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Retail turf war heats up

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A fight over grocery turf at shopping malls has become so bitter that “if an egg rolls through the front door of a Game store, Pick n Paywill probably sue.” The lawyer who told this to The Witness, Chris Charter, is fighting one of three battle fronts against the major supermarket chains for Massmart, as the retail giant seeks to roll out grocery outlets at malls. KZN consumer experts said shoppers would enjoy promotional discounts and slightly lower food prices if Massmart won the battle for the right to open its Foodco outlets in almost every Game store in the country. Pick n Pay and Shoprite have gone to court and to mall bosses to demand that they enforce old exclusivity agreements with centre owners, which restrict them from signing-up rival supermarkets like Foodco. The malls have now joined Massmart’s fight. Last week, a spokesperson for the Competition Commission revealed to The Witness the South African Property Owners Association (Sapoa) repre- senting landlords has filed a complaint, “which will be fully investigated”.

Meanwhile, Charter said Massmart would file a “comprehensive” complaint to the Commission this month. And in a blitz, which has caught supermarkets off-balance, Massmart now controlled by U.S. giant Walmart has already rolled out Foodco sections at 55 malls around South Africa, often in open defiance of exclusivity agreements. One retail source said many malls had “developed amnesia” over the contracts in failing to stop Foodco. The retailers have fought back with court actions at three malls. A Game spokesperson confirmed that expensive refrigeration equipment established at Game’s Midlands Mall store in Pietermaritzburg is standing idle, as a result of one Pick n Pay legal action this year. Meanwhile, Charter alleged that Pick n Pay had launched a “pre-emptive strike” with letters to malls in KZN and elsewhere, demanding that they enforce the exclusivity agreements and ban the Foodco outlets from operating. He could confirm the letters, because they had been copied to Game stores. Many KZN mall-goers are already doing their monthly shopping at Game food stores at Gateway, Westwood Mall in Westville, West Street, and Pinecrest Centre in Pinetown.

David North, head of strategy for Pick n Pay said: “If you enter freely into an agreement, you should honour it. We don’t want to go to court any more than anyone else does. Unfortunately, in a couple of cases, we have had to do that to stop our lease agreements from simply being ignored.” Sapoa CEO Neil Gopal said “most mall owners would no doubt welcome” any ruling to overturn the restrictions. “We believe enforcement of exclusively clauses is anti-competitive as consumer choices are significantly limited,” he said. Adding fuel to the fire between the giants is that Massmart has already been ordered to spend R200 million to develop small suppliers, as part of its merger conditions with Walmart. Charter said it was “unfair” that Foodco was excluded from benefiting from some of the business from these same suppliers at restricted malls, while their rivals were cashing in on their goods. The pros and cons of mall exclusivity clauses SOUTH African supermarkets have enjoyed “exclusivity” deals at malls for decades — and analysts say the country’s vast malls network only exists because of them. But experts are split over whether they are fair, and whether their days are numbered. Dov Green, competitions chairperson at the SA Reit Association, said they originated with mall developers, who found they could attract anchor tenants if they promised that no supermarket rivals could sign up latLast month, the Association declared the clauses “anti-competitive'; alleging that the lease deals denied choice to consumers. Retail analyst Chris Gilmour said they began in an era when malls were risky investment propositions and that this no longer applied, with malls seen as reliable cash cows. “They’re going out of fashion, but the old contracts are still there,” he said. David North, head of strategy for Pick n Pay, claimed the deals actually added to consumer choice by generating more malls. “Exclusivity provisions … are freely entered into by landlords and prospective anchor tenants,” he said. “The landlord benefits because an attractive anchor tenant helps to draw other, quality businesses into the retail development. The tenant derives some security in terms of likely trade in order to justify their investment in opening a store in the particular development. This certainty on both sides has helped to underpin the strong growth in retail centres in this country. Consumers benefit from more stores, more choice and greater competition:’

Earlier this year, the Competition Commission said it was “concerned” that exclusive lease agreements raise “barriers to entry into grocery retailing,” and that Shoprite, Spar and Pick n Pay would sometimes use them to “compel landlords not to deal with competitors” However, it said the investigation lacked evidence to demonstrate anti-competitive consequences, and did not refer the issue to the Tribunal. But spokesperson Mava Scott said: “That investigation could unfortunately not go forward due to a technicality. We did have concerns about this practice and that is why we will investigate the new evidence.” He expected the Commission to rule against the agreements. Gloves come off as grocery sales slide THE battle for consumers’ grocery spend is set to become “desperate” at malls, as profits crumble and shoppers choose fewer items for their baskets. The KZN-based food price barometer by social action body, Pacsa, revealed that a basket of 32 grocery items had jumped in cost by almost 11% over last year.

Meanwhile, food price inflation doubled in the first four months of 2014. Pacsa director Mervyn Abrahams said his own family had stopped buying luxury items like ice cream, and had cut down on pricey goods like coffee and red meat. He said new Foodco stores would likely present short term discounts, “but once they’re established, I suspect we will see the same price increases as at other stores” Chris Gilmour, retail analyst for Absa Capital, said the “gloves-off” contest between the major stores followed a serious decline in food retail sales, and the “disruptive force” of the Walmart-backed Massmart. He said wealthy consumers continued to fill their carts, but that middle class and lower middle class shoppers were buying fewer items. Gilmour said the retail food business was “as tough as I’ve ever seen in 30 years” He predicted Massmart would “do whatever it takes” to treble its current small fresh food market share of three percent. He expected exclusivity agreements to be overturned, “though it may take some time” Lawyer for Massmart, Chris Charter, said it was busy with a massive push. “They will fight for as long as it takes.

Rowan Philp
The Witness
16 September 2014

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