Tembinkosi Bonakele on big retailers and exclusivity contracts
Big retailers warned to exit exclusivity contracts or face law
The head of the South African Competition Commission, Tembinkosi Bonakele, says the days of the country’s biggest grocery retailers dictating who can rent out space in shopping malls are over.
The Competition Tribunal’s recent confirmation of an agreement reached by the commission for Shoprite Checkers to end its exclusive lease agreements has effectively consigned a practice that allowed retail giants to exclude competitors from South African malls to the dustbin of history, he says.
Shoprite will terminate its exclusivity agreements in rural areas immediately and phase them out over five years in urban areas.
Bonakele says the agreement to end exclusive lease arrangements between big retailers and landlords is a major victory for transformation and economic inclusivity.
“Shopping malls have become an almost indispensable platform for anybody who wants to go into retail.
“So the ability of anchor tenants to tie that space to exclusivity contracts has had a huge impact on people’s ability to enter retail in SA, whether grocery retail or specialised retail like butcheries, bakeries, fresh produce or even a biltong bar.
“All of those speciality, independent supermarket groups could not enter a South African shopping mall, where the biggest portion of our population shop.
“This now opens up all of that space to independents.”
Other retail giants will have to end their exclusive lease agreements or face legal action, says Bonakele, 44, a lawyer by training who joined the commission in 2004 and became commissioner in 2013.
“We believe these agreements are illegal.”
This was the conclusion of the commission’s 650-page report on the grocery retail market, which it released last year after a four-year inquiry.
“We have come to the conclusion after our analysis that they’re in violation of the Competition Act and these retailers must remove them. If they don’t, we will prosecute.”
He says giving exclusivity to the big retailers was justified for years on the assumption that it was the only way to raise capital to develop shopping malls.
“Our investigation showed this was flawed. We went to the financial institutions, who said they don’t actually care how many retailers developers have in their malls, who they are or their size.
“They said as long as they can show they’re going to get feet into the mall and will be able to repay them, they’ll happily finance it. It became clear there was no correlation between funding the mall and long-term exclusivity.”
Another flawed assumption was that because the major retailers played an indispensable role in bringing people to the mall, they should be compensated.
As a result of their exclusivity they could squeeze developers on the rental they were paying.
“Because they had this exclusive right you couldn’t play one off against another, so they were paying very low rentals.”
This led to smaller retailers having to pay higher rentals and in effect subsidise the anchor retailers.
“So they were paying the lowest rent and had the most favourable terms.”
Why did it take the Competition Commission so long to investigate all this?
“Because you assume this is what it takes for this market to function, for large retailers to offer lower prices — because of their ability to squeeze developers and suppliers. These are assumptions that are inbuilt.
“It’s only when you drill down into the logic of this business structure that you’re able to make the big change that we’re making now. You can’t just do it because it feels unfair.”
He says they looked at Australia, the UK and India.
“We liked the fact that there’s a thriving SMME sector in India that’s active in the retail sector.”
But India is “much more draconian” about protecting its retail space.
“They don’t allow foreigners in their retail space anywhere, not just in malls.
“It would be difficult for SA to say no foreigners should participate.”
So how does the competition authority feel about the recently introduced Gauteng township development bill, which will restrict foreigners from doing business in townships?
“We haven’t engaged with that process yet, but we’ll be looking at it closely because it does impact on competition.”
Something needs be done to develop the economy in these areas, he says.
“Our report raises concerns about the decline of the retail sector in the townships.”
It found that the major reason for this is crime, “above the entry of foreigners or large supermarket chains”.
The entry of both, including foreigners who are outperforming locals in the retail space, did, however, come through as a factor, he says.
“Foreigners are more organised, they have buyer groups and are able to get discounts. Some of them own the wholesalers that supply the spaza shops, so they get preferential pricing.”
Is that uncompetitive as far as the commission is concerned?
“It does lead to competition not working, but it’s not necessarily bad. It’s what we’re encouraging the locals to do. The fact that foreigners are ahead of the locals in doing such things makes them more competitive, but we’re not saying it’s unlawful or frowning upon it.
“There are some bad things, such as dealing in counterfeit goods. But as our report says, these are things law enforcement must deal with.”
It would also be in the interests of fair competition if municipalities did more to regulate the sector, he says.
“Just get the spaza shops registered, as a start.
“Do inspections to make sure they comply with bylaws and health standards.”
He says the commission made strong recommendations about how to support locals to make them more competitive,•“but we said nothing about banning foreigners”.
“Even if one banned foreigners, that would not be enough to support locals. There’s much more that needs to be done to make locals competitive.”
Are foreign entrepreneurs being used as a scapegoat for the failure of local entrepreneurs?
“I think South Africans really need to confront the problems facing them. Crime is the no 1 thing government can address to improve the business environment in the townships.
“If you want people to run retail, little stores and so on, the no 1 priority is to keep entrepreneurs safe.”
Deals led to smaller retailers having to pay higher rentals and in effect subsidising the anchor retailers