The big four retailers’ stranglehold on the market has squeezed out competitors, driven up prices and throttled choice, says the Competition Commission.
Its Grocery Retail Market Inquiry report, which was released this week, focuses on barriers to entry for small retailers and the historically disadvantaged. But concerns have been voiced that if the inquiry’s recommendations are enforced, it could spell disaster for consumers.
The report highlights a lack of competition in the sector, violations of the Competition Act and the regulatory landscape as areas of concern. It says a less concentrated sector, with many small independent traders alongside national chains, is in the best interests of the economy and, ultimately, consumers.
Independent retailers, it notes, “provide important avenues for participation in the economy, support for smaller suppliers further up the value chain, whilst also offering consumers greater product choice. There is still a role for large supermarkets for the bulk shopping experience, but this should not be to the exclusion of others”.
Supplier discounts and preferential lease agreements in shopping centres are further bones of contention: the commission wants to see the end of rebates and exclusive leases, because it views these as squeezing out competition.
Unlike most countries where independent specialist and convenience stores are in healthy competition with supermarket chains, the commission says the local market is impeded by the dominance of the big four: Pick * Pay, Shoprite/Checkers, Spar and Woolworths.
In shopping centres, their presence bars emerging operators from trading under the same roof, if they compete with any of the big chains’ product lines. And in townships, the big retailers, as well as foreign-owned shops, are pushing out spaza shops. The monopoly, it says, is maintained through exclusive lease agreements for “anchor tenants” in shopping centres, which pay significantly less per square metre than smaller operators.
The commission claims the big four control up to 80% of the market and are hindering emerging challenger chains from making headway.
The inquiry says there should be no exclusivity clauses in new lease agreements or in lease renewals; and the clauses must be phased out over five years.
It says the buying power of the national retail chains helps them to get more favourable treatment by suppliers relative to the buyer groups and wholesalers that service the small and independent retailers.
It has also called on the government to remove regulatory obstacles, with revisions to trading times, introduction of proactive zoning, enhanced law enforcement and the registration of businesses to track informal economic activity.
The commission has given retailers six months to comply with its recommendations, failing which the government will be required to step in with legislative amendments or a code of practice.
Strangely, Fruit & Veg City/Food Lover’s Market and Massmart are not grouped among the big players. Combined, all six control only about 65% of the formal market. That’s a far cry from the claimed 80% market dominance by the big four thrown out by the commission.
The inquiry’s views on buyer power and rebates are also on shaky ground. By centralising supply chains, distribution centres and relationships with suppliers, the big retailers (which operate on thinner margins than suppliers) benefit from better economies of scale and pricing through volume discounts, which are passed on to consumers. On a smaller scale, foreign-owned stores benefit from the combined power of buyer groups.
Ultimately, shoppers visit the bigger grocers because they offer value for money, convenience, freshness and service. Smaller retailers and spaza shops cannot compete on that level because they don’t have the industry clout. And suppliers are not going to pass on bulk discounts for small orders.
Retailers are studying the report’s contents, with Woolworths saying: “As noted by the commission, our leases do not contain exclusivity clauses and they do not restrict the entry of competitors into shopping centres.”
David North, Pick * Pay’s strategy and corporate affairs head, says: “We were encouraged that the report acknowledged the benefits of major retailers like Pick * Pay in giving consumers, including those in townships and rural areas, access to greater choice and lower prices.
“We will have to digest the full report and understand better how the commission and the government intend to take it forward.
“We are concerned that some of its recommendations could make it harder for retailers to do what they do best, which is always to negotiate the best value we can from large suppliers, so that we can pass on the savings on to our customers through lower prices.”
Angela Tzarevski, a senior associate in Baker McKenzie’s competition and antitrust practice, says the grocery retail sector could face radical changes.
“On the one hand, exclusivity arrangements are often necessary to ensure a shopping centre’s financial viability and sustainability or to secure favourable funding to develop a mall in the first place. Adopting a blanket approach that all exclusivity arrangements are problematic will undoubtedly affect investors’ risk appetite to invest in new shopping mall developments, which may itself have undesirable effects.
“Similarly, forcing suppliers to offer equivalent trading terms to all retailers, wholesalers and buyer groups may have serious financial implications and erode incentives that stimulate frequent bulk purchases.”