COMPETITION TRIBUNAL
REPUBLIC OF SOUTH AFRICA
Case Numbers: 39/LM/Jul01 and
47LM/Aug01
In the large mergers between
Massmart Holdings Ltd
and
Jumbo Cash and Carry (Pty) Ltd
and
Massmart Holdings Ltd
and
Picardi Liquors (Pty) Ltd Sip ‘n Save division
Reasons for the Competition Tribunal’s Decision – NONCONFIDENTIAL
VERSION
Approval/Prohibit
1. The Competition Tribunal issued a Merger Clearance Certificate on 21
September 2001 approving the acquisition by Massmart Holdings Ltd
of Jumbo Cash and Carry (Pty) Ltd and of Sip ‘n Save, a division of
Picardi Liquors (Pty) Ltd, from Rebhold Ltd. The acquisition was
approved without conditions. The reasons for our decision are set out
below.
The transaction
2. The transactions will result in Massmart acquiring control of Jumbo Cash
& Carry and its subsidiaries Browns and Weirs from Rebhold, and of Sip ‘n
Save, a division of Picardi Liquors, also controlled by Rebhold.
3. Rebhold owns 70% of Jumbo with the remaining 30% held by Tiger. Sip ‘n
Save is a division of Picardi, which, in turn, is wholly owned by Rebhold.
Rebhold informs us that it is disposing of these businesses because it
wants to focus on its core business, namely the provision of business
support and facilities management services. The target companies, Jumbo
and Sip ‘n Save, are involved in the retail and wholesale trade and, as
such, do not form part of Rebhold’s core business focus.
4. The core business of Massmart, on the other hand, is precisely in the
retail and wholesale trade. Massmart believes that this transaction will
allow it to diversify its range of retail and wholesale activities and to
deepen its involvement with particular consumer segments and product
groups. Massmart avers that it has the skills, expertise, experience and
commitment required to invest the capital and other resources to further
develop the target businesses.
5. The parties argue that the acquisition of Jumbo and Sip ‘n Save constitute
a single transaction. They point out that both the target firms are
controlled by Rebhold and that the completion of the Sip ‘n Save
transaction is conditional upon the successful completion of the Jumbo
transaction. The Commission, on the other hand, insists that they be
treated as separate transactions. We are however persuaded by the
parties’ argument and find that we are here dealing with a single
transaction.
The parties
6. Massmart comprises the following wholesale and retail chains:
transaction.
The parties
6. Massmart comprises the following wholesale and retail chains:
• Massdiscounters, a chain of discount stores trading as Game and Dions
which retail a wide range of general merchandise.
• Makro, a chain of large warehouse club outlets, involved in the retail and
2
wholesale distribution of food, liquor and general merchandise.
• Shield Buying & Distribution (Pty) Ltd (Shield), a buying association
procuring products on behalf of 241 independently owned wholesaler
businesses and 254 independently owned retail businesses. 1 Shield’s
wholesale members collectively constitute 70% of Shield’s sales.
• CCW, a periurban and rural chain of 18 “cash and carry” or wholesale2
warehouses distributing basic food, liquor and groceries to retailers trading
in a low income retail market. CCW coowns some stores with its
managers who own up to 48% of the shareholding in their respective
stores.
7. Rebhold’s involvement in the retail and wholesale trades comprises:
• Jumbo, a wholesale distributor of cosmetics, toiletries, and hair care
products for the lower to middle income urban consumers. In the recent
past Jumbo has widened its focus to include food, grocery products,
hardware and cigarettes. Jumbo operates in the urban areas of Gauteng,
KwaZulu Natal, the Northern Province and Free State.
• Brown’s and Weir’s, wholesale distributors of basic grocery products and a
limited range of general merchandise. Brown’s and Weir’s are active in
the rural areas of KwaZulu Natal and the Eastern Cape respectively.
There are 22 Brown’s and 22 Weir’s stores, 22 of which (11 Browns and
11 Weirs stores) will be acquired by Massmart.
• Sip ‘n Save, a division of Rebhold’s wholly owned subsidiary, Picardi
Liquor (Pty) Ltd, comprises 3 stores involved in the wholesale and retail
liquor trade. It sells mainly beer and massmarket wine to low income
consumers in the Port Elizabeth area.
The relevant market
8. The relevant product market comprises all of those products and/or
services which are regarded as interchangeable or substitutable by the
services which are regarded as interchangeable or substitutable by the
consumer, by reason of the products’ or services’ characteristics, their
prices and their intended use.
1 According to the parties the term “independent” refers to small and medium sized businesses not owned
or controlled by any of the large participants in the relevant market.
2 Consideration has been given to the distinction, if any, between ‘cash and carry’ and ‘wholesale’. We
have, as is elaborated below, decided to treat these as identical distribution concepts and activities.
3
9. The parties to this transaction are involved in the provision of a distribution
service. They effectively serve as the intermediaries between, on the one
hand, a vast number of manufacturers of a wide range of products and, on
the other, the consumers of those products. Certain of their customers
are the final consumers of the product – this describes the retailing
activities of the parties. In other instances the customers are themselves
retail outlets who purchase the products for onsale to the final consumer.
This latter activity describes the wholesaling activities of the parties.
10. The activities of three of the target firms – Jumbo, Brown’s and Weir’s –
are overwhelmingly directed at the wholesale trade. That is, a relatively
insignificant portion of their revenue is derived from sales made to final
consumers their customers are predominantly retailers who onsell the
product that they purchase to the final consumers. The fourth target firm,
Sip ‘n Save, is involved in both wholesaling and retailing.
11. One of the acquiring firms, Massdiscounters, trading as Dion’s and Game,
is exclusively engaged in retailing. A second acquiring firm, Makro, is
engaged in both wholesaling and retailing. CCW, a third acquiring firm, is
overwhelmingly involved in the wholesale trade – a relatively insignificant
portion of its sales is made to final consumers. Shield, the fourth acquiring
firm, undertakes bulk purchases on behalf of it members, who are both
retailers and wholesalers. The bulk of Shield’s purchases are undertaken
on behalf of wholesalers.
Percentage sales by customer type:
Wholesale “cash & carry” Direct to general public
Makro (SA) 57% 43%
CCW (SA) 95% 5%
Massdiscounters (SA) 100%
Jumbo 95% 5%
Browns stores 95% 5%
Weirs stores 95% 5%
Sip ‘n Save 50% 50%
12. The above table underlines Massmart’s strong involvement in the retail
12. The above table underlines Massmart’s strong involvement in the retail
trade: Dion and Games are exclusively in retail and some 43% of Makro’s
considerable revenues are generated through direct sales to the public.
However, the target firms in the Rebhold stable – Jumbo, Brown’s, Weir’s
4
and Sip ‘n Save have a very limited exposure to the retail trade. There
is, thus no competitive overlap of any consequence in the retailing trade.
Accordingly little purpose is served by further examination of the retail
market in grocery products (in which Makro is active) or general
merchandise (in which Makro, Dions and Game are active). The one
exception is Sip ‘n Save, half of whose revenues are generated through
retailing liquor. There is some competitive overlap in both the wholesale
and retail liquor trades arising from the acquisition of Sip ‘n Save and this
will be briefly examined – as we shall show Sip ‘n Save’s geographic focus
as well as the specific consumer segment that it serves considerably limits
the competitive overlap with the acquiring parties.
13. Accordingly, with the limited exception of liquor retailing, our analysis
focuses exclusively on the activity in the wholesale market. The parties
have contended for a relevant market that denies the existence of a
boundary between wholesale and retail markets. They argue that the
large retailers – be they grocery, general merchandise of liquor retailers
effectively set the upper limit on the wholesale prices of those products. It
is argued that the limit imposed by competition between the supermarkets
and the small retailers effectively constrains the ability of the wholesalers
to unilaterally impose price increases on their retail customers – in the
event that such action on the part of the wholesalers compromised the
price competitiveness of their retail customers, the result would be a
decline in the market share of all those retailers dependent upon
wholesale distribution and, by extension, a decline in the customer base of
the wholesalers. We do not accept that this eliminates the distinction
the wholesalers. We do not accept that this eliminates the distinction
between the wholesale and retail markets. It may, however, through the
exercise of a countervailing power, influence the assessment of post
merger market power and the argument will be considered at that stage. 3
14. This is not to deny the major impact that the advent of mass, supermarket
type retailing has had on the character and extent of wholesaling. In
essence, and at the risk of considerable oversimplification, previously
wholesaling was, to all intents and purposes, the only mechanism for the
distribution of manufactured products to a myriad of small retailers.
However, the advent of the supermarket effectively shortened the link
between the manufacturer and the final consumer by eliminating the
wholesaling stage – these relatively gigantic retailers purchased in
3 It is by no means certain that small retailers – the customers of the wholesalers – are even in the same
relevant market as the large supermarkets. Certainly it is not apparent that price is the only competitive
variable in the interplay between supermarkets, on the one hand, and small retailers, on the other. The
latter offer convenience in terms of location, store hours, etc and while this does not mean that their
pricing is absolutely unconstrained by the pricing behaviour of the supermarkets, it does mean that, within
limits, they are able to charge a premium over the prices charged by the supermarkets.
5
sufficient bulk to permit economies of scale in warehousing and
distribution and enabled them to demand discounts similar to, or even
greater than, those available to the large wholesalers. The rise of retail
franchising operations, with the franchisor generally performing the
intermediating function between the manufacturer and the individual
franchisees, further excluded the wholesaler.
15. Many of the old names in South African wholesaling simply disappeared.
However, there arose in their stead a new breed of wholesaler dedicated
to serving the still considerable slice of the retailing trade that was not
subsumed by the new supermarkets and franchise operations. However,
by contrast with their predecessors, these new wholesalers offered an
extremely pared down service, a level of service geared towards enabling
the remaining small retailers to achieve pricecompetitiveness with their
efficient largescale counterparts. Credit was limited as were other
services such as transport. The small retailer would typically go in his or
her own transport to the massive warehousetype facilities of the new
wholesaler, trawl the aisles and choose the required stock, pay cash, and
depart with the wares – hence the term ‘cash and carry’. There is, of
course, an element of caricature in this description. In fact it appears that
many of the ‘cash and carry’ outlets do offer limited credit and some do
offer, at a price, transport and other distribution services. 4 However, the
point remains: the new breed of wholesaler responded to the new retail
environment by offering a service to small retailers that gave them the
opportunity to remain price competitive in the process eliminating
convenient but costly services such as telephone ordering and delivery.
convenient but costly services such as telephone ordering and delivery.
Certain of the parties to this transaction – who will be referred to as
‘wholesalers’ belong to the new breed of ‘cash and carry’ wholesaler.
16. The manufacturers whose products are distributed through the
mechanism of wholesale by the parties include the producers of grocery
products, liquor and general merchandise.
17. General merchandise, as the name implies, encompasses a disparate
4 We had originally explored a possible distinction pertinent to identifying the relevant market between
‘cash and carry’ and ‘wholesale’. However while this distinction was undoubtedly valid for the period
when the new ‘cash and carry’ wholesalers coexisted with the traditional wholesalers, it is no longer
pertinent – many of the ‘cash and carry’ wholesalers now offer certain of the services previously provided
by the traditional wholesalers although they clearly remain price oriented eschewing the service orientation
of their erstwhile competitors. It appears that certain of the traditional wholesalers redirected their efforts
at retaining the custom of what are sometimes referred to as ‘industrial households’, that is institutions such
as schools, hospitals, workplace canteens, etc that purchase groceries on a considerable scale but who are
prepared to forego some price advantage for the additional convenience offered by the traditional wholesale
model. Cf. EU Commission Decision of 20 November 1996, Case No IV/M.784 – Kesko/Tuko
6
array of products including office supplies, DIY equipment, hitech
products, household appliances and even certain categories of clothing. It
appears that a relatively small proportion of trade in these products is
conducted through wholesale channels, that is, for the most part, retailers
of general merchandise tend to source their product directly from the
manufacturers. Hence, it is to be expected that Dion’s and Game, who
trade overwhelmingly (to the extent of some 91% of their sales) in general
merchandise, are not involved in the wholesale trade at all. 36% of
Makro’s sales are in the area of general merchandise (with 51% and 13%
in grocery items and liquor respectively) with 57% of its sales directed at
wholesalers and 43% purchased by end consumers. It appears that the
lion’s share of Makro’s retail activity is in general merchandise and liquor,
with grocery products making up the bulk of its wholesale revenues.
18. Grocery products encompass food, cigarettes, health and beauty products
and nonedible consumables such as detergents and house care
products. In contrast with general merchandise there is a considerable
wholesale trade in grocery products. Certainly the competitive overlap
between the parties to this transaction occurs in the grocery products
wholesale market. Jumbo’s, Brown’s, Weir’s, CCW and Makro are
principally involved in the wholesale distribution of grocery items. It is
however important to keep in mind that although Jumbo does sell
groceries it has established itself as a leading player in a particular
segment of the grocery market namely the distribution of cosmetics,
toiletries and hair care products. Makro, as noted above, does earn
toiletries and hair care products. Makro, as noted above, does earn
significant revenues from its retailing activities but this is largely accounted
for by its sales of general merchandise
19. Note that while a single store may and, indeed, in this particular case,
does distribute grocery products, general merchandise and liquor, it is also
not uncommon, and also occurs in this instance, for stores to specialize in
the distribution of one or other of these broad product categories. We are
satisfied that there is not meaningful substitutability between groceries,
general merchandise and liquor, and, accordingly that they belong in
separate relevant markets no matter that they are frequently traded under
the same roof.
20. By the same token it may be argued that one grocery item is not
substitutable for another and that within the overarching grocery products
market the specific product categories – say detergents versus canned
food products – should be treated as separate relevant wholesale grocery
markets. However, it appears that mass grocery products wholesalers do
not specialize in the distribution of a small number or limited range of
7
grocery or general merchandise items successful mass wholesaling
appears to demand that a full line of items is stocked. The range of items
will, to be sure, vary, principally, it appears, in relation to the customer
segment upon which the wholesaler store or chain is focused, but, within
that parameter, each will carry several thousand different lines. We are, in
short, dealing with fullline wholesaling of grocery products .5 A distributor
specializing in the distribution of a small number of select grocery product
brands is not part of the same market as a full line grocery wholesaler
whose product offerings are intended to satisfy the full range of
requirements of a typical retailer. 6
21. We will confine our analysis of the competitive impact of this transaction to
those markets in which both the acquiring and target firms are active, in
which, in other words, there is competitive overlap. This refers principally
to the wholesale distribution of grocery products, although we will briefly
examine the wholesale and retail markets for liquor. There is, as already
elaborated, a limited wholesale market in general merchandise and there
is no competitive overlap between the acquiring firms considerable
involvement in the retail side of this trade and the activities of the target
firms given their near exclusive involvement in grocery wholesaling.
22. Note that the market is further limited by its geographic boundaries.
Where the retail liquor market is concerned the geographic market is very
narrow, confined, at its widest, to Port Elizabeth. Hence the geographic
markets for retail liquor would be very narrow, certainly not extending
beyond the city or town in which the retail outlets are active. In the case of
the Sip ‘n Save transaction then the widest retail geographical market
the Sip ‘n Save transaction then the widest retail geographical market
would be Port Elizabeth and, given that its trade is directed at low income
consumers this may be narrowed to specific sections of the city.
23. On the other hand, geographic markets for wholesale products are clearly
larger than that of their retail counterparts. The Commission has
concluded that retailers are prepared and able to purchase product from
wholesalers within a radius of some 200 kilometers of their stores. This is
borne out by the data supplied by the parties although it appears that most
retailers have access to wholesale facilities in closer proximity.
Nevertheless retailers are clearly prepared to travel some considerable
distance to access the desired products and, this fact, combined with the
5 Makro stocks some 45 000 line items of which 40% is groceries,
40% is general merchandise
and 20% liquor; CCW stocks 20 000 line items; Jumbo 25 000 line items; and Brown’s and
Weirs between 5 000 and 12 000 line items depending on the size of the store
6 Competition Tribunal Case No: 78/LM/Jul00 JD Group Ltd and Ellerine Holdings Ltd.
8
assertion that, in these circumstances, a ‘chain of substitution’ will further
widen the geographic parameters of the market, leads us to accept the
contention that the geographic markets for the wholesaling of grocery
products are local. 7
24. In a previous matter, the Tribunal held that, even if the ability to physically
substitute an alternative source of supply was geographically bounded, in
order to sustain a claim for a subnational definition of the geographic
market, it still had to be demonstrated that national chains allowed prices
and other competitive conditions to be set within these geographic bounds
rather than at a national level. 8 This has significant implication for the
place of independent stores operating in limited geographical areas – if
the national chains pricing and competitive strategies are not influenced
by the competitive behaviour of local or regional stores then the latter are
clearly not within the relevant market. Conversely expressed, this would
mean that the relevant market was the market for national chains of
wholesale groceries or, as in the case referred, national chains of furniture
retailers. In the present case, however, we are persuaded that store
managers play a significant role in determining prices, certainly in the
stores of the acquiring party. 9 This is consistent with a finding that the
relevant geographic market for the wholesale trade in grocery products is
indeed local.
25. This finding further limits the areas of competitive overlap as illustrated in
the following table:
Provinces Grocery Wholesale (X) Liquor
Wholesale/retail (xx)
Acquiring Firm Target firm Acquiring Firm Target firms
Gauteng X X Xx
Kwazulu
Natal X X Xx X
Free State X
Western
7 The Commission has recommended that the provinces be used to delineate the geographic markets.
While we accept that data limitations necessitate using the provinces as a proxy for local markets, there is,
data exigencies aside, no apparent reason to support a provincial delineation – as noted the data support the
view that retailers are willing to shop around over a radius of some 200 kilometres of their stores and this
then constitutes the approximate scale of the geographical markets.
8 See footnote 6 supra
9 Note that most of the managers of the various CCW stores own significant equity stakes in their
respective stores. It appears that this arrangement is, in part, preferred by Massmart because it retains
committed managers with considerable local knowledge. This naturally increases the likelihood of
decentralized decision making with respect to pricing and other competitive strategies.
9
Cape X Xx
Eastern Cape X X Xx Xx
Mpumalanga X Xx
Northern
Province X X Xx
26. Thus the provinces in which both the acquiring and target firms are
present with regard to grocery wholesale are Gauteng (GP), Kwazulu
Natal (KZN), Northern Province (NP) and Eastern Cape (EC). With regard
to liquor wholesale and retail there are two geographic markets in which
they overlap namely KwazuluNatal and Eastern Cape.
27. We will, therefore, focus our analysis on the wholesale grocery market in
GP, KZN, NP and EC and on the liquor wholesale and retail market in
KZN and EC since these are the relevant markets in which competition will
be affected by the merger. As noted it is our view that the geographical
markets for wholesaling are somewhat narrower than the province but
data limitations oblige us to use the provinces as a proxy.
The Impact on Competition
28. In terms of Section 12A(1) of the Act we are enjoined to determine
whether or not the merger is likely to substantially prevent or lessen
competition in the relevant market. In terms of Section 12A(2) we are, in
making this determination, required to assess the strength of competition
in the relevant market, and the probability that the firms in the market after
the merger will behave competitively or cooperatively. Section 12A(2)
provides a nonexhaustive list of factors that, if relevant, we are required
to consider in making our determination.
Grocery Products
The level and trends of concentration, and history of collusion in the
relevant market
29. The competitors in the wholesale grocery products trade in each relevant
province, that is in each relevant geographic market, include both
wholesale chains (such as Metcash, Sentra/Mega Save and Rainbow
Cash & Carry) and various independent wholesalers. The Commission
Cash & Carry) and various independent wholesalers. The Commission
avers that, on the basis of interviews conducted with competitors, that
there is robust competition in each in each geographic market and that
price is the overwhelming basis for competition.
10
30. Neither the parties, nor the Competition Commission could provide reliable
market share figures for the independent wholesalers or the main chain
wholesalers. The Commission presented us provincial market shares
although it appears that these shares are calculated on the basis of
estimates of the provincial turnovers of the wholesale chains active in the
respective provinces. In other words it does not include the sales figures
of the various independent wholesalers. 10
Geographic market Massmart:
Premerger %
Target:
Premerger %
Postmerger
%
Gauteng 10.40 6.15 16.56
KZN 9.49 3.35 12.84
EC 8.88 23.81 32.69
NP 9.21 10.50 19.71
31. However based on the available market share information we conclude
that there will be active competition in each geographic market post
merger. The market share data is corroborated by the number of
competitors competing in each province. In Gauteng there are 18 Metcash
stores, 1 Rainbow store and more than 60 Independent stores as opposed
to the 8 of the merged entity. In KZN there are 23 Metcash stores, 19
Megasave/Sentra stores and more than 50 Independent wholesalers as
opposed to the 17 of the merged entity. In the EC, where the market share
figures provide the most serious grounds for concern, our fears are
somewhat allayed by the fact that there are 24 Metcash stores, 11
Megasave /Sentra stores, I Rainbow and over 60 Independents as
opposed to the 18 stores of the merged entity. In the NP there are 3
Metcash and 5 Independents competing with the 2 stores of the merged
entity.11 Furthermore we are reassured by evidence presented by the
Commission suggesting that many of the independents are long
established, large and, in certain instances referred to, growing
businesses.
businesses.
32. That having been said, the transaction clearly results in the absorption of a
10 While we appreciate that the parties may not have had access to the sales figures of their independent
competitors this has bedeviled this investigation. Suffice to point out that the Commission has the
authority to insist that data be provided to it.
11 Note that Metcash derives a significantly larger proportion of its revenue from wholesaling than does
Massmart with its considerable retail interests. Naturally with the inclusion of Jumbo, Brown’s and Weirs
in the Massmart stable the contribution of wholesaling increases significantly however it’s aggregate
turnover in wholesaling is still smaller than that of Metcash.
11
formidable competitor – at least insofar as the sale of Jumbo is concerned
– into the ranks of a robust and substantial player in the same market. 12
Our concern here is somewhat ameliorated by Jumbo’s focus on a
particular market niche, the health care and beauty products market.
Indeed some consideration was given to defining this segment as a
separate relevant market. Although this was ultimately rejected and this
product niche was included in the grocery products market, the fact that
Jumbo’s focus is so distinctive does, unquestionably, ameliorate the
impact of the transaction on competition. 13 This is, to some extent, borne
out by Massmart’s intention to treat Jumbo and the product market
segment in which it is active as an additional division of the Massmart
group.14
33. Does the transaction increase the likelihood of collusion in the grocery
products wholesale market? Obviously, a particular danger here is of
collusion between the relevant members of the Metcash and Massmart
groups. We have, however, no reason to believe that collusion is likely to
occur postmerger. There is no obvious history of collusion – quite the
contrary, there is evidence of robust competition. Moreover, although
Metcash and Massmart will, between them, command an important share
of the relevant market, competition from established independent
wholesalers and from the various buying groups will make it difficult to
collude successfully. 15
The ease of entry into the market
12 In documents filed at the hearing Makro itself acknowledges that it regards Jumbo as an important
competitor.
13 On the other hand, had we been confident of Brown’s and Weir’s ability to maintain a competitive
presence in its market niche (see below) we would have been more concerned at the elimination of an
effective competitor – the portion of the grocery product market occupied by Makro, CCW, Brown’s and
Weir’s is, in contrast with Jumbo’s relatively distinctive niche, very similar. Note that Jumbo has recently
broadened its focus and moved into the wholesaling of general grocery products thus lending weight to the
view that its niche focus should be subsumed into the general grocery products wholesale market.
14 The other divisions are Massdiscounters, Makro, CCW and Shield. Brown’s and Weir’s, on the other
hand, will be absorbed into the division occupied by CCW.
15 The buying groups are an interesting and rapidly growing phenomenon. While the function that they
perform is easily understood, it is difficult to identify precisely how they have managed to establish
themselves in the teeth of a robust wholesale sector. More particularly it is difficult to understand precisely
why Massmart is, though Shield, active in this area. On the face of it Shield’s activities do, in supporting
purchases by small wholesalers, facilitate the rise of competition for wholesalers within the Massmart
group itself. We can only conclude that Massmart’s commitment to Shield represents a farsighted
acceptance on Massmart’s part that buying groups are a feature of the distribution chain that is, for
whatever reason, permanent and growing, and that it is preferable for a large distribution group like
Massmart to participate at this level rather than to resist it thus placing all of its longterm commercial bets
on the continued dominance of its own distribution formula. Shield is the largest of several substantial
buying groups .
12
34. It has been suggested that entry into this market is relatively easy.
Suppliers, we are informed, are generally willing to extend credit to new
entrants.16 Moreover, while the experience of firms within both Rebhold
and Massmart is that a wholesaler must be prepared to stock a substantial
range of the grocery products line items, it is not necessary to extend
beyond grocery products, and, as Jumbo’s experience demonstrates, it is
even possible to flourish by focusing on a broad product niche within the
grocery products relevant market. Stores are basic in their design – they
are essentially warehouses – and there is no commercial requirement that
they be located in the high rent parts of the towns in which they are based.
Wholesalers attract little brand loyalty from customers whose overriding
concern is with price – hence there is little of the cost that retailers, for
example, generally have to incur in advertising and in building up store or
chain brand reputation.
35. The Commission holds that supplyside substitution is likely in the face of
anticompetitive behaviour by the wholesalers. That is, the Commission
argues that in the event of an exercise of market power on the part of the
wholesalers it would be relatively easy for the wellestablished and richly
resourced large retailers to enter wholesale distribution. We do not accept
this argument – as Mr. Lamberti of Massmart points out this would
essentially entail the retail supermarket chains supporting their own
competitors.17
The degree of countervailing power in the market
36. As indicated above, the parties argue that the coincidence in a single retail
market of large supermarkets outside of the wholesale chain of distribution
with small retailers dependent upon a wholesale distribution network
constrains the ability of the wholesalers to increase the price of their
service to their customers – it would be a selfdestructive act, one that
would sacrifice market share to precisely that element of the retail market,
the supermarkets, that has removed itself from the wholesale chain of
distribution. In other words, the wholesalers and the small retailers have a
mutual interest in the latter maintaining market share against the
supermarkets thus providing a peculiarly strong incentive for the
wholesalers to raise efficiencies rather than prices.
37. While, as indicated above, we were not willing to accept that this
16 The parties argue that the large manufacturers whose products are distributed through the wholesale
mechanism have a positive interest in holding down distribution margins and that this imperative
incentivises them to ease new entry.
17 We accept Mr. Lamberti’s argument although it is not clear how this differs in substance from Shield’s
effective support of wholesalers who compete with members of the Massmart group.
13
eliminated the distinction between the wholesale and retail markets it is,
on the face of it, a factor countervailing the ability of the wholesalers to
increase the price of the service that they provide to their retailer
customers. In order to make a firm finding on the strength of this
countervailing power the degree to which supermarkets and small retailers
are substitutable forms of distribution (that is, participants in the same
relevant market) would have to be established. Small retailers are able to
charge a premium over the prices offered by supermarkets and still retain
their custom – they are able to do this because they offer convenience, a
feature for which consumers are clearly willing to pay a price.
The ‘failing firm’ defence
(THIS SECTION CONTAINS CONFIDENTIAL INFORMATION)
38. Accordingly the ‘failing firm’ argument supports our decision to approve
this transaction.
Liquor Products
43. There is a degree of overlap between the activities of the target and
acquiring firms in the retail and wholesale liquor trades. We have
accordingly examined the impact that the transaction would have on
competition in these markets. As briefly elaborated below we have
concluded that there is unlikely to be any discernible impact on
competition in either the retail or wholesale liquor markets
44. Makro is the only wholesale chain that has a significant presence in the
liquor market, with 13% of its total sales representing liquor sales. The
target wholesale chains only sell liquor in KZN and the EC where its
market shares are 0.58% and 2.95% respectively. Postmerger the
market shares are as follows:
Gauteng 5.39%
KZN 6.88%
EC 4.95%
NP
45. Sip ‘n Save, the retail arm of the target firm, distributes beer, low quality
NP
45. Sip ‘n Save, the retail arm of the target firm, distributes beer, low quality
wine and liquor to the lower income consumer through 3 stores in Port
Elizabeth. The major wine brand that is sold by Sip ‘n Save is “Namaqua”
which represents 30% of sales generated, with the remainder beer and
spirits.
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46. The following table sets out the retail market shares:
Market players in Port Elizabeth Number of
large stores
Market shares based on
number of large stores
Picardi 5 7.24%
Big Daddies 10 14.49%
Makro/Sip ‘n Save post merger 4 5.79%
Other 69 72.46%
47. The smaller liquor retail outlets have not been taken into consideration in
calculating the market shares and would accordingly reduce the market
shares should they be included.
Conclusion
48. In our analysis of the transaction’s impact upon competition we have
considered two markets, these are the grocery products wholesale market
in selected geographical areas and the liquor retail and wholesale trade in
selected geographical areas.
49. We are persuaded that the transaction will not substantially diminish
competition in the grocery products wholesale market. While market
shares in certain of the geographical areas in question are prima facie
cause for concern we are persuaded that the merged entity will not only
face robust competition from other national chains but, given evidence of
local determination of prices and competitive strategies, will face
competition from wellestablished independents. The suppliers have a
positive interest in facilitating the competitiveness of independents who
are, moreover, assisted, by the growth of bulk buying groups. Entry into
this market is, we conclude, relatively easy. Moreover, the influence of
large retailers on the prices of small retailers will act as a countervailing
influence upon the ability of the wholesalers to exercise market power
over their customers.
50. Market shares in liquor retail and wholesale markets indicate clearly that
there is no prima facie cause for concern.
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10 October 2001
D.H. Lewis Date
Concurring: F. Fourie, P.E. Maponya
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