Competition Commission retail inquiry does not stand up to scrutiny

The Competition Commission released its report on the South African retail sector, specifically on how exclusive agreements between the “big” retailers and property developers inhibit market competition.

The commission recommends that the enforcement of these agreements be eased, if not outrightly ignored, and that new agreements should not include such clauses.

This recommendation not only violates long-established contractual principles like privity, but also creates the possibility of economic harm for all South Africans.

In the name of facilitating competition, the Competition Commission, as usual, will most likely impede it.

According to the commission, Pick n Pay, Shoprite, Spar, and Woolworths – the big four retailers – are creating barriers to entry for new retailers wishing to operate out of shopping centres, by concluding exclusive agreements.

These agreements prohibit shopping centres from renting space to retailers other than the lessee.

Of course, an exclusive contract constitutes a barrier, but so do the capital requirements for establishing retail outlets and a myriad of other costs involved in establishing a business.

Should the state, in a cronyist fashion, fund spaza shop owners so that they can overcome the barrier to entry that is the initial capital outlay for a retail store?

According to the commission, yes.

But if the raison d’être of the commission is the norm, and is to be consistent, it has given itself the task of eliminating or dealing with every such barrier to entry for every industry, because they exist in every business type.

Barriers to entry, properly understood, are the artificial requirements businesses have to comply with in terms of legislation or regulations.

These barriers to entry do not come about through market forces, but rather government diktat.

These are the barriers the Competition Commission should be concerned with to improve competition.

Legislation like the Basic Conditions of Employment Act, Occupational Health and Safety Act, Employment Equity Act and the Labour Relations Act, to name but a few, put costs on businesses that do not stem from the normal operation of the market, but from state interference.

State regulations, zoning laws and municipal codes, which the commission mentions in passing, are the real reasons why there are not more flourishing small businesses, but the commission’s recommendation is to impose even more regulations.

The irony is lost on the commission that it received proposals from retailers other than the big bad four, which itself is indicative that the retail space market is contestable and contested.

There is a lack of rigorous evidence that these exclusivity agreements, at some shopping centres, in fact hinder emerging retailers from concluding agreements with others or using their own plots, as they do.

The proliferation of exclusivity in lease agreements is due to the requirement that financers usually impose on property developers prior to approving the financing of a shopping centre.

Financiers want anchor stores, and since the big four retailers have the financial muscle to take on the risk of renting space in a mall that is still in development, they enjoy considerable leverage in negotiations.

They rightfully utilise this leverage to hedge their risk by excluding not only small retailers but other big retailers from competing with them at those malls.

This is itself a sign of healthy location competition.

Small retailers, in turn, could compete on price, but themselves are often in far better locations given that many minimarts and spaza shops are in the middle of suburbs and townships themselves.

A potential unintended consequence of invalidating these lease agreements will be that property developers will have a hard time sourcing anchor stores, making it harder to get financing, making it harder to build more shopping centres.

The commission believes this will enhance competition, but this is, in fact, simply a market distortion that in all likelihood will lead to the further contraction of the once prosperous construction industry and a dearth in opportunities for small businesses dependent on new shopping centres for expansion.

The Competition Commission report betrays the spirit in which competition law was birthed: To protect free enterprise against actual monopolisation, the likes of which we see with Eskom today and SAA before the 1990s.

Competition cannot be enhanced through regulation. Indeed, SAA’s monopoly was broken through liberalisation and deregulation.

The commission is agitating for special interests: Giving one group of businesses preferential treatment over others, simply because some enterprises have been more successful than others.

This harkens back to the preferential treatment whites received from the 1920s onwards, when blacks were more successfully competing against them for jobs on the mines.

Voluntary trade and interaction in the market should not be questioned by government, particularly not those entrusted with safeguarding the market itself.

Instead, the Competition Commission should hold an inquiry into how its own behaviour is a detriment to competition.

Zakhele Mthembu is an associate of the Free Market Foundation and a law student at the University of the Witwatersrand. The views expressed in this article are those of the author and not necessarily those of the Free Market Foundation.

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