9 February 2016
Opinion & Analysis
Reena das Nair and Shingie Chisoro
IN TIMES of escalating prices of goods and services, vigorous competition between grocery retailers or supermarkets can result in a much-welcome price reprieve for consumers of basic foods.
Greater competition has the added benefit of offering consumers a wider choice of quality products and services. Not only does a competitive, modern retail sector benefit consumers, it plays a major role for suppliers, as supermarkets are a key route to market for their products.
Yet, the South African supermarket industry remains concentrated, with large, well-known names — Shoprite/Checkers, Pick n Pay, Spar and Woolworths — dominating this space.
This reflects the high barriers to entry faced by new players wanting to enter and grow in the industry, as shown in a recent study by the Centre for Competition, Regulation and Economic Development at the University of Johannesburg.
Barriers to entry and how they can be overcome are especially relevant for policy makers in SA, where there are significant challenges to opening up the economy to wider participation by historically disadvantaged individuals.
But there have been success stories. Fruit & Veg City/Food Lover’s Market and Botswana-based Choppies Enterprises are successful new entrants in the supermarket space (although they launched at different times). Both entered in niche areas on which the incumbent supermarkets were not focused — Fruit & Veg City on fresh produce and Choppies on low-income consumers in mining towns located near transport nodes.
DIRECT procurement from municipal fresh-produce markets cuts costs for Fruit & Veg City, which allows it to offer lower-priced fresh produce (its prices have been claimed to be between 20% and 25% lower than those of other supermarkets).
This also provides an important source of demand for smaller farmers who are not able to deal directly with the large supermarket chains.
As Fruit & Veg City built a footprint it could support, it made investments in distribution centres and logistics networks, which are significant barriers to entry.
On the back of strong growth in Botswana, SA and Zimbabwe, Choppies has also been able to invest significantly in distribution centres and a transport fleet to move goods to their supermarkets.
Other major barriers for small retail players include a lack of business management and operational skills, retail capabilities, and access to finance.
Strong and flexible business models have allowed Fruit & Veg City and Choppies to grow and diversify into different formats and markets. Fruit & Veg City moved into a higher-income target market through Food Lover’s Market and into other formats, including convenience foods and liquor.
Choppies managed to penetrate SA’s low-income market by focusing on relatively cheaper products, with a strong emphasis on its own-label brands, extended shopping hours and convenient locations near transport nodes.
Often reported to be a declining segment of SA’s retail industry, clusters of independent retailers —
ranging from small township spaza shops to modernised superettes and supermarkets — have shown surprising resilience and growth recently.
Spurred by income from social grants, these retailers are an important alternative to supermarkets for low-income consumers in urban and township areas.
Bulk-buying groups have reduced certain barriers to entry faced by independent retailers that procure through them — including barriers of economies of scale and scope, advertising and promotion costs, and training and retail capabilities.
However, the lack of access to finance, distribution centres and logistics networks still place independent retailers at a considerable disadvantage relative to incumbent supermarket chains.
While these barriers are inherent characteristics of the supermarket sector, the anticompetitive conduct of dominant supermarkets can also result in barriers.
In SA, the historic practice of long-term, exclusive lease agreements entered into by incumbent supermarkets and property developers in shopping centres has raised exclusionary concerns. These stipulate, at the insistence of the anchor tenant (a supermarket), that no rival supermarket can operate in the same mall.
THE exclusivity requirements often span decades, creating a barrier to entry or expansion for rivals. New entrants and specialist retailers such as butcheries and bakeries, particularly in shopping centres in rural areas, are negatively affected by this. Exclusive leases have been the subject of Competition Commission investigations and a current market inquiry.
The development of Fruit & Veg City, Choppies and independent retailers demonstrates the competitive value of a diversity of retail business models — for both consumers and suppliers — and emphasises the importance of keeping the retail space open to entrants to allow them to gain a foothold in the market.
Policy makers can intervene to tackle some of these barriers. They could facilitate voluntary and legally enforceable undertakings by supermarkets either not to enter into exclusive leases, or to reduce their duration and scope.
They could also consider open and flexible retail spaces in urban planning to ensure a mix of formats and tackle exclusivity through planning policies.
In other countries, urban development has played a vital role in opening retail markets to wider participation and ensuring competition to incumbents.
Various support measures for new entrants can also be instituted, including facilitating access to distribution centres and logistics networks — either through funding their construction, management and operations, or through facilitating joint initiatives with incumbent supermarkets.
Levelling the playing field for new entrants by encouraging suppliers to offer them fair prices and terms of supply — possibly through encouraging voluntary codes of conduct — would also go a long way to improve their competitiveness.
GIVEN that effective cash-flow management and access to finance is a major constraint for new entrants, providing financial assistance may help them get past initial loss-making phases. But any financial assistance provided without upskilling capabilities is not sufficient to attain sustainable inclusive outcomes.
To build retailer capabilities, the government should foster long-term, public-private partnerships between major suppliers, wholesalers, buying groups and independent retailers to ensure successful transfer of knowledge and skills in advertising, marketing, cash flow management, inventory, and waste management, among other essential skills.
• Das Nair and Chisoro are researchers at the Centre for Competition, Regulation and Economic Development at the University of Johannesburg