Creating room to set out a small stall

The South African competition commission is coming a-knocking at grocery retailers’ doors once again, and it has a number of uncomfortable questions to ask, says the Financial Mail.

The regulatory body will be embarking on a market inquiry into the sector and a full report is expected to be delivered to economic development minister Ebrahim Patel by this time next year. However, this does not necessarily mean there will be a negative impact on JSE-listed grocers’ share prices.

Most of the six major areas of the inquiry deal with the market dynamics of small and independent retailers, including foreign operators. The probe was first announced during Patel’s budget vote last year, when the minister said the retail sector contributed to growth in jobs and that the small retail sector was a critical economic entry point for black South Africans.

The commission says it wants to “engage meaningfully” with all stakeholders to come up with workable recommendations to promote competition in the sector. A key issue for the commission concerns exclusive clauses in leasing agreements.

Mall developers often sign exclusivity agreements with anchor tenants in the hope that they will attract other high-quality businesses and shoppers. Exclusivity clauses are defended on the grounds that they protect big retailers’ investments – chains often spend more than R30m setting up larger-format new stores and do not want their trade affected by another large anchor store or smaller businesses.

In a previous inquiry into retailers, the commission said it was concerned about the potential damping effects of exclusive leases on competition, but it found insufficient evidence to pursue any cases.

Halton Cheadle, chairman of the inquiry panel, says these contracts may be causing distortion in the sector by entrenching barriers to entry and expansion.

One of the smaller players affected by these agreements, OBC Chicken, says the problem is entrenched.

“When positive negotiations with landlords are suddenly reneged on for no reason whatsoever, one becomes concerned,” says OBC Chicken MD Tony da Fonseca.

“It is of concern that now, when many of the big players in the retail supermarket arena have discovered the potential of trading in high-density black areas, we are experiencing what is commonly known as ‘blocking’ of sites by the anchor tenants who obviously have a greater say in the tenant mix of shopping centres.”

OBC Chicken has more than 60 stores.

Slowing income growth, high household debt and the rising cost of living have prompted big retailers to launch an aggressive space race to capture consumer’ spend – both in city suburbs and in townships served by smaller players.

The commission says it wants to research the impact of the expansion and diversification of these supermarket chains on small and independent retailers in these areas, as well as in the informal economy.