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Restrictive mall leases should end

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BIG companies that benefit from operating in a generally free market are not always fervent ideological supporters of that market. Our recent corporate history offers many examples of anticompetitive structures and behaviour. There was the infamous cement cartel, as well as dubious tendering practices in the construction sector and collusion in setting bread prices.

Now, Massmart has complained to the competition commission that it is prevented from setting up food stores in malls where the property owner has an exclusivity agreement with other retailers. These agreements were traditionally offered to attract anchor tenants — big retailers that are regarded as magnets to shoppers, who will then also spend their money at other stores.

The exclusivity deals were hardly remarked on until Massmart decided to expand into selling food in its Game discount supermarkets. That changed the game for anchor tenants like Pick n Pay, which mounted a legal challenge to protect their turf.

This was successful: in one case, the Gauteng high court found that an exclusivity agreement between Pick n Pay and Hyprop at a Cape Town shopping centre was valid and had to be honoured. But Massmart argued the agreements were an easy option that enables “an entrenched clutch of anchor retailers to decide who they will compete against in malls”.

The competition authorities, in recent years, have tended to use the power at their disposal as a blunt weapon. They have often seemed viscerally hostile to the private sector generally and individual commissioners do not always seem to be aware of the nuances of the sectors they rule on.

For instance, it is widely argued that the building of stadiums for the 2010 Fifa soccer World Cup would not have happened without some collusion and co-operation among our leading construction companies.

Yet the sector has been hammered by the competition authorities, with heavy fines and intimidating language. Some industry insiders were muttering (and some analysts were saying openly) that the survival of some companies, and perhaps the sector itself, was at stake.

The competition commission has already investigated shopping mall leases involving Pick n Pay, Shoprite and Spar, but seemed unusually tentative. It found that anticompetitive effects “could not be demonstrated conclusively”, but “expressed concern about the potential dampening effects of exclusive leases on competition, particularly as they affect small competitors and potential entrants to the market”.

The SA Property Owners Association shares this concern. Perhaps it is time for the commission to be as aggressive in retail as it has been in other sectors. This week, Massmart stepped up its fight, placing a formal complaint before the competition commission.

The stakes are high for big retailers. Massmart’s Game stores had been identified as serious underperformers and the addition of the food offering was seen as part of the solution. Much time, energy and money has been invested, only for the process to be delayed by legal objections.

Pick n Pay, on the other hand, seems to be gradually taking the long road back to healthy growth after it fell behind its peers in the mid-2000s and lost its blue-chip status among investors in the retail sector. In a sense, at this fragile stage of its turnaround, it cannot be blamed for wanting to enforce a contract that is valid and standard in the sector.

However, it is not always enough to be right, and having one’s argument upheld by a court may be a technical victory, but it does not necessarily gain a company the moral high ground.

For a company whose founder, Raymond Ackerman, was so finely tuned to winning the emotional loyalty of consumers, the lease dispute should have been a golden opportunity for Pick n Pay to say: “We are not going to resort to exclusivity agreements to defend our territory. Instead, we welcome the new challenger and will compete on price, value and customer satisfaction.”

The fact that companies generally do not instinctively behave like this is the reason why we need a competition commission.

First published in the Financial Mail
6 November 2014.
To view the original article click here.

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