/ 4 July 2009

Supermarket chains investigated

Farmers and food analysts are in agreement: South Africa’s supermarket chains have too much power and are squeezing margins down through the chain.

Food analysts have backed the Milk Producers Organisation’s (MPO) complaint to the Competition Commission that supermarket chains are using their dominant position to squeeze margins.

The MPO complaint is the only official one regarding supermarket chains and would have been key to the Competition Commission’s decision to launch a full investigation into potential collusion among the main supermarket players.

Competition commissioner Shan Ramburuth says that the producers claim that “supermarkets are getting milk dirt cheap because of their negotiating power”. A number of analysts told the Mail & Guardian that supermarket retailers have significant market power in the supply chain, which feeds downwards towards the farmers.

Professor Johann Kirsten of the University of Pretoria says that retailers have to be included in the Competition Commission investigation. “It’s time the Competition Commission investigates the power of the retailers and how that affects power relationships down the chain,” said Kirsten. “The dairy producers are at the mercy of supermarket buyers and they are not friendly people.”

Kirsten said he has anecdotal evidence from chief executives of medium to large dairy processors, who told him that negotiations with supermarket chains are awkward. “The negotiations are not cordial.”

In the recent Competition Tribunal hearings into collusion by Pioneer Foods, numerous bakery staffers testified that the only way they could get an increase in the bread price approved by the retail chains was for all of South Africa’s main baking giants to increase at the same time, and that this was a contributing factor to the collusion that led to the bread cartel.

The commission’s investigation into potential collusion by South Africa’s supermarket chains is the next logical step in an ongoing focus on high food prices in the country. It announced this week that it was turning the spotlight on South Africa’s four main supermarket chains — Pick n Pay, Shoprite/Checkers, Woolworths and Spar — as well as the country’s major wholesaler-retailers, Massmart and Metcash.

This follows an intensive investigation into South Africa’s food processing sectors, which so far has uncovered a national bread cartel and a dairy cartel.

“The commission has made several interventions along the food-value chain, from production through to processing,” said Ramburuth.

“This complaint initiation now aims to uncover whether there are any possible competition concerns arising in the retail space where consumers would most directly be affected.”

Ramburuth said that during the course of these investigations numerous stakeholders informally complained about supermarket chains’ possible anti-competitive behaviour.

The commission has identified several areas of concern, including the supermarket chains’ concentration of buyer power, which could limit upstream competition and make it difficult for small producers to gain and retain access to retailers’ shelves.

It will also put its spotlight on long-term exclusive lease agreements whereby property developers allegedly enter into exclusive anchor deals with major retailers for periods as long as 20 years. And the commission suspects that supermarkets could be exchanging price-sensitive information, which may have an impact on competition and lead to price-fixing.

But an investigation such as this could take years, especially because it is likely to have its hands full with investigations in the construction, steel and fuel sectors.

All supermarket chains and wholesalers have welcomed the investigation, arguing that allegations have been flying around for a while and this is an opportunity to prove that there is no collusion taking place.