Retail sectors are under the spotlight across the globe
July 10, 2009
 By Ann Crotty
'The existence of legal restrictions and market failures in retailing and the supply of daily consumer goods is one of the most worrying questions for competition authorities throughout the world."
This was not a comment made by our own competition commissioner last week when he announced the commission's investigation into the South African supermarket industry. It was made by the Spanish competition authorities earlier this year.
It could as easily have been made by the UK, EU, Irish, Australian, New Zealand or Norwegian competition authorities because the reality is that everyone is doing it.
Just about every competition regulator around the globe has either looked into the workings of their retail sector or will be in the very near future.
The interest reflects the fact that governments across the world are keen to ensure that "consumers are well served by an industry that accounts for a significant proportion of weekly household expenditure", as the UK competition commission wrote in its report on the subject last year.
Given the high level of interest that surrounds the retail sector in other jurisdictions, accusations that the South African competition commission is responding to pressure from the "new government" seem ill considered. They also reflect a poor understanding of the workings of the competition authorities in this country.
Far from acting at the whimsical instruction of the government of the day, over a year ago the competition authorities announced their intention to focus on key sectors of the economy.
High profile
To this end they have been looking closely at various segments of the food sector, such as dairy, bread and milling, as well as the building industry.
So far, evidence from the high-profile investigations into the food industry certainly justify the commission taking a closer look at other layers of this industry, particularly the all-important retailers.
In addition the Competition Act of 1998 states that one of the purposes of the act is "to provide consumers with competitive prices and product choices". No doubt a key objective of the investigation will be to establish whether or not consumers are getting these.
Given all of these considerations it is easy to see why local retailers did not seem surprised by the competition commission's announcement last week that it "has initiated an investigation against major South African supermarket chains Pick n Pay, Shoprite/ Checkers, Woolworths and Spar (who together comprise more than 60 percent of the market by turnover), as well as the major wholesaler-retailers Massmart and Metcash, for alleged contraventions" of the act.
Although the timing of the investigation had been prompted by concerns raised by various stakeholders and the public in general, the commission decided that, before it responded to these concerns, it would undertake its own "preliminary review" of industry practices.
Results from this preliminary review identified several potential concerns. These included concentration of buyer power, long-term lease agreements, category management and information exchange.
Similar concerns have been raised in all of the countries that have investigated their retail industry and will no doubt be referred to by some of the wide range of parties involved in the commission's investigation.
In March this year the European Parliament approved a resolution aimed at dealing with a variety of concerns in the industry.
These included that, throughout the EU, retailing is dominated by a small number of supermarket chains; that retailers were "fast becoming gatekeepers, controlling farmers' and other suppliers' only real access to EU consumers"; and that large supermarkets were abusing their buying power to force down prices paid to suppliers to unsustainable levels and impose unfair conditions upon them.
Below cost
The EU resolution also stated: "Pricing below cost, while not viable in itself for any undertaking, can only be applied by big (diversified) undertakings for a short period of time and only to drive their competitors out of the market."
The EU believed that, in the long term, such practice benefited neither consumers nor the market as a whole.
Concerns were raised about instances where dominant players used their position to enforce excessive payment deadlines, listing charges, threats of delisting, slotting allowances, retrospective discounts on goods already sold, unjustified contributions to retailer promotion expenses or insistence on exclusive supply.
Significantly the EU resolution dismisses one argument that might have supported our own retailers, which is that their power acts as a countervailing force to the power enjoyed by a handful of large food manufacturers.
"In some member states," remarked the EU, "both the buying and selling side of the market tend to be equally concentrated, thus aggravating the distorting effect on the market."
The most recent investigation into the retail sector undertaken by the UK's competition authorities gives some indication of the very wide range of issues that interest groups in South Africa might expect our own commission to address in its investigation.
These include: the need to protect small shops that contribute to a sense of community identity; widespread availability of cheap alcoholic drinks, which was encouraging alcohol consumption, binge drinking and leading to violence, disorder and loss of social cohesion; the reduction in choice of grocery stores was limiting the choice of healthy food options and contributing to obesity; grocery retailers' visual requirements for the presentation of fresh produce resulted in waste and increased pesticide use, which has adverse environmental effects; working conditions among agricultural workers supplying the large retailers were of concern, particularly in relation to developing countries.
The rather unwieldy list of issues that the UK competition authorities were expected to address is probably a reflection of the very large role that powerful retailers play in the lives of consumers in today's concentrated markets.
But as the UK authorities remarked: "There are limits as to how far these issues can be addressed in the context of our investigation."
Competition policy
Its 2008 report noted that an effective competition policy made a key contribution to the broader economy with a positive impact on economic growth, innovation and living standards.
"The benefits to consumers (of effective competition policy) include lower prices, better product quality, greater choice and more innovation."
What the UK authorities had to establish had to do with whether the interests of UK consumers are well served by grocery retailers, whether competition is effective and whether it will remain so.
In its final report the UK competition commission found that despite all the issues "in many important respects, competition in the UK groceries industry is effective and delivers good outcomes for consumers".
Those who have come to expect high drama in this area of public policy may be disappointed to hear that the steps being taken to address the perceived problems in the UK were limited to making recommendations to the government and tightening the provisions of the Supermarket Code of Practice with the possibility of establishing an ombudsman.
In the EU the focus was also on making recommendations to national governments.
Nandi Mokoena, the manager of strategy and stakeholder relations at the competition commission, seems keen to restrain unrealistic expectations among South Africa consumers.
Although the commission has concerns, it has to investigate rigorously each of these concerns before determining whether or not they lead to anti-competitive outcomes. Mokoena refers to what is known as the "rule of reason" contravention of the Competition Act, which, unlike a straightforward price-fixing contravention, requires that the commission shows the effect of the conduct and determines whether the anti-competitive effect outweighs the pro-competitive effect.
"We have to show the effect of the conduct that concerns us, we can't just talk about it conceptually," said Mokoena, noting as an example that in some areas exclusive lease agreements could actually be pro-competitive. She refused to be drawn on any possible outcomes, noting that it was a highly complex situation.
She also explained that the commission had not yet decided how to process input from the public. It might be persuaded by the strongly favourable response to the public hearings into banking to provide a public forum.
As for how long it would take, Mokoena said that would be determined by the degree of co-operation received.
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