24 January 2014 by Cliffe Dekker Hofmeyr

Competition Commission issued notice of non-referral of a complaint with regards to the supermarkets investigation

The Competition Commission (Commission) today announced it has concluded its investigation into long-term supermarket lease agreements under  the Competition Act and has issued a notice of non-referral.  This means that the respondents, Pick ‘n Pay, Shoprite/Checkers, and Spar will not be prosecuted by the Commission for contraventions of sections 5 and 8 of  the Competition Act.

The Commission explained that, “The evidence gathered by the Commission did not conclusively demonstrate that the anticompetitive effects of the conduct outweigh the efficiencies claimed. The strength of the evidence did not meet the tests required for prosecution and therefore the Commission has taken the decision not to refer the matter to the Tribunal.”

The Commission did say that despite its conclusions it remained concerned about the widespread use of exclusive leases by the industry as a whole as this could restrict competition and raise entry barriers. The Commission also expressed concern about the duration of leases in instances unwarranted by the investments made by the supermarket.

The Commission said it would address any residual competition concerns arising from exclusive lease agreement through advocacy engagements with key industry stakeholders, including landlords and supermarkets.

“Over the past four and a half years, use limitation terms in supermarket anchor leases in shopping malls have been investigated by the Commission under the restrictive practices provisions of the Competition Act.  In this time the Commission's managed its concerns through merger control by requiring that the merger parties agree to negotiate with the supermarket tenants to excise the exclusivity terms from the anchor leases. This approach was endorsed by the Competition Tribunal repeatedly as it considered it to be in the public interest that smaller firms were not precluded from trading in popular retail space by reason of the contracted restriction.” says Petra Krusche, Director in the Competition Practice at Cliffe Dekker Hofmeyr.

Krusche explains that exclusivity clauses in supermarket leases typically prevent the landlord from letting space in a mall to other supermarkets, preclude tenancies of certain specialty stores, such as butcheries and bakeries, restrict the size or location of premises of certain co-tenants, and/or any combination of the aforesaid. 

“It stands to reason that a potential tenant will consider its risks and return on investment before establishing a business in a shopping mall, also taking account of the proposed tenant mix, and naturally negotiate lease terms to manage its risks as favorable to its business as possible in the circumstances. For example, the risks of and investment in a shopping mall designed to house more than one supermarket and an upmarket tenant mix in a highly concentrated middle-class area, will differ from an investment in a mall  planned for discounters, big and small in the industrial outskirts,” she explains." It will be interesting how the market will react to the Commission's preference that protection be negotiated if justified by investment and in order to recoup the initial investment only. In the end it may be a question of who will pay for renovations and upgrades necessary after the elapse of the initial period of the lease- the landlord or the tenants."

The remaining concerns of the Commission relate to the ability of firms to enter a local market  which has limited retail space and a limited number of supermarkets. 

"This was also the area of concern by the UK competition authority on conclusion of its own investigation into supermarket practices in 2010; in the UK it was also established that the consumer was harmed through the higher profit margins national supermarkets earned on store specific offers in area where they were protected. 

“This is not the case in South Africa. It is clear that the Commission did not find hardship to the consumer as the evidence during the investigation was that supermarket competition is strong, and that customers of the national supermarkets pay the same price in any of the same brand stores in a particular region, irrespective of the particular supermarket lease terms,” adds Krusche. 

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