The Competition Commission’s Grocery Retail Inquiry has found national supermarket chains are putting small, independent players out of business – and wants to put a stop to it.
Sitting in the witness chair at the Parktonian Protea Hotel in De Korte Street Johannesburg in early June 2017, Mphuthi Mphuthi accused South Africa’s shopping malls of being an “extension of the big business agenda”.
Mphuthi, the chairperson of Soweto Business Access, was testifying before the Competition Commission’s Grocery Retail Inquiry, which held hearings around the country in 2017.
Mphuthi told the inquiry: “The malls are biased towards big business.” He argued that if independent black retailers are allowed into a mall, they are only given 12- to 18-month leases, which are more expensive than the long-term ones provided to big business. Mall management justifies this by saying they don’t trust small retailers.
This practice amounts to “rent protection” for big business at the expense of small black businesses, Mphuthi argues. Short leases also mean a rent increase with each new period, so independent black retailers find their rent escalating dramatically over a five-year period.
“We are on our knees. The shopping malls are killing us,” Mphuthi said. “And they are not ploughing [the money] back into the townships.” He contrasted the R100-million remuneration package received by former Shoprite Holdings chief executive officer Whitey Basson in the previous fiscal year to the plight of small retailers, who were being squeezed out of the market by South Africa’s big four grocery retailers — Spar, Woolworths, Shoprite/Checkers and Pick n Pay/Boxer. These big players make up 64% of the grocery retail sector.
Prevent, distort or restrict
Almost two and a half years later, the Competition Commission’s Grocery Retail Market Inquiry released its 657-page final report last week. One of its findings is that charging smaller tenants higher rents than larger anchor tenants in malls is “generally widespread”.
“The inquiry is cognisant of the need to ensure there is a balanced treatment of tenants, premised on the principles of fairness and transparency,” reads the report.
It calls for fair and transparent rental agreements for all retail businesses and has given property businesses six months for voluntary compliance, otherwise government regulation will follow.
The report highlights a number of features in the grocery retail market that “prevent, distort or restrict” competition in the market, which ultimately affects the consumer’s choices at the till. The features distorting the market were identified as long-term exclusive lease agreements signed between grocery retail chains and mall landlords, some of which can last for up to 30 years, and the buying power these large grocery chains have when purchasing products from suppliers, both of which have an impact on the ability of smaller players to compete.
The inquiry also points to failures in government’s various regulatory frameworks, which should play a role in regulating the market. The result is that independent, family-orientated businesses in rural and non-urban areas are being replaced by the bigger players.
‘They just undercut people’
Back in June 2017, the inquiry also heard testimony from Mokoka Moagi. Moagi’s meat supply shop in Sebokeng is a longstanding, independent business. But slowly malls were developed in the area, and since 2008 there are more than five of them within 6km of the butchery.
He testified that as a result, revenue dipped drastically and Moagi had to lay off six of his staff, leaving him with a workforce of four. Mphuthi pointed out that opening specials used by retailers in a new mall have put independent businesses out of business.
He recalled the opening of a new supermarket 10 years ago where bread was sold at below cost as an opening special. This, he claimed, put a number of small retailers out of business. “They just undercut people who are already operating in the township.”
The report describes the entry of Shoprite into the spaza shop segment of the grocery retail sector via its Usave e-Kasi brand as “very concerning”. It argues that this move will have the effect of “obliterating ordinary spaza shops” and calls for urgent policy intervention from government.
Sustained pattern of behaviour
According to the report, there “appears to be a sustained pattern of behavior” between supermarket chains, property developers and grocery suppliers, in relation to the long-term, exclusive leases and rebates paid by suppliers to the supermarket chains. These leases and rebates entrench the big supermarket chains’ dominance in the market and raise barriers to entry for independent players.
The inquiry found that there was an “unequal bargaining framework” in the market in relation to supplier rebates paid to supermarket chains, with grocery suppliers unable to walk away from negotiations with national supermarket chains as they were a “critical” route to market.
It found there was “no clear rationale” for the larger rebates paid to supermarket chains versus the lesser ones paid to smaller players, besides “buyer power”. Even when an independent grocery retailer was a larger customer for a supplier than a chain supermarket, the chain would get a better rebate. Smaller black farmers who can’t afford the rebates required by supermarket chains are squeezed out of the grocery chain.
Long-term exclusive leases
The inquiry established that the “vast majority” of Shoprite and Spar leases contain exclusivity provisions, while the “majority” of Pick n Pay leases do too. “In essence the current exclusive leases prevent emerging chains from developing to the point where they can suitably play the anchor tenant role in new developments,” reads the report. “There is very limited evidence of the emerging challenger retailers such as OBC, Fruit and Veg City, Liquor City and Choppies being allowed to enter shopping centres.” It found the reasoning for the long-term exclusive leases for national supermarket chains “not compelling”.
The report made a number of recommendations for remedial action. National supermarket chains must immediately cease from enforcing exclusivity clauses in existing leases against small to medium enterprises, specialty stores and other grocery retailers and no new leases can include exclusivity clauses.
Replaced by chains
The inquiry also flagged the use of “usage clauses” in leases, aimed to identify potential areas of business that a retail chain may want to go into in the future, but is not currently operating in at the present time. “The inquiry finds that this conduct is akin to the national supermarket retail chains carving out potential product markets they may want to enter in the future,” reads the report. The inquiry points to evidence that independent retailers had their leases terminated once the retail chain began to operate in a new market that was stipulated under the usage clause.
Back in 2017, the inquiry heard testimony from Manny de Atouguia, the CEO of Liquor City. He shared his experiences of being pushed out of malls where he had operated for years because the supermarket decided to open its own liquor store in the mall. “This has been a trend since 2003,” said De Atouguia. “Independent retailers are told to get out and are replaced with supermarket liquor stores.” He claimed that since 2003, 70% of independent liquor retailers have shut down and estimated that more than 60 000 jobs have been lost.
Twenty-four Liquor City stores have been shut down in the past two years. In one case, the bottle store had been operating in a shopping centre since 1996, but was pushed out by a supermarket chain in 2014. In that particular case, all 14 of De Atouguia’s staff lost their jobs, and nine were still unemployed when he testified in 2017. In another centre, De Atouguia’s rent was increased by 300% after a major supermarket chain acquired a share of the mall.
It’s clear that the Competition Commission and government have a busy six months ahead of them.
If the proposed remedies are successful, small independent retail players like De Atouguia’s Liquor City will be protected from the behaviour he testified about in 2017 and the big four supermarket players will be facing a lot more competition.
For the consumer this will mean more choice and lower prices.
This article was first published by New Frame.