JSE-listed grocers’ share prices.

Most of the six major areas of the inquiry deal with the market dynamics of small and independent retailers, including foreign operators. The probe was first announced during Patel’s budget vote last year, when the minister said the retail sector contributed to growth in jobs and that the small retail sector was a critical economic entry point for black South Africans.

The commission says it wants to “engage meaningfully” with all stakeholders to come up with workable recommendations to promote competition in the sector.

A key issue for the commission concerns exclusive clauses in leasing agreements.

Mall developers often sign exclusivity agreements with anchor tenants in the hope that they will attract other high-quality businesses and shoppers. Exclusivity clauses are defended on the grounds that they protect big retailers’ investments — chains often spend more than R30m setting up larger-format new stores and do not want their trade affected by another large anchor store or smaller businesses.

In a previous inquiry into retailers, the commission said it was concerned about the potential damping effects of exclusive leases on competition, but it found insufficient evidence to pursue any cases.

Halton Cheadle, chairman of the inquiry panel, says these contracts may be causing distortion in the sector by entrenching barriers to entry and expansion.

One of the smaller players affected by these agreements, OBC Chicken, says the problem is entrenched.

“When positive negotiations with landlords are suddenly reneged on for no reason whatsoever, one becomes concerned,” says OBC Chicken MD Tony Da Fonseca.

“It is of concern that now, when many of the big players in the retail supermarket arena have discovered the potential of trading in high-density black areas, we are experiencing what is commonly known as ‘blocking’ of sites by the anchor tenants who obviously have a greater say in the tenant mix of shopping centres.”

OBC Chicken has more than 60 stores. Slowing income growth, high household debt and the rising cost of living have prompted big retailers to launch an aggressive space race to capture consumers’ spend — both in city suburbs and in townships served by smaller players.

The commission says it wants to research the impact of the expansion and diversification of these supermarket chains on small and independent retailers in these areas, as well as in the informal economy.

Jason van Dijk, a director at Norton Rose Fulbright SA, says though the commission is conducting an inquiry and not an investigation, retail companies that will be participating still need to come armed and ready.

“Because of the risk of penalties being imposed after successful prosecution of any complaints that may be initiated by the commission at the conclusion of the inquiry, market participants should obtain legal advice on their compliance and any remedial action necessary to prevent potentially significant administrative penalties being imposed on them.”

According to Van Dijk, the inquiry could result in changes in policy which could affect the level of competition.

“Inquiries can be conducted by the competition commission only where it has reason to believe that there are features in a particular sector that may prevent, distort or restrict competition within that sector.

“If the commission identifies such features and concludes that they do lead to anticompetitive outcomes, the inquiry panel can make recommendations. Enhancements to competition generally benefit consumers.”

Meanwhile, an analyst who could not be named in line with company policy says it is unlikely that the inquiry will cause significant movements in the share prices of listed grocery retail companies.

“An inquiry is a very different process to an investigation. Whatever comes out of it will be nonbinding legally. There are no fines involved. Of course the panel can recommend an investigation into an issue but that is a different process.

“There may be reforms in the sector as whole but they are unlikely to push share prices significantly up or down.”

The panel will take stakeholder submissions between July and August this year.

Public hearings are scheduled to begin in January 2017.