CompCom clamps down on the use of long-term exclusive lease agreements

The Competition Commission has found that the sustained use of long-term exclusive lease agreements between grocery retail giants Shoprite, Pick n Pay, Woolworths and Spar and owners of large shopping malls restricts competition to the detriment of consumers, thus contravening the Competition Act.

The competition watchdog is so concerned about these agreements that it has recommended that their use by the big four retailers cease with “immediate effect” and be phased out within three years.

Long-term exclusive lease agreements between retailers and shopping mall owners, which can be in force for as long as 45 years, allows retailers to be the only seller of specific goods to protect their turf. The agreements also include restrictions on the type of non-supermarket tenants that mall owners can allow to trade, thus restricting the entrance of competitors.

A blow for mall owners

The Competition Commission’s recommendation is a blow for shopping mall owners, who have vociferously argued that entering into an exclusive lease agreement with retailers is necessary as it allows them to secure a large tenant that pays higher rentals for a long period.

Its recommendation also potentially brings an end to a more than 40-year practice of shopping mall owners enforcing exclusive long-term lease agreements at a time when they are battling to secure high paying tenants due to SA’s struggling economy and a glut of competing shopping malls.

The recommendation on long-term exclusive lease agreements emerges from the Competition Commission’s grocery retail market inquiry provisional report, which was released on Wednesday. The inquiry has probed the impact of the entry of national supermarket chains into townships, peri-urban areas, rural areas, and the informal economy. The inquiry also probed the extent to which long-term exclusive lease agreements, regulations and by-laws have impacted on grocery retail sector competition.

Retailers given a month to comment

The competition watchdog’s recommendations do not come into effect immediately, but only after it has completed and adopted a final report. The Competition Commission has given the big four retailers a month to comment on the provisional report.

Thereafter, it can uphold its provisional recommendation that no new leases or extensions to leases by grocery retailers may incorporate exclusivity clauses or clauses that restrict product lines, store size and location of other stores selling grocery items in a shopping mall.

Shoprite, Pick n Pay, Woolworths and Spar were found to have enforced exclusive lease agreements to restrict the trade of not only their larger competitors but also their smaller counterparts, including Food Lover’s Market, Fruit & Veg City, Choppies and others.

Abuse of clout

Inquiry panel member Lulama Mtanga says the use of exclusivity clauses by the big four grocery retailers, which have a collective market share of 72%, promotes a level of concentration and restricts the entry and expansion of emerging retail chains into shopping malls nationally.

“These emerging challenger retailers and independent stores have been forced to seek alternative avenues in order to compete in the South African grocery retail sector,” she says. “The inquiry finds it concerning that their growth and competitive ability has been substantially limited because of exclusion from the shopping malls.” 

Mtanga believes the cessation of exclusivity agreements is warranted given that “these restrictions have serious detrimental effects on broadening the participation in the economy by SMEs [small and medium enterprises] and firms owned by historically disadvantaged persons”.

Woolworths, Shoprite and Pick n Pay were not immediately available to comment when reached by Moneyweb, while a Spar spokesperson said the retailer is “considering the recommendations included in the report for now”.

This is not the first time that exclusive leases have come under the spotlight.