Mom 'n pop battle to hold their own among retail giants.

Posted On Friday, 18 July 2003 02:00 Published by
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The SA Council of Retailers, a national retailers' association representing the interests of the independent local retailer, is making a number of submissions to the Competition Commission against the owners of shopping centres countrywide.
The SA Council of Retailers, a national retailers' association representing
the interests of the independent local retailer, is making a number of
submissions to the Competition Commission against the owners of shopping
centres countrywide.

The cornerstone of the issue is the monopolised concentration of shopping
mall ownership, with only six to 10 regional shopping centre owners in South

In the 1960s there were only 100 000 metres of institutional shopping centre
space. Central business districts (CBDs) were thriving, vibrant places with
healthy, fragmented ownership of retail space, spread over tens of thousands
of landlords.

Today 5 million square metres of institutional shopping centre space is
predominantly controlled by a handful of players.

This has all but killed CBDs across the country, displacing control from the
hands of many into the hands of a few today.

Small traders have been forced to leave the High Street and lease property
in the malls.

Aside from the loss of heritage and social interaction as we move to
American type "mall culture", this development has also created urban decay
and the highly concentrated control of previously healthy, fragmented

This concentrated ownership is routinely abused by the established interests
almost as a matter of course, to the extreme prejudice of the smaller
traders, who end up subsidising the rentals of the majors by paying them
exorbitant rentals.

The smaller "mom 'n pop" tenants pay base rentals of up to R500 a square
metre, while major retailers next door to them pay "penny rents" of as
little as R20 a square metre.

The mom 'n pops pay turnover rentals of as much as 12 percent of their
sales, while the major retailers pay heavily reduced turnover rentals of as
low as 1 percent of their sales, or in some cases even zero.

The mom 'n pops also endure annual escalations of as much as 15 percent, way
in excess of the consumer price index, while the major established retailers
enjoy far smaller annual escalations, in some cases as little as zero.

It's not difficult to understand why 95 percent of all mom 'n pops fail at
such rentals - nor how Edgars and Truworths manage to report a profit of
R400 million at rentals of R30 a square metre and 2 percent of turnover.

There is an iniquitous cross-subsidy. The small, fledgling players pay
dearly to prop up the large, established players.

The situation is exacerbated by the fact that almost all the established
shopping centre landlords hold significant shareholdings in the major

Woolworths, Foschini, Edgars, Mr Price and Pick 'n Pay all enjoy significant
shareholdings held by the same companies that control the shopping centres -
Mutual, Liberty, Sanlam, Transnet and Allan Gray.

Attorney Reid Corin points out that Mutual, for example, owns Cavendish
Square in Cape Town, Gateway in Durban, Menlyn in Pretoria and Rosebank Mall
in Johannesburg - and 30 percent of Mr Price.

These crossholdings create fertile ground for vertical practice and
collusive conduct.

It's not difficult to see why so many of these majors get such preferential
deals - at the expense of the mom 'n pops.

The SA Council of Retailers believes this conduct to constitute excessive
pricing, price discrimination, abuse of dominant position, and exclusionary

These practices are prohibited in terms of the Competition Act, which aims
to create frictionless markets with level playing fields, equal opportunity
and no barriers to entry.
The intention is to stimulate healthy competition, fuel economic growth,
create new jobs, support small business and protect consumer interests.

The council believes the current practices have the opposite effect. It's an
invidious situation that kills the little guy and subsidises the
inefficiency of the big guy.

There is a strong argument that the R400 million in profit the majors report
each year is nothing other than the cross subsidy from the mom 'n pops -
which would be quickly reversed if the majors had to compete on a level
playing field. It's quite possible that certain majors owe their existence
to this cross-subsidy.

Some major retailers, such as Pick 'n Pay, do deserve some sort of rent
break for the feet they draw to a shopping centre but many others receiving
sizeable rental concessions do not draw the feet.

Such practices fly in the face of equity, fair play, and all the
government's macroeconomic policies.

Major retailers also receive a large contribution to "fit-out allowances"
when opening a store, but smaller tenants generally receive nothing.

In fact, they often have to finish off the landlord's work at a cost of
anything up to R300 000.

Major tenants, on the other hand, receive significant fit-out allowances
from landlords of up to R2 000 a square metre.

Thus the cross-subsidy is perpetuated again at this level.

Excessive rentals, runaway escalation clauses and the like force small
retailers to pass their exorbitant cost structure on to the end consumer,
fuelling inflation and contributing to the high failure rate of small

Some 95 percent of all small retail businesses in South Africa fail in the
first five years. It's not hard to see why.

The established majors, together with the dominant landlords, enjoy
fortified positions, giving them unfair advantage and propping up their
inefficient practices.

The smaller players, with their highly prejudicial terms, are forced to
charge more for their services.

The end loser is the consumer, who suffers higher prices, low competition
and barriers to entry.

The composition of the local market shows clear symptoms of this malaise.

In Europe, the retail scene has traditionally comprised 80 percent
independent traders, with only 20 percent chain stores.

In South Africa over the past 30 years we have seen the exact opposite: 80
percent major chain stores with only 20 percent independent traders.

The local market has become so concentrated that today only seven players -
Woolworths, Edgars, Foschini, Truworths, Mr Price, Pick 'n Pay and Shoprite
- almost all of whom have large institutional shareholdings held by the same
companies that control the shopping centres, occupy over 50 percent of all
shopping centre space on highly preferential terms, allowing them to notch
up R70 billion in sales - about 40 percent of the national retail market.

In other countries, smaller tenants receive far greater protection than
here. In Australia, the Competition Commission polices unfair practice under
the Unconscionable Conduct Act, intervening to assist small tenants when
they are subjected to extortionary terms from dominant players, for instance
on lease renewal.

In the UK, similar protection is afforded under the Unfair Trade Practices

In France, small tenants are afforded significant legislative protection,
enjoying inter alia statutory rights of renewal on their leases unless they
fail to fulfil certain conditions. - Marcel Joubert

Marcel Joubert is chairman of the SA Council of Retailers and chief
executive of Platinum Holdings, which owns well-known clothing retail brands
Jenni Button, Hilton Weiner, Aca Joe and Vertigo. This article reflects his
personal view

Publisher: Business Report
Source: Business Report

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