The grocery retail market inquiry received evidence of instances in which the national supermarket chains waived exclusivity provisions in order to allow competitors – including other national supermarket chains, speciality stores and in limited instances, the emerging challenger retailers – to access shopping centres.
While some national supermarket chains are becoming more lenient regarding the enforcement of exclusivity against small and specialist stores, the inquiry remains concerned that they still require limitations on the size of these competing line tenants. May 29 marks one year since the inquiry was publicised and we will continue to reflect on the Grocery Retail Market Inquiry.
The inquiry finds that the restrictions on size have the effect that line tenants cannot effectively compete and grow their businesses beyond the required floor space imposed by the landlords at the behest of the national supermarket chains.
Digital grocery retail stores or eCommerce has not disrupted the South African grocery retail market, the sector requires bold entrepreneurs and disruptive innovators to change the current status quo of the South African retail.
The retail and wholesale evolution has certain trends that the current leadership has not diagnosed and that gives us an understanding that reflecting on history, provides propositions that are thought through, futuristic, inclusive growth and high emphasis of stakeholder capitalism as opposed to shareholder capitalism.
Small businesses in the grocery retail market will only add value when the NBA playing field is set to a balance and there is enough market access to smaller retailers, mainly in the townships and rural communities.
The pattern of these long-term exclusive lease agreements appears to have persisted over long periods with the initial lease period being generally 10 years. When regard is given to the renewal clauses in these lease agreements, some of these contracts could endure for at least 30 years.
The Inquiry finds that given the high levels of concentration in the formal retail channel, primarily through national supermarket chains, the foreclosure effects that arise as a result are significant.
While the historic focus of the effect of exclusive leases was on competition between the national chains, the Inquiry has focused on the effect of such leases on the entry and expansion of smaller challenger retail chains and independent stores, including specialist retailers.
The inquiry has found that exclusive leases have substantially hindered the emergence of challenger retail chains to the main four national retailers and has also served to prevent economic participation by small independent retailers, including specialist retailers.
The Statement of Issues (SOI) proposed to assess competition in the grocery retail sector according to these stated objectives.
- Objective 1: The impact of the expansion, diversification and consolidation of national supermarket chains on small and independent retailers in townships, peri-urban and rural areas and the informal economy.
- Objective 2: The impact of long-term exclusive lease agreements entered into between property developers and national supermarket chains, and the role of financiers in these agreements on local competition in the grocery retail sector.
- Objective 3: The impact of the dynamics of competition between local and foreign national operated small and independent retailers in townships, peri-urban and rural areas and the informal economy on competition.
- Objective 4: The impact of regulations, including, among others, municipal town planning and by-laws on small and independent retailers in townships, peri-urban and rural areas and the informal economy.
- Objective 5: The impact of buyer groups and buyer power of the national retail chains on small and independent retailers in townships, peri-urban and rural areas and the informal economy.
- Objective 6: The impact of certain identified value chains on the operations of small and independent retailers in townships, peri-urban and rural areas and the informal economy.
In conducting this Inquiry due regard was given to ensuring that the processes followed were both thorough and fair. The Inquiry reached out to numerous stakeholders operating at different levels of the grocery retail value chain across South Africa and received both written and oral submissions.
The stakeholders that participated included the national supermarket chains, small and independent retailers, spaza shop owners, FMCG suppliers, consumers, local authorities, provincial and national government departments, and industry regulators. In addition, the Inquiry also conducted site visits to spaza shop owners, grocery retailers, wholesalers and other stakeholders at a number of sites in towns and cities where local grocery retailing issues had been brought to its attention.
On the basis of these submissions, the Inquiry published its Preliminary Report on 29 May 2019 setting out its initial findings and proposed recommendations, and invited stakeholders to make submissions in response.
Having considered the views and submissions from stakeholders arising from the Preliminary Report, this report reflects the Inquiry’s final findings and recommendations (“the Final Report”). The Inquiry received numerous submissions from stakeholders in response to its Preliminary Report. These included various national and provincial government departments, industry regulators, industry associations, the national supermarket chains and emerging challenger retailers, small and independent retailers, buyer groups, property owners or developers and managers, banking institutions, FMCG suppliers, spaza shop owners, and academic research institutions.
Broadly, the Inquiry found that a combination of features in the grocery retail sector may prevent, distort or restrict competition. In particular, three principal areas of concern warrant remedial action: long-term exclusive lease agreements and buyer power; competitiveness of small and independent retailers; and the regulatory landscape.
Market structure and the inquiry’s scope of analysis
Contextually, the grocery retail sector is characterised by low levels of economic regulation and openness of markets. The openness of the sector has enabled the increased expansion of corporate retailers to the displacement of small and independent businesses. This displacement has been further exacerbated by the ease of entry in the informal segment, leading to the replacement of small and independent retailers, which were primarily family operated and mainly serviced rural and non-urban communities, before the boom of shopping malls in these areas.
It is within this context that the Inquiry has considered the competitive dynamics in the grocery retail sector. Loopholes in the constitution of South Africa not only highlighted these elements but also its inability to restructure the economy 26 years in democracy, these findings require future leaders in municipalities, provincial and national governments to be conscious and mindful in policy formulation to make an impact in transformation.
There are low barriers to starting survivalist informal spaza shops. However, there are significant challenges to building them into thriving, competitive businesses that can enter the higher value segments within grocery retail, such as tenancy in formal shopping malls. There is a need to remove impediments to the increased and effective participation of small, medium- and micro-sized enterprises (SMMEs) and operations owned by HDIs in the grocery retail sector.
Making markets more inclusive, as anticipated by the provisions on the purpose of the Act, not only addresses social imperatives but also provides a platform for more competitive markets, which benefit consumers.
The Inquiry considered the market structure of the grocery retail sector and found that it is complex, consisting of numerous players including manufacturers or suppliers of grocery retail products, buyer groups and distributors, wholesalers, hybrid wholesalers (i.e. wholesalers that also have retail supermarket offerings), national supermarket chains, speciality stores, emerging challenger retailers, independent retailers (formal and informal) and consumers.
At the supplier level, there are a number of firms who manufacture and supply various FMCG products to different retail platforms. These suppliers are of varying size, with a limited number of large multi-product firms. Similarly, the wholesale level comprises a number of formal players such as buyer groups and cash and carries, who primarily supply the independent and informal retailers such as spaza shops.
The retail level of the value chain is segmented between the formal and informal channels. The formal retail segment is characterised by the presence of the incumbent national supermarket chains, speciality stores and the emerging challenger retailers, while the informal segment mostly has an active presence of small and independent retailers including general dealers and spaza shops. The sale of grocery products takes place through both formal and informal retail channels.
The formal channel is the larger and more important distribution segment. Within the formal channel, a large proportion of grocery product sales takes place in shopping centres which are primarily occupied by national supermarket chains as the anchor tenants.
Many studies are conducted but the impact of change inspired by different market inquiries are minimal and this piteous situation will require monitoring and evaluation of recommendations, so the predicted transformation is realised.
Pension Funds, Development Finance Institutions and commercial banks must initiate a strategy to assist previously disadvantaged SMMEs in the Grocery Retail Market to own the Township and Rural economy, while also they are allowed or given market access to participate at Mega malls such as Sandton City, Waterfront Mall, Canal Walk Mall, Hydepark Mall and Eastgate Mall. The development of entrepreneurs in the Grocery Retail Market is a sustainable solution for the future of Township Economy and it’s Revitalization nationwide.