There are cracks emerging in the grocery retail sector from the practice of established players trying to keep competition out by entering into “exclusive leases”.
This follows Massmart’s Constitutional Court victory against one of the “exclusive leases” wielded by rival Pick n Pay that could redirect the continuing fight around these controversial mall monopolies towards the mall owners themselves.
David North, group executive of strategy and corporate affairs at Pick n Pay, said: “This is a complicated, technical judgment that focuses on whether legal action to enforce our contract should have been directed at our landlord or at Massmart. The high court said it should have been directed against Massmart, but the Constitutional Court says it should be directed at our landlord.”
It matters because Spar and Shoprite have separate court cases pending against Massmart to defend their exclusive leases at, respectively, the King Senzangakhona Shopping Centre in Ulundi and at Mthatha Plaza mall.
Reena das Nair, senior economist at the Centre for Competition, Regulation and Economic Development, a University of Johannesburg unit, said: “It potentially opens the door to taking cases against the actual property owner instead of the rival. It puts the property developers in a bit of a tricky situation.”
Massmart is pursuing a de facto defiance campaign against exclusive leases in various malls.
Malls usually give exclusive leases to one or two major retail chains so that no other tenants are allowed to compete with them, especially in the fresh food arena.
It is a historic practice often perpetuated by long-term leases with renewal clauses, said Das Nair.
“You will probably find this is more common in older shopping malls.”
The justification is usually that these monopolies are necessary for retailers to recoup their investments – an argument that wears thin after a decade or two.
Mall owners themselves don’t like this practice and the SA Property Owners’ Association (Sapoa) lodged a competition complaint against Pick n Pay, Spar and Shoprite about it in 2014.
This helped spark the Competition Commission’s retail market inquiry, which is looking into the issue.
Sapoa’s legal manager, Mumtaz Moola, said: “The problem with exclusive leases is that many of them are historical and many of our members have inherited exclusive leases by acquiring new properties.
“Sapoa’s members are against exclusive leases as they create a barrier to entry in the marketplace and restrict competition. The Competition Commission needs to make a ruling on the anticompetitive nature of exclusive leases once and for all.”
Das Nair said that the wording and interpretation of the Competition Act make it all but impossible for a new entrant to challenge exclusive leases, causing several attempted cases to be non-referred by the Competition Commission.
“You would have to show that, by Massmart not being in the mall, you are harming consumers substantially. The burden of proof is large,” she said.
“What I found quite striking [in the ruling] was the emphasis on unlawful competition. I wonder if it might stimulate rivals to bring these cases outside the competition regime,” she said.
Ironically, it is now the world’s major retail multinational that is fighting a practice that is usually blamed for stifling small independent butcheries and bakeries.
Ever since the US retail giant Walmart bought a controlling stake in Massmart in 2011, it has been trying to get into the grocery market. It claims that the exclusive leases are stopping a fair competitive fight and undermining its business model.
Massmart has rolled out grocery sections at 73 of its more than 100 Game stores, often in defiance of existing exclusive lease arrangements.
At Cape Gate Mall, Massmart’s Game store had a lease that specifically prohibited it from running a “general food supermarket”.
However, Massmart believes that the phrase ‘general food supermarket’ is imprecise.
“We don’t believe we are a supermarket, and we are still waiting for confirmation from the courts as to what they determine a supermarket to be,” spokesperson Annaleigh Vallie told City Press.
While getting sued by all its major competitors, Massmart has also taken a case to the Competition Tribunal against Pick n Pay, Spar and Shoprite, which will only run its course in two to three years, said Vallie.
The bigger fight
In submissions to the retail market inquiry, Pick n Pay has strongly defended exclusive leases.
It argues that the leases have no real anticompetitive effect because all its prices are set nationally anyway.
Pick n Pay also claims that, “in many instances”, it has allowed small retailers to set up in malls where it holds sway.
Massmart attacked these claims in a countersubmission, saying that its rival was being vague about the exceptions it allegedly allowed.