The Competition Commission on Monday released the final findings of its Grocery Retail Sector Market Inquiry, finding that national supermarket chains have by and large limited small and competitor retailers’ activity in the sector over the last few years.  

The market inquiry was launched on October 30, 2015, to understand how the grocery retail sector operates. The commission had reason to believe that competition was distorted or restricted in the sector.

The commission assessed the impact of the expansion, diversification and consolidation of national supermarket chains on small retailers in rural areas; the impact of long-term exclusive lease agreements entered into between property developers and national supermarket chains on local competition in the grocery retail sector; and the role of financiers in these agreements.

Almost 2 000 malls nationally accounted for roughly half of all grocery sales, while well over 70% of these shopping centres had exclusive lease arrangements with supermarket chains in place – some extending beyond 30 years.

Other objectives included looking at the impact of buyer groups and buyer power of national retail chains on small retailers, and the impact of certain identified value chains on the operations of small retailers. 

The commission stated that the grocery retail sector was characterised by low levels of economic regulation and openness of markets.

In turn, the openness of the sector had enabled increased expansion of corporate retailers, displacing small and independent retailers.

The displacement had been exacerbated by the ease of entry in the informal segment, leading to the replacement of small and independent retailers, which were primarily family operated and which mainly serviced rural and non-urban communities, before the boom of shopping malls in these areas.

“There were low barriers to starting survivalist informal retailers, but there were significant challenges to building them into thriving and competitive businesses that can enter the higher value segments within grocery retail, such as tenancy in formal shopping malls,” the market inquiry report found.

The inquiry further established that the national supermarket chains were vertically integrated in that they act as both distributor and retailer of groceries, which confers some competitive advantage as there is recognition that such strategies yield efficiencies in the distribution system and savings for suppliers.

Additionally, some buyer groups had also adopted this strategy and established their own central distribution centres, while some of the buyer groups had members who also own distribution centres.

Therefore, the commission believes the market structure of the grocery retail sector created a conducive environment for a significantly altered bargaining framework between the national supermarket chains and their suppliers, which, in turn, leads to distortions in competition between the chains, emerging challenger retailers, specialist stores and those firms that are serviced by the wholesalers and buyer groups – such as informal retailers.

Moreover, in light of long-term exclusive lease agreements, buyer power and distortions on competition between grocery retailers in the sector, the commission found a pattern of behaviour by national supermarket chains and their counterparts – property developers or suppliers.

The pattern involved exercising market power to the exclusion of smaller, independent stores and emerging challenger retailers such as OBC, Choppies, Fruit and Veg and Food Lovers Market.

For example, the commission said the market power pattern was demonstrated in supermarket chains signing long-term exclusive leases in shopping centres and the payment of rebates by suppliers to the national supermarket chains.

Both these behaviours were reinforcing the levels of concentration in the formal retail segment; entrenching incumbency by the national supermarket chains; and raising barriers to entry for small and independent retailers and thereby removing a crucial element for competition in the retail ecosystem.

“Cumulatively, the distortions to competition arising from this pattern have resulted in restricted consumer choice,” the market inquiry report highlighted.

RECOMMENDATIONS
The commission in its market inquiry report suggested that national supermarket chains must cease from enforcing exclusivity provisions in their lease agreements against small and medium-sized enterprises, speciality stores and emerging challenger retailers in shopping centres located in non-urban areas.

Should these chains not voluntarily commit to the commission’s recommendations, the commission would approach government to introduce legislation in this regard.

The report also recommended that property owners and managers of shopping centres must use fair and commercially justifiable criteria in determining differences in rental rates across tenants, while escalation rates must be uniform or fairly justifiable.

The commission further stated that suppliers of fast-moving consumer goods must ensure that trade terms were uniformly available to all retailers, wholesalers and buyer groups, while ensuring that trade terms were based on cost savings, supply chain efficiencies, efficient risk-sharing or sales promotion.

National supermarket and retailer chains will also be required to strengthen enterprise development programmes to increasingly develop small and historically disadvantaged suppliers.

“Government should facilitate the establishment of distribution centres to be located in peri- and non-urban areas to service small retailers and wholesales; while also establishing an incentive programme that will provide seed finance for innovative commercial models of private businesses that aim to offer support for small, informal retailers.

“Given the multiplicity of issues that impede competition in the sector, the inquiry recommended that government develop a legislative framework with a statutory industry body for the regulation of the retail sector in South Africa,” the commission stated.