Consumers and smaller retailers will reap the benefits of an end to exclusive lease agreements
For many decades, South Africa’s Big Four supermarket chains – Shoprite, Pick n Pay, Spar and Woolworths – prevented one another and smaller grocers from opening stores in malls where they were already anchored, to protect their turf and remain competitive and profitable.
Supermarket chains entered into exclusive lease agreements with shopping mall landlords, which meant that such chains were the only seller of specific goods in malls. Leases lasted as long as 30 years.
In essence, there couldn’t be more than two competing supermarket chains in certain shopping malls. This arrangement, made between supermarket chains and landlords, disadvantaged consumers because they then had limited shopping choices.
For landlords, the use of exclusive lease agreements was profitable because they would be guaranteed to keep supermarket chains as tenants for a long time. After all, supermarket chains take up large spaces in malls.
But the use of such exclusive lease agreements is coming to an end after the intervention of the Competition Commission.
In 2019, the competition watchdog concluded an inquiry into competition dynamics in the grocery retail market and recommended that the use of exclusive lease agreements by the Big Four supermarket chains must cease with “immediate effect”, and be phased out within five years.
It found that the use of exclusive lease agreements is anti-competitive and in contravention of the Competition Act, because they “hinder the emergence of challenger retail chains to the main four retailers and [have] also served to prevent economic participation by smaller independent retailers”.
Smaller retailers that were largely blocked from entering shopping malls, and thus relegated to opening stores on the periphery of malls, are Food Lover’s Market, Fruit & Veg City and Liquor City.
Pick n Pay, a big user of exclusive lease agreements at shopping malls where its stores operate, recently agreed with the commission that it would end the use of such agreements.
On 11 June, the Competition Tribunal, the body that has the final say on anti-competition matters in South Africa, confirmed the agreement between Pick n Pay and the commission.
This means that supermarket chains that are small, independent and controlled by historically disadvantaged people can open shops in shopping malls where there is already a Pick n Pay store.
According to the commission, Pick n Pay, which had 1,933 stores (Pick n Pay- and Boxer-branded stores) across South Africa by February 2021, has agreed to phase out exclusive lease agreements with its landlords over six years, ending on 31 December 2026. Pick n Pay has also agreed not to sign new leases that include exclusive clauses for new stores that it plans to open.
The agreement also applies to 761 Pick n Pay stores that are not owned by the retail giant but are owned and operated by franchisees.
“The commission has prioritised opening up markets by lowering barriers to entry and allowing [small, medium and micro enterprises] and HDI [historically disadvantaged individuals] firms to have a fighting chance in the economy.
“This is the only sustainable way towards a growing and inclusive economy,” said Competition Commissioner Tembinkosi Bonakele on 14 June.
Woolworths wasn’t found by the commission to be a big user of exclusive lease agreements. Meanwhile, other retailers have also scrambled to cancel exclusive lease agreements.
Shoprite, which operates Shoprite-branded stores, Checkers and Usave, also agreed with the commission and tribunal in October 2020 to stop enforcing exclusivity provisions in its lease agreements immediately. This applies to Shoprite-branded stores and others in its portfolio, including Checkers, OK Foods and Usave.
The commission has prioritised opening
up markets by lowering barriers to entry... This is the only sustainable way towards a growing and inclusive
economy