South Africa’s Competition Commission has ordered supermarket chains to drop exclusivity clauses in shopping mall leases. At present according to their research, 70% of South Africa’s shopping centres are subject to exclusive lease agreements – some lasting 30 years. The development could open the way for new entrants in Africa’s largest supermarket sector.

This week South Africa’s Competition Commission published a 600 page report looking at competition in South Africa’s grocery retail market. It highlighted two problematic practices:

• long-term exclusive leases in shopping centres and
• the payment of rebates by suppliers to the national supermarket chains

In both cases, the report said that it reinforced levels of concentration in formal retail, entrenched incumbent chain and raised barrier to entry for small, independent and challenger retailers.

The inquiry established that the vast majority of Shoprite and Spar leases, and a majority of Pick n Pay leases, contain exclusivity provisions. Woolworths leases do not contain explicit exclusivity provisions but have provisions which impact on letting and usage.

The Competition Commission has warned that South Africa’s leading supermarket chains may be forced to drop exclusivity clauses in shopping mall leases if they do not do so voluntarily.

There is a subtext here of the important issue of black empowerment and the economic success of black entrepreneurs. Inquiry chair Halton Cheadle has noted that “independent retailers provide important avenues for participation in the economy, provide support for smaller suppliers further up the value chain, whilst also offering consumers greater product choice.”

The inquiry also found that the entry of Shoprite’s “Usave e-Kasi” brand into the spaza shop segment, providing directly competition to independent spaza shops, was “very concerning”. Spaza shops are small, traditional convenience outlets typically found in black majority areas in South Africa. Given the loss of spaza shops as a result of supermarket competition, the inquiry noted that “spaza shops offer convenience in terms of longer trading hours, proximity of location and products in smaller quantities making them affordable to poor consumers who could not afford to purchase bulk products from supermarket chains.”

As well as calling for an end to exclusive lease agreements, the Competition Commission has also ordered “that trade terms are uniformly available to all retailers, wholesalers and buyer groups”, ending the practice that FMCG suppliers help lower the cost of goods in supermarkets by providing rebates unavailable to buying groups and wholesalers.

The guidance for improving then competitive profile of spaza shops and small independent retailers is less prescriptive, calling on the government to facilitate the establishment of distribution centres
to be located in peri- and non-urban areas (to support independent retailers) and provide incentives to help modernise spaza shops (formation of buying groups, improved access to finance).

It is hard to see that these measures will, by themselves, change much in South Africa’s grocery retail landscape. There are already several initiatives to help spaza shops modernise while even with improved access to malls and ending the practice of rebates to major chains, challenger retailers will still battle against four sophisticated grocery chains that retail considerable operational expertise, buying power and, of course, incumbent positions. Furthermore, poorer consumers have no appetite for potential consequences, namely food prices going up.