Price-fixing: Pioneer Foods in bid to clear its name
Question: Why would a bunch of employees from South Africa’s biggest bakeries not take minutes at a meeting they held together?
The answer, according to Blue Ribbon’s regional director for the Eastern and Western Cape, Terrence Lavery, is because pricing was discussed and they knew that if minutes were taken it would lead to a “a lot of kak”.
Lavery made this statement at the Competition Tribunal hearing into whether Pioneer Foods was part of South Africa’s bread cartel, a charge it denies.
Premier Foods, who own Blue Ribbon Bakeries and were the first to break ranks from the cartel and cooperate with the commission, received corporate leniency.
As a result Lavery is one of the commission’s key witnesses and Pioneer’s advocate John Newdigate attempted at length to discredit Lavery’s witness statement that price increases and the implementation dates of the increases were discussed at meetings held on December 6 and 12 2006.
However, Competition Tribunal member Norman Manoim cut straight to the chase asking Lavery why no minutes had been taken at these meetings, when minutes had been taken at earlier meetings between the bakery giants to discuss bread crate theft.
Pioneer Foods is attempting to clear its name on charges of collusion being faced by its bread businesses Sasko and Duens this week, with the start of its Competition Tribunal hearing.
While Pioneer’s alleged fellow colluders Albany (Tiger Brands), Blue Ribbon (Premier Foods) and Sunbake Bakeries (Foodcorp) have all admitted guilt and settled with the Competition Commission, Pioneer is taking on the commission, claiming it was not part of the national bread cartel.
Premier was the first to break ranks from the cartel and to cooperate with the Competition Commission’s investigation into the bread and milling sectors—and for this it received corporate leniency and no fine.
In November 2007 Tiger Brands were the next to come forward and cooperate with the Competition Commission and, for the additional evidence it provided regarding collusion in the milling industry, it received a fine of R99-million or 5,7% of its national turnover for bread operations.
In January 2009 Foodcorp settled with the commission and paid a penalty of R45-million, representing 6,7% of its turnover for baking operations.
However, Pioneer has stood fast, claiming it is not guilty, with managing director Andre Hanekom adamant that it has a strong case and that it was determined to clear its name.
The commission’s advocate David Unterhalter got the proceedings under way on Wednesday, with an opening statement in which he accused Pioneer of engaging in “offensive conduct” in “aggravated circumstances” in that bread was a food product that was consumed by South Africa’s poorest citizens.
“Their conduct is of the gravest kind and warrants the gravest sanction,” argued Unterhalter. “They must suffer the full consequences of the defence they put up.”
Pioneer’s advocate John Newdigate stated that Pioneer disputed the fact that it was part of the bread cartel and that it did not deserve the harsh penalty that the commission was proposing.
Newdigate said Pioneer did not dispute that meetings took place between staff members of the various bakeries, but would challenge the fact that these meetings were used to reach agreements on pricing.
It appears that Pioneer’s defence will rest on the witness statements made by Andries Goosen, the general manager of Sasko’s baking division, who claims that while some of his staff may have attended meetings without his knowledge, their attendance had no impact on Sasko’s pricing, which was set by him.
Unterhalter argued that this defence did not stand up because Gerhard Lourens, the key accounts manager for Sasko, who took part in the informal meetings between bakery staffers held a senior management role at Sasko.
“Pioneer cannot suggest that these were minor salesmen having a drink at the pub and having a casual chat about pricing,” said Unterhalter. “This was an agreement that involved someone who was employed in a senior management role at Pioneer.”
Lavery contradicted the claim made by Goosen in his affidavit that he was unaware of his staffers participation in the meetings.
Lavery who was the first witness called by the commission testified that Lourens had told Lavery at a meeting of bakery staffers that occurred on December 6 2006 that Goosen was “uncomfortable” that Lourens was attending the meeting.
Lavery said price increases that were to be effected in mid-December were discussed at the meeting and the bakeries staffers agreed to stagger their increases between December 18 to 20 2006, so that they didn’t all happen at the same time.
Lavery also testified that he had met with Goosen in his office in March 2004 to discuss the possibility of a bread price increase nationally at the request of Blue Ribbon’s CEO, because the managing director had resigned at the time.
Newdigate in his cross-examination of Lavery stated that Goosen has no recollection of any such meeting and that he doesn’t ever remember meeting Lavery before.
Newdigate also attempted to discredit Lavery’s witness statement by pointing out contradictions between his version of events and those of Goosen, Duens bakery manager Jacob Patience, Albany Western Cape Manager Rassie Erasmus and Blue Ribbon’s Sales Manager Dave Donovan, who attended one or both of the meetings held on December 6 and 12 2006.
Newdigate’s cross-examination focused on the fact that none of the other bakery staffers had said in their witness statements that pricing or implementation of pricing had been discussed at these meetings.
Earlier in Lavery’s testimony on the first day of the hearing he detailed how the relationships between the bakeries had broken down in 2003, because of their failure to stick to price increase agreements that had been negotiated.
Lavery stated that there had been serious deviations from agreements that had been reached and this lead to a lot of acrimony.
Lavery said this came to a head at a meeting at the Vineyard Hotel in 2003 where he stated that Lourens said: “Were never going to have these meetings again because they are as waste of time.”
“These agreements were not as effective as the parties would have liked,” said Lavery.
This began what Unterhalter referred to as the “Cold War period” where between 2003 and 2006 the Western Cape bread market was defined by “price wars”, as when any of the bakeries tried to push through a price increase there competitors took them on so that they had to discount so much the increase became inconsequential.
Then in 2006 when there was a 34% increase in the wheat price, 46,7% of the final bread price is attributable to raw materials, the bakeries decided that they had to cooperate again otherwise they would face an increasing margin squeeze.
Allegations against Pioneer
The Competition Commission’s referral affidavit details a whole host of collusive practices that took place between all four bakeries that are alleged to make up the South African bread cartel.
These practices included price fixing and the division of markets.
“The respondents fixed their prices in a manner which was intended to mislead their customers into believing that they were independently set,” says the affidavit. “There were usually slight differences in pricing and the increases were implemented either on the same date or within a few days of each other.”
Below the Mail & Guardian has highlighted a number of the allegations that involve Pioneer Foods’ Sasko Bakeries.
The 1999 agreement
The Affidavit alleges that in 1999 Sasko (Pioneer), Blue Ribbon (Premier Foods), Sunbake (Foodcorp) and Albany (Tiger Brands) entered into a verbal agreement that would prevent them from competing with each other in certain geographic areas.
As a result of this agreement, Sasko agreed to close down its bakery in Welkom, allowing Albany to expand in this area.
In exchange Albany agreed to keep out of the wider Free State area, which would benefit Sasko.
Albany also agreed to close down bakeries in Phalaborwa and Louis Trichardt, which would benefit Sasko and Sunbake and to close bakeries in Queenstown and East London, which would benefit Sasko.
The 2004 meeting
The affidavit details a meeting that took place in 2004 at the Willows Hotel conference centre, where price increases and the timing of these increases were discussed by representatives of Sasko, Blue Ribbon and Sunbake and they all agreed to institute similar price increases at the same time.
It was at this meeting that the representatives of the three bakeries entered into a “gentleman’s agreement” to prevent customers switching suppliers, by refusing to supply any of their rivals customers if they approached them to do business.
Attending the meeting were Elmare Pieterse, general manager at Blue Ribbon’s Potchefstroom bakery, Elize van Dyk, Michael Florench and Gideon Oosthuizen of Sasko and two representatives of Sunbake whose first names were Pieter and Margaret.
2006: Collusion by telephone
The affidavit states that in November 2006 William van der Linde, the managing director of Blue Ribbon’s Pretoria bakery telephoned Johan Oosthuizen, the general manger of Sasko’s Aeroton bakery, to find out if it was going to be increasing its bread prices and if so when.
“Oosthuizen indicated to Van der Linde that Sasko Aeroton was soon going to be increasing its price of bread by 25c per loaf, but that he was not sure of the exact date,” says the affidavit.
After similar enquiries from Oosthuizen, Van der Linde informed him that Blue Ribbon was set to increase its price by 30c on December 18 2006.
Oosthuizen then told Van der Linde that he would contact Sunbake and Albany to see if they were planning increases.
Two days later Van der Linde received a call from Oosthuizen to inform him that both the other bakeries would be increasing prices by 30c on December 18 2006 too.
The affidavit states that this agreement between the four bakeries “had the effect of substantially preventing or lessening competition in the market”.