Anchors hold fast in face of lease storm

But exclusive rental agreements scupper the chances of smaller retailers, critics argue

AS the Competition Commission deepens its inquiry into the grocery retail sector, industry pundits are concerned that amendments to exclusive leases at shopping malls, which are claimed to favour big retailers, will come at a cost.

The inquiry, announced in May last year by Economic Development Minister Ebrahim Patel, is set to ruffle the feathers of long-standing anchor tenants such as Shoprite, Spar and Woolworths.

An exclusive lease secures a site in a mall for a certain number of years, sometimes as long as 40, meaning the space is restricted for use by that specific retailer. These leases also stipulate to what extent other retailers that sell similar products are allowed to establish a presence in a mall.

Spar Group CEO Graham O’Connor said although he welcomed investigations into the sector, the issues around the exclusive leases are “a major concern. It’s a concern about the time the investigation will take and the costs involved.

“If the landlords, who seem to be driving this, want to put other retail sites into where we operate, we might as well renegotiate the rent, because that is part of the same equation.

“As far as the head [exclusive] leases go, when you sign up for a lease you know what the landscape is,” said O’Connor.

According to the chairman of the inquiry, Halton Cheadle, the exclusivity clauses in lease agreements between property developers and national supermarket chains have been one of the main barriers to entry for small independent retailers.

Cheadle said part of the reason the commission decided to launch the inquiry was that “despite various advocacy attempts by the commission to bring this to an end, it hasn’t come to an end”.

The complaints regarding the exclusivity clauses were recent and “at this point all we have been given is the terms of reference, so I would imagine that all this stuff is going to come out”, he said.

In 2014, Massmart lodged a complaint with the commission calling for an end to exclusivity clauses. The company claimed the clauses restricted it from opening new stores in malls. At the time the group, which owns RUFFLING RETAIL FEATHERS: Economic Development Minister Ebrahim Patel BOTTOM LINE: Spar Group CEO Graham O’Connor is concerned about costs chains such as Game, DionWired, Makro and Cambridge, described the exclusive lease agreements entered into by the major retailers as “intuitively anticompetitive”.

Brian Leroni, Massmart’s corporate affairs executive, said this week the reliance placed on exclusivity clauses appears to have created a historical form of “contractual entitlement”.

“That represents a cynical attempt to maintain the status quo by closing the door on new competition. If left unchecked it is our view that it will be the entrenched anchor grocery retailers — rather than market forces — that will control competition in the grocery sector,” said Leroni

According to the commission’s initial statement on the grocery retail sector inquiry, which was released this week, five major national supermarket monopolies account for between 80% and 90% of the food retail market in the South African grocery supermarket sector.

Michael Clampett, the head of retail asset and property management at Attacq, the owner and landlord of the newly developed Mall of Africa, said that from a rental and rent per square metre perspective nothing should change as a result of the inquiry.

“We don’t use exclusive leases to negotiate rentals or any other commercial terms. It’s got more to do with when you need to get a new shopping mall off the ground. You need a certain amount of commitment before the banks can fund you,” said Clampett.

“So there are sometimes leases that contain clauses that say you can’t have a pharmacy, because it competes directly. From a landlord’s point view, it’s also very restrictive and we don’t like it.”

Clampett said Attacq had engaged with the commission through the South African Property Owners Association, and was anticipating changes regarding exclusive lease agreements as a result of the inquiry.

Tony Ehrenreich, Cosatu’s provincial secretary in the Western Cape, said that exclusive leases posed a threat to those employed by smaller retailers because the major players were grabbing all the market share.

“As long as the sector remains dominated by the big players, those uncompetitive practices have a debilitating effect on the economy and have long-term effects on growth and equity,” said Ehrenreich.

The final report on the grocery retail sector will be submitted to Patel at the end of May next year.

The entrenched anchor grocery retailers — rather than market forces — will control competition