legal update
Competition Commission retail market inquiry – Massmart complaint By Mumtaz Moola
T
he Competition Commission received a number of complaints regarding exclusivity clauses in the industry. As a result of the complaints it received, the Commission elected to conduct a market inquiry into the grocery retail sector. On 30 October 2015, the Competition Commission, in the exercise of its powers under the Competition Act No. 89 of 1998, published a notice that it would conduct a market inquiry into the grocery retail sector. The official commencement date of the inquiry was 27 November 2015; it is expected be completed by 29 May 2017. The Commission may, however, by notice in the Government Gazette, amend this time frame. Massmart chose not to wait for the conclusion of the retail market inquiry; rather it elected to proceed with its complaint (hearing) against Shoprite, Pick n Pay and Spar (retailers) to the Competition Tribunal. On 11 June 2015, Massmart referred its complaint against Shoprite, Pick n Pay and Spar (retailers) to the Competition Tribunal, following the Commission’s decision to “non-refer” the matter due to the market inquiry. In other words, because the issue is of great significance to Massmart’s plans to expand in the grocery market in SA, it was not willing to wait for the outcome of the Commission’s market inquiry, but has chosen rather to ask the Tribunal to decide on the lawfulness (alleging anticompetitive behaviour) of these clauses.
Issues raised by parties with regards to exclusivity clauses in lease agreements Interesting to note is the submission made by the Centre for Competition Research and Economic Development (CCRED), which makes reference to a SAPOA survey that was completed in 2012 (in which 15 property owners were interviewed). It is submitted the survey indicates that 94% of property owners were of the view that they would prefer not to have exclusivity clauses in their lease agreements. A range of reasons for this view is also given. Further, 56% of property owners were of the opinion that “exclusivity clauses had no benefit (presumably to property owners) and were actually detrimental to the management of their assets”.
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SOUTH AFRICAN PROPERTY REVIEW
Reference is also made in the CCRED submissions to SAPOA’s complaint regrading exclusivity clauses. Spar – In Spar’s submission, the company indicates the following points of interest regarding exclusive leases: lease agreements are on average for an initial period of 10 years, often with an option to renew. Most Spar retailers are located in small developments and require long-term leases to secure financing. Approximately 30% of Spar’s stores are subject to exclusivity clauses in lease agreements. Spar estimates that most retailers take approximately three years to break even and then need to earn a return on their investment. Spar stores are subject to exclusivity arrangements in order to reduce the risk of opening a new store.
The retailers each argued that the substance of Massmart’s complaint referral does not meet the strict procedural and content requirements to allow the respondents to deal with the complaint Woolworths – Woolworths submits that exclusive lease agreements should only endure for the period necessary to recover a retailer’s initial investment, and that they should be for no longer than five years. Massmart – The section of Massmart’s submission in relation to exclusive lease agreements is very brief. Massmart did, however, also refer to (and attach a copy of ) its complaint referral that is currently before the Competition Tribunal. The short submission states that exclusive lease agreements are anti-competitive, and that they prevent entry and expansion by new retailers into areas where the three large retailers are incumbent.
Pick n Pay – Pick n Pay provided a lengthy and detailed submission, which includes the following points on exclusive leases: exclusive lease agreements have not diminished competition between large grocery retail chains. Because Pick n Pay sets its prices on a national basis, there is no reason to believe exclusive leases have an impact on prices set in particular stores. Informal retailers are not generally affected by exclusive lease arrangements. From a competition law perspective, the appropriate manner in which exclusive leases should be assessed is to determine appropriate parameters of the relevant geographic market and whether exclusive lease arrangements substantially prevent or lessen competition. Based on previous decisions of the Tribunal, a relevant geographic market would be within a two- to five-kilometre radius, and in certain cases would be within a 10- to 30-kilometre radius.
Massmart’s complaint referral The retailers each argued that the substance of Massmart’s complaint referral does not meet the strict procedural and content requirements to allow the respondents to deal with the complaint. Massmart conceded that its pleadings needed to be improved in respect of the abuse of dominance allegations. However, Massmart argued that it makes out a proper case in terms of Section 5, regarding vertical restrictive agreements. The focus of Massmart’s allegations of vertical restrictive agreements was clarified as being a “network of exclusive lease agreements” in South Africa, which together have the effect of substantially lessening or preventing competition by impeding Massmart from competing in the national market for fresh groceries. Although the principle of a network of agreements has been recognised in European case law, there was some debate as to whether this type of case fits within the parameters of Section 5 of the Competition Act. Counsel from both sides submitted that where pleadings are found to be defective, the usual position is to grant the party an opportunity to rectify its pleadings and only where pleadings are irremediable should they be struck out.