The War of the Titans
1 December 2013Without Prejudice
The current feud between Massmart and Shoprite regarding Shoprite's exclusive rights in terms of the lease in CapeGate shopping centre is rekindling competition concerns in the property and retail industry over what is considered common practice.
Shoprite recently filed an urgent application for an interdict in the Western Cape High Court, challenging the legality of a Walmart-owned Massmart Game store in the CapeGate centre competing directly against its outlet in the same mall following the introduction of Game's Foodco section.
Shoprite's legal challenge is based on an exclusivity agreement with CapeGate landlord Hyprop Investments, which grants it the right to operate as the sole supermarket, grocery store and liquor store in the centre, with the exception of Pick 'n Pay and Woolworths. Massmart responded by claiming that Shoprite was effectively preventing competition by enforcing these rights and the matter has been referred to the Competition Commission for investigation.
This matter revives concerns expressed during the 2009-2011 investigation by the Competition Commission into possible collusion among supermarket chains by the Food Sector Study team.
The commission had been enquiring into the retail sector's pricing of "staple foods" for some time and in the investigation, focused on four areas of concern, abuse of buyer power, category management concerns, collusion through information sharing, and exclusive long-term lease agreements. While the investigation by the Commission cleared South Africa's major supermarkets of collusion in 2011, it flagged some "competition concerns."
In its investigation, the Commission considered whether exclusive supply agreements would be anti-competitive and contravene the Act on the basis that they would fall foul of s5(1) and s8(d)(i) of the Competition Act.
- s5(1) prohibits a company from entering into an agreement with a customer or supplier, which has the effect of substantially preventing or lessening competition in a market, unless a party to such an agreement can prove technological gains, efficiency gains or other pro-competitive gains that outweigh that effect.
- s8(d)(i) prohibits a dominant firm from requiring or inducing a supplier or customer to not deal with a competitor.
While no charges relating to contraventions of the Act were pursued, the issue regarding long term leases remained open for investigation and the commission decided to engage all relevant stakeholders with a view to finding a constructive solution to this problem. However, further reports on the issue were never published. In two recent related judgements, the Competition Tribunal approved mergers that involved the acquisition of control of the "Somerset Mall" letting enterprise. (An interesting, and perhaps not entirely co-incidental factor in relation to these was that the primary acquiring firm in one of those mergers, and a major unit holder of the primary acquiring firm in the other, was Hyprop Investments, the landlord of the CapeGate Centre).
In those judgements, the Tribunal considered whether the exclusivity clause in the lease between the landlord and anchor tenant Pick 'n Pay, had the effect of preventing small businesses from accessing Somerset Mall as per the Commission's finding.
The Commission, in coming to its recommendation to the Tribunal, investigated:
- the current vacancy rate at Somerset Mall,
- the number of entries and exits of tenants over the past three years,
- the number of lease agreements, which terminate within the next two years; and
- whether any expansion was envisaged in the next two years.
Having had regard to these factors, the Commission concluded that there were practical possibilities of small business entering Somerset Mall and that the exclusivity clause accordingly had the potential of excluding small business. The Tribunal agreed and held that the exclusivity clause raised potential substantial public interest concerns. The merger was approved subject to a condition that the merging parties negotiate in good faith with Pick 'n Pay with a view to reaching an agreement to remove the exclusivity clause.
The Somerset Mall judgements, stopped short of declaring the exclusivity clauses to be prohibited or requiring they be removed from the leases but indicate a clear aversion to such clauses. However, on the facts of these judgements, it is arguable that the objections would apply only where the clause impacts on the weaker of two unequal players (in these cases, smaller businesses that might be competing with Pick 'n Pay).
However, where two retail giants are involved, the position of the Commission and Tribunal may well be quite different. Whatever the outcome of the Competition Commission's latest investigation into exclusive lease agreements, the law is clear — if exclusive supply agreements (especially, but not only) leases containing exclusivity clauses, lessen competition, competition authorities will investigate them and possibly look to lay complaints of contravening the Act against the offending parties.
Accordingly, it is advisable for companies to review their exclusive supply agreements and be advised as to whether there are competition law concerns or not.