Tribunal renews SAB’s tribulations

‘They took my pension, my pension is gone,” said the old man, nodding towards the room where the South African Breweries (SAB) hearing before the Competition Tribunal was taking place this week.

The pensioner, who had come to listen to the proceedings, was Gerrie Mofokeng, who had given evidence four years earlier as a witness for the Competition Commission.

A former Metro Cash & Carry employee, Mofokeng invested his pension in a liquor distribution business, but found himself unable to compete after discovering that the retailers to whom he was supposed to be selling his beer were able to buy it directly from SAB depots for the same amount he was paying, even though he was a licensed distributor.

Unlike SAB’s appointed distributors, he would testify that he was not entitled to any discounts unless he bought liquor in bulk, which, meant an outlay of half a million rand.

On top of this, the SAB deal would not allow him to limit his purchases to Black Label and Hansa brands, for which he had a market, but required that he buy a range of brands that he was unable to sell to his clients.

Buying with the retailers
“When I go to buy my stock at SAB I was buying with the retailers, people whom I must sell to,” said Mofokeng.

“When I wanted to make a mark-up, it was not possible, because I was buying with those people and they were the people that I had to sell my stock to. This meant I had to sell my stock at cost price. I lost three times.”

According to Mofokeng, distributors were required to buy 128 pallets (66 cases per pallet), for which they would get a 50c discount per pallet.

Mofokeng’s case illustrates why independent distributors lodged a complaint with the Competition Commission in 2004. SAB controlled 97% of the market at the time.

The case was brought by Nico Pitsiladis, head of the Eastern Cape-based Big Daddy’s group, and some other retailers and distributors.

Following a four-year hiatus resulting from an unsuccessful challenge led by SAB against the commission, the commission has returned to the tribunal, asking it to confirm the commission’s findings, namely that SAB’s agreements with its appointed distributors divide the market between competitors, in contravention of the Competition Act; and that the company favours its own distributors at the expense of independent distributors, who are thereby placed at a disadvantage.

"Abusing" dominance
It also alleges that SAB has abused its dominance by preventing retail outlets from doing deals with its competitors.

David Unterhalter, appearing on behalf of SAB, has argued that it is accepted by competition authorities “in almost every jurisdiction in the world, that one of the basic aspects of competition law is that firms, irrespective of their size and potential market power, are able to determine their own route to market and can fashion distribution arrangements that the firm considers to be optimal for getting goods to market”.

Unterhalter said distribution was essential to manufacturers, and the aim of manufacturers was to minimise their costs.

He said the allocation of regions for distributors was not an attempt to control the market, but to ensure that no distributor dominated the market, which could disadvantage the consumer.

Unterhalter said the distributors were never intended to earn a margin on fees — “they earn fees for effecting distribution and they earn fees for handling the product” — suggesting that it is unreasonable for independent distributors to expect to make money on margins.

Independent distributors could become appointed distributors if they wanted to, subject to a number of restraints, such as being unable to choose the price at which they sold their product, or being unable to sell to the unlicensed sector.

Commission's investigation
The commission, said Unterhalter, had looked at SAB’s distribution system a few years earlier and had not had a problem with it.

Former commission economist Simon Roberts told the tribunal on Monday that an analysis of SAB’s operations between 2004 and 2007 indicated that the company was abusing its monopoly.

The commission had investigated the complaint by Big Daddy’s that SAB’s practices were exclusionary in terms of the Competition Act and, in 2007, had announced that it would proceed with its case against SAB and some of its appointed distributors.

The tribunal halted its hearing in March 2011 to consider a complaint by SAB that the case be dismissed. SAB said the commission had gone beyond the original complaint by the Big Daddy’s group.

After a review of other rulings by the Competition Appeal Court, tribunal chair Norman Manoim agreed, and the case was dismissed.

The Competition Appeal Court disagreed, however, finding the tribunal’s interpretation of the rulings too narrow, and the case was allowed to resume.

The hearing
It was understood that the hearing would deal only with the allegations relating to the distributors for the time being and allegations of abuse of dominance would be dealt with at a later stage.

Roberts said SAB’s share of the market had subsequently decreased when the Amstel brand left its stable and was bought by Brand House, which now has 10% of the beer market.

He found that there were arrangements about pricing, to the extent that retailers and distributors paid different prices depending on the income of the region they operated in. These regions were areas created by SAB.

This led to some clients (referred to by SAB as runners) driving to a cheaper region to buy stock.

Roberts cited a document by SAB referring to pricing, which included the term “what the market will bear”.

He said the brewer had increased its margins considerably in the past few years, benefiting from an improvement in the economy.

The meaning of the deal
The deal with appointed distributors meant that independent distributors were unable to pass on any savings to their customers, he said.

The exclusive arrangements were discriminatory, weakened intra-brand competition and undermined competition at the wholesale distribution level.

SAB said it would contest the allegations against it.

“We remain confident that none of our practices are in breach of the law and that we have not engaged in any anticompetitive behaviour,” said the company’s strategy director, Yolanda Cuba.

SAB was committed to operating in a way that favoured both competition and the consumer, said Cuba.

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