SA supermarkets to be investigated

The commission said yesterday it had launched an investigation against major supermarket chains Pick n Pay, Shoprite/Checkers, Woolworths and Spar, which make up more than 60% of the market , as well as major wholesaler-retailers Massmart and Metcash.

The four major retailers yesterday distanced themselves from any wrongdoing and promised to co-operate with the commission.

Despite interest rates being slashed by 400 basis points this year and fuel prices down to R7.40 a litre from last year's highs of R10, food prices continue to rise.

The latest consumer price index for May showed inflation of 8%, driven largely by food inflation at 12.5%. This was despite unchanged food costs at manufacturing level [recorded in the producer price index] and agricultural commodity deflation of 1.5%.

Areas of concern

The commission said it had identified four areas of concern:

• Concentration of buying power, which results in practices such as exclusive supply arrangements and high listing (shelf-space) fees.
• Long-term exclusive lease agreements, which can be as long as 20 years. Property developers offer retailers favourable rental rates that act as a barrier to entry for competitors;
• Category management, where “category captains” are appointed from the ranks of the largest manufacturer, in particular product categories, to manage all aspects of that category in the store, such as placement, promotion and pricing of other competitors' products on a category-wide basis; and
• Information exchange, where supermarkets are said to be exchanging price-sensitive information, which might have an impact on competition.

Competition commissioner Shan Ramburuth said in a statement: “The commission has made several interventions along the food value chain, from production through to processing. “This complaint initiation now aims to uncover whether there are any possible competition concerns arising in the retail space, where consumers would most directly be affected.”

Nandi Mokoena, the commission's manager of strategy and stakeholder relations, said the commission was still not decided on whether it would prosecute the supermarkets.

“We'll be speaking to the consumers, industry and competitors,” she said. “There is nothing definite yet, since we are still at the very beginning of our investigation.”

Whitey Basson, chief executive of the Shoprite Group, said: “I have already stated four weeks ago that Shoprite would welcome an investigation in this regard by the minister of agriculture so that all stakeholders, especially consumers, will have a clear picture of the situation.”

Challenge issued

Spar sent a challenge to the commission, proclaiming that it had nothing to hide.

Spar group marketing director Roelf Venter, told Sapa: “Retail is the most competitive sector in South Africa, so let the commission get this once and for all. Spar does not sit around tables with other retailers in discussions.

“Show me any company in the world that spends R20-million on opening a store and then doesn't have a long-term lease arrangement,” he said.

Nick Badminton, Pick n Pay chief executive said: “We welcome any investigation or enquiry and will co-operate fully with the commission. Our record stands as a company in South Africa that has consistently fought anti-competitive practices, price-fixing and collusion.”

Woolworths' short statement read: “Woolworths notes the Competition Commission's press release and will co-operate fully with the investigation.”

Fanie Joubert, economist at the Efficient Group, said: “From [consumer price index] and PPI data, food at manufacturing and retail level remains high, while agriculture is in deflation. The decrease in prices of farming products is not coming through to the consumer.”

He said there was money to be made in the food industry, but not in farming — where margins were being squeezed tighter each year.

“It's a difficult sector to read because there are so many phases for the product to go through before it reaches the consumer's table,” Joubert said.

“There is some price stickiness somewhere along the value chain, but no one knows where it is and who takes the biggest margins. While interest rates and fuel prices have been going down, and the rand is strengthening, food prices continue to go up. Maybe the industry takes it for granted that people are used to price increases,” he added.

Mixed feelings

Analysts had mixed feelings about the commission's prospect of success, but all felt that it was a high-priority sector that needed to be investigated.

Heather Irvine, director of competition law at Deneys Reitz, said: “It's been coming for a while. When milk producers were being investigated for collusion they said that it was the supermarkets who were abusing their market dominance.

Martin Versfeld, head of competition law at Webber Wentzel, said: “This will raise concerns of whether producers [farmers] are receiving the margins they are entitled to, especially considering the buying power the supermarkets enjoy.

“Some producers have to wait as much as 120 days before being paid by supermarkets that may have already gone into a third or fifth selling cycle. The commission will have to look at buying practices and category management.”

Source: Business Times

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