Proposed Massmart procurement targets not commercial sense

Aimed at remedying the concern regarding Wal-Mart's perceived strategy to source a significant amount of products through imports, opponents seek to place a condition on the merged entity that commits it to a minimum specified level of procurement of domestically produced and manufactured goods.

In his witness statement, submitted as evidence at the Competition Tribunal Hearings into the merger, Pattison said he was strongly of the view that it was simply not possible to impose procurement targets of the nature sought by the opposing parties.

He said the decision to locally source goods or import them drew on far more than a simple price comparison and explained why local procurement made good business sense. In so doing, he highlighted the folly of placing too much emphasis on foreign procurement strategies to the exclusion of a strong local supplier base.

"Local procurement is being, and will continue to be, pursued by Massmart and Wal-Mart because it makes commercial sense to do so," he said.

According to him, the group's current patterns of procurement are primarily determined by economic considerations, such as innate competitive advantages in production, the strength of local preference for domestic brands, the minimum quantities that can be viably imported, the magnitude of transport and storage costs, the degradation of product quality in transit, the importance of security of supply and the extent to which local servicing and support are required.

"As the acquisition will not have a material impact on these fundamental economic determinants, the basic procurement patterns currently seen within the business are unlikely to be changed significantly by the proposed transaction," he said.

Forced suppliers will raise prices

Commenting on the opposing parties' demand that both groups commit to procuring a certain percentage of goods from SMMEs and HDI owned firms, Pattison said that being forced to buy from particular suppliers would skew negotiations in favour of such suppliers and normal market forces would no longer determine the outcome of negotiations.

"This will clearly have substantial, unintended competitive consequences. In particular, this will remove the incentive for local suppliers to become more efficient.

"The ultimate effect of such targets will be to raise pricing. Consumers will be forced to fund inefficient suppliers, or buy the products they want from other retailers," he said.

Put another way, the proportion of goods ultimately sourced from local manufacturing tends to change over time and fluctuates according to market forces outside of Massmart's control.

"Massmart cannot commit, by itself, to the current levels of procurement from local manufacturers, not because we are not supportive of local manufacturing, but because to do so would fundamentally undermine the functioning of a competitive market.

"On any basis, any such procurement targets can only be effective if they are regulated and legislated by Government and applicable across the entire value chain. In other words such targets must apply equally to all retailers and suppliers.

"If Massmart / Wal-Mart tried (or was forced) to do this alone, the likely outcome is that the merged entity will be forced to shed jobs as its competitors gain market share at its expense," he said.

BBBEE would influence procurement practices

"As the industry leader in BBBEE, Massmart scores 12.55 points out of a maximum of 20 for preferential procurement; and 15 out of 15 for enterprise development on its latest BBBEE scorecard. Self-evidently, this is something on which Massmart places substantial importance," he continued.

"Nevertheless, while corporate social responsibility cannot be ignored by firms operating in South Africa, local procurement in the wholesale/retail arena is commercially justifiable as profit-maximising conduct in its own right," he said, adding that the tangible commercial benefits delivered by a strong BBBEE scorecard would continue to influence the procurement and commercial practices of Massmart after the acquisition by Wal-Mart.

Mature competitive market

Pattison said he would be very surprised if Wal-Mart adopted a procurement strategy that differs substantially from Massmart's. "In my view it would be illogical for Wal-Mart to pursue low prices at all costs or to bypass the South African supply chain - it makes far more sense from a commercial perspective for suppliers and retailers to build a mutually beneficial and sustainable relationship. This will certainly not be the case if Wal-Mart attempts to bypass the South African supply chain or to squeeze prices to be unsustainable."

In any event, were it Massmart's strategy to move towards sourcing more of its products internationally post the implementation of the proposed merger (which is unlikely to be the case), this will not have a significant negative effect on the South African manufacturing and supply sectors for the simple reason that the wholesale / retail sector in South Africa is a mature and competitive one, characterised by a number of alternative channels to the market.

Pattison's conclusion was that based on the above, the opposing parties' focus on local procurement targets was misplaced.

Other sought conditions

Other conditions listed by the various opposing parties include:

• Commitment by Wal-Mart to honour current union relations as well as refrain from preventing or dissuading workers from forming any new such relations and collective bargaining;
  
• Those relating to the limitation of the extent of foreign ownership or the form of foreign ownership of South African firms;
  
• Requirement that foreign firms investing in South Africa have a positive global reputation;
  
• Commitments to the quality of goods supplied (referred to as "consumer protection mechanisms");
  
• That the merger does not result in job losses or failed firms;
  
• That there is no downward variation in terms of employment;
  
• Requirement that Massmart pays an equivalent or better wage relative to the industry average;
  
• Commitment to procure a certain percentage of goods from SMMEs and HDI owned firms;
  
• Commitment to create new jobs;
  
• Restriction of new stores to city outskirts;
  
• Limitation of scope of expansion, by region, size or acquisition;
  
• That Massmart provide favourable terms to suppliers;
  
• Requirement that Massmart ensures overseas suppliers comply with labour laws;
  
• Prevention of the merger for a period so that South Africans can have a fully informed debate;
  
• Limitation of the products Massmart can sell;
  
• Limitation of market shares for specific goods and categories of goods;
  
• Application of something similar to the UK Supermarkets Code of Practice and an ombudsman to oversee the implementation;
  
• Prohibition of retailers from direct dealings with producers;
  
• Prohibition of below-cost selling;
  
• Requirement that the merged firm accept "joint-liability" with its suppliers for compliance with labour laws "where the cost of the contract would not allow wages and benefits sufficient to comply" with labour law;
  
• Commitment by Wal-Mart to the "four core conventions of the ILO," namely prohibition of child labour, prohibition of forced labour, non-discrimination and freedom of association;
  
• Suspension of the new performance management systems until there has been an informed and agreed upon discussion;
  
• Requirement that the merged firm develop programs to allow local suppliers to export through Wal-Mart's global distribution network.
  
• Regular monitoring and enforcement mechanisms, such as requiring Wal-Mart to report to the Competition Commission on a scheduled basis, providing it with all relevant data, supplier locations, breakdowns of domestic procurement etc.