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The grocery retail sector could face radical changes if proposals unveiled by a panel established by the Competition Commission to look into the sector are accepted.
The grocery retail market inquiry on Wednesday unveiled its provisional report found that: “features of the South African grocery retail sector that may prevent, distort or restrict competition.”
To fix the anti-competitive situation in the grocery retail sector, the panel in the report proposed a number of significant changes with the most radical being that the four major grocery retail chains, Shoprite, Pick ’n Pay, Woolworths and Spar, “with immediate effect, cease from enforcing exclusivity provisions in their lease agreements against speciality stores”.
This will open up opportunities for the big four grocery chains’ major rivals.
The report identified three key areas of concern that warranted remedial action, which are as follows:
- The use of long-term exclusive leave agreements and the exercise of buyer power by the national supermarket chains;
- The inability of small and independent retailers, particularly spaza shops to adapt to a changing competitive environment; and
- The lack of a pro-competitive regulatory regime that is aligned with the convenience model associated with small and independent retailers.
The panel found that these factors obstructed the objectives of the Competition Act.
“The inquiry found that these factors were prohibitive to the realisation of the objectives of the Competition Act, which seek, among others, to realise inclusive economic participation,” Lulama Mtanga, a panel member of the grocery retail sector market inquiry, said on Wednesday.
The inquiry found that long-term exclusive lease agreements, buyer power and distorted competition between grocery retailers.
“The enormous bargaining power that the national supermarket chains have over property developers and suppliers enables them to demand exclusive leases, low rentals from property developers and rebates from suppliers for which only they qualify,” Mtanga said.
The practice of long-term exclusive lease agreements was widely prevalent across the country and that the exclusionary effects last for significant periods of up to 45 years.
“The justifications put forth by the national supermarket chains were not compelling for a number of reasons, including that the risk factor presented in justification for the necessity of such contracts is now significantly reduced,” Mtanga said.
“What is even more concerning for the inquiry was the overwhelming evidence pointing to a number of specialist stores and the emerging challenger retailers being foreclosed from the shopping centre environment, a crucial aspect for effective competition in South African grocery retail sector, as customers spend more than half of their grocery shopping expenditure in shopping centres,” she added.
“The phasing out of existing exclusive agreements where appropriate, whilst setting the platform for a future where such agreements do not exist to restrict entry and expansion by the specialist and emerging retail chains into shopping malls nationally,” Mtanga said.
The grocery retail sector market inquiry was established in October 2015 to conduct a market inquiry to understand the general state of competition in the grocery retail sector.
Mtanga said that the inquiry had received more than 500 submissions, held over 80 round-table discussions, as well as a number of public hearings.
She said that the formal retail segment was characterised by high levels of concentration and that the sector was dominated by Shoprite, Pick n Pay, Spar and Woolworths.
Regarding small and independent retailers, especially spaza shops, Mtanga said that the entry of national supermarket chains had shifted the competitive landscape in rural areas in relation to price, product variety and consumer expectations.
Another recommendation from the panel is that an industry code of conduct by established to apply to all the national grocery chains.
“Failing a voluntary or regulatory code, the commission has the option to initiate enforcement action against the incumbent national supermarket chains,” Mtanga said.
Regarding buyer power and rebates, she said that this entrenched business practice might be difficult to move away from but there was a need to move to a more “non-discriminatory outcome”.
Turning again to spaza shops and small independent retailers, Mtanga said that there was a need for: - improved bargaining and procurement processes;
- the removal of information inequalities in order to improve access to credit finance; and
- provide support to allow for enhanced business skills.
The inquiry also recommended that the one government department coordinated support for spaza shops.
Finally the inquiry, recommended the removal of regulatory obstacles to meeting competitive challenges.
These regulatory obstacles include:
- municipalities must speed up the approval of any existing re-zoning requests for spaza shops in township areas;
- municipalities must rezone areas and erect infrastructure for informal traders to enable them to carry on business in a more effective and formalised manner; and
- there must be improved co-ordination by government in addressing the regulatory challenges that affect small businesses.
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