The South African Competition Commission has recently concluded its investigation into the potential effects on competition of exclusive lease agreements between supermarkets and their landlords. This note explains the implications of the Commission’s decision for firms that rely on exclusive lease agreements.
Arguments for and against exclusive lease agreements
Supermarkets often play the role of ‘anchor tenant’ in a shopping centre. They draw consumers into the centre, who then spend their money not only on their groceries, but also in other shops. This makes the centre an attractive place to conduct business, and the landlord is able to maintain a good mix of tenants (and perhaps charge higher rent to the occupants of the centre). If the supermarket is able to provide a wide selection of quality products at reasonable prices, consumers will also be happy – everybody seems to win.
The supermarkets would argue that exclusivity clauses in their lease agreements are key to this winning formula. Once insulated from competition in the immediate vicinity, the supermarket may earn sufficient profits required to invest in the quality and variety of the products or services it offers, in the presentation and ‘look and feel’ of their stores, and in innovation of new, better products and services. This is critical to continue attracting ‘feet through the door’.
Potential rivals of the supermarket may have a different view. The prevalence of exclusivity provisions between supermarkets and major shopping centres creates a significant barrier to entry into the retail sector, particularly for small firms. Competing bakeries, butcheries and other part-line stores are restricted from trading in the affected centres. Because of the insulation from competition created by the exclusivity clauses, consumers are denied the lower prices, product quality, variety and innovation that is driven by rivalry. The anchor tenant is able to sit back and enjoy a position of comfort, free from the stress of having to sharpen its business in response to the threat of competition. This, so the argument would go, is ultimately to the detriment of consumers.
Treatment under competition law
Competition laws generally recognise these apparently conflicting forces – exclusive leases enable beneficial investment, but starve consumers of the benefits of rivalry. The law therefore generally treats exclusivity provisions under a so-called ‘rule of reason’ standard. This means that the potential anti-competitive effects of the agreement must be identified, and weighed against the countervailing benefits to the consumer that may arise from the agreement. The law is contravened only if the anti-competitive effects are found to outweigh the resulting benefits.
Following a number of complaints by potential rivals of the three major South African supermarket chains – Spar, Pick ‘n Pay and Shoprite – the Commission conducted an investigation into the exclusive leases, looking at local markets across the country where exclusive leases had been agreed.
Despite continuing to harbour some apparent skepticism about these agreements, the Commission was unable to demonstrate to the required legal standard that the exclusivity clauses were anti-competitive. It therefore decided not to refer the various complaints to the Competition Tribunal for adjudication, which means it closed its file.
Implications of the decision
So what does the Commission’s decision mean for firms that rely upon exclusive lease agreements in their business?
It is important to recognise that this is just one example of an instance where there was insufficient evidence of anti-competitive effects arising from the agreement to warrant further action. Where the products and services supplied, the geographic reach of the relevant markets and the nature of the potential business justifications for the exclusivity clause are different, a fresh examination would be required.
The Commission itself does not express a great deal of comfort with exclusive leases. The Commission’s media release following the decision to end its investigation makes it clear that it …remains concerned about… the potential dampening effects of exclusive leases on competition, particularly as they affect small competitors and potential competitors.
Therefore, firms should not interpret the Commission’s decision to mean exclusive lease agreements are automatically legal. Despite the Commission’s decision, each case must be examined on its merits, and firms would be well advised to ensure compliance of their existing and future exclusive lease agreements with competition law.