Brief Summary

Competition Law — Merger Approval — Shoprite Checkers (Pty) Ltd and Foodworld Group Investment Holdings (Pty) Ltd — Competition Tribunal approved the merger between Shoprite and Foodworld, finding that the relevant market for grocery retailing, including halaal products, is not a separate niche market but part of a broader grocery market. The Tribunal concluded that Muslim consumers do not refrain from shopping at general retailers like Shoprite for halaal products, provided they are halaal-certified, and that the merger would not substantially lessen competition in the grocery retail market.

Comprehensive Summary

Summary of Judgment

1. Introduction

These were large merger proceedings before the Competition Tribunal of South Africa concerning the acquisition by Shoprite Checkers (Pty) Ltd (“Shoprite”) of the business of Foodworld Group Investment Holdings (Pty) Ltd and its wholly owned subsidiary, Foodworld Stores Holdings (Pty) Ltd (together referred to as “Foodworld” or the “target firms”), as a going concern.

The Tribunal issued a Merger Clearance Certificate on 10 November 2005 approving the merger in terms of section 16(2)(a), and these reasons explain the basis for that approval. The reasons were signed on 28 November 2005 (Y Carrim, with L Reyburn and T Orleyn concurring).

The dispute centred on the competition assessment of Shoprite’s acquisition of a regional chain of stores that primarily traded as a halaal food chain in the Western Cape. The main analytical disagreements concerned the relevant product market (whether halaal retailing constitutes a distinct niche market) and the relevant geographic market (national versus regional versus local catchment areas), and whether the merger raised competition or public interest concerns.

2. Material Facts

Shoprite is a subsidiary of Shoprite Holdings Limited, a JSE-listed company. For purposes of the transaction, the Tribunal treated Shoprite’s grocery retailing activities as the relevant business line, noting Shoprite’s operation of multiple grocery retail formats and brands (including Shoprite supermarkets, Checkers supermarkets, Checkers Hyper, and Shoprite U Save).

Foodworld comprised 13 retail outlets and 4 Saveworld wholesale outlets, operating throughout the Cape peninsula and Paarl. Foodworld primarily operated as a halaal food chain selling to the Muslim community in previously disadvantaged areas, targeting lower-income consumers (described as LSM 4 to 8). Foodworld Group also controlled certain dormant companies, but these did not feature as material to the competitive assessment.

The transaction involved Shoprite buying the target firms’ business as a going concern. The target firms, described as traditionally run as a family business, sought to sell due to resource constraints. Shoprite’s stated rationale was to enter and expand in the stand-alone halaal food shop segment and to grow its retail presence in the Western Cape, emphasising that it historically lacked ideal Western Cape premises or facilities for halaal offerings.

The facts relevant to market definition included the Tribunal’s description of halaal foods as foodstuffs prepared according to Muslim precepts (including avoiding pork and alcohol and preventing contamination). The Tribunal accepted that Muslim consumers may purchase permissible items from any store, and that general retailers can sell halaal products provided they comply with separation and contamination-prevention standards and obtain approval/certification from the Muslim Judicial Council (MJC), whose inspectors monitor compliance.

On the product dimension, it was common cause that Shoprite and Foodworld both retailed grocery products including halaal foodstuffs, and that there was some product overlap. The extent and significance of overlap was disputed in argument: the Competition Commission found that approximately 80% of Foodworld’s product range would be found in general grocery stores (with only about 20% not typically found there), while the merging parties contended the overlap was significantly smaller. The Tribunal also recorded that Foodworld itself had stated on the record that it competed with large retail chains (including Shoprite/Usave, Pick ’n Pay, and Spar), which the Tribunal treated as significant to the competitive assessment.

On the geographic dimension, Foodworld operated only in the Western Cape, while Shoprite operated nationally. The Commission analysed competition at multiple geographic levels (national, regional, and local catchment areas). In local analysis, the Commission demarcated seven catchment areas around Foodworld outlets, initially using a 3-kilometre radius, and also considered a wider radius (up to 10 kilometres) as a possible travel distance for grocery shopping. The Commission identified multiple competing outlets of larger retail chains within both 3 km and 5 km radii in each catchment area, and the Tribunal noted that independent retailers were not included in that count, though the merging parties asserted their presence.

A further material fact relevant to competitive effects was Shoprite’s post-merger plan to maintain the halaal format in localities where there was demand, and to rebrand the acquired stores as Shoprite stores. The Tribunal recorded Shoprite’s indication that, because Foodworld’s prices were then approximately 6% higher than Shoprite’s regional pricing, prices at the former Foodworld stores would likely reduce by about 6% after integration into Shoprite’s pricing structures.

3. Legal Issues

The central legal questions were whether the Tribunal should approve the merger in terms of section 16(2)(a), which required the Tribunal to evaluate whether the merger was likely to substantially prevent or lessen competition, and, if so, whether any pro-competitive gains or other considerations justified approval, as well as whether there were any public interest grounds that would warrant conditions or refusal.

The dispute primarily concerned the application of competition-law principles to facts, rather than contested legal doctrine. In particular, it required evaluative determinations regarding (i) the relevant product market (whether the market is a separate halaal retail market or part of a broader grocery retail market including halaal products), (ii) the relevant geographic market (regional or local), and (iii) whether, on either plausible market definition, the merger raised competition concerns given the presence of alternative retailers and the extent of competitive constraints.

4. Court’s Reasoning

The Tribunal’s analysis proceeded from the standard merger assessment framework, focusing on market definition (product and geography) and then assessing the effect on competition, followed by consideration of public interest.

On product market definition, the Tribunal preferred the Competition Commission’s approach. While accepting that, from a demand perspective, Muslim consumers may not view non-halaal foodstuffs as substitutable for halaal foodstuffs because of religious strictures, the Tribunal placed weight on the practical and institutional ability of general retailers to compete for halaal consumers through halaal certification and compliance. The Tribunal accepted evidence that major supermarket chains in the Western Cape, including Shoprite, were certified by the MJC Trust, and that compliance requirements were regularly monitored by MJC inspectors. This supported the Tribunal’s finding that halaal retailing was not insulated from competition by general grocery retailers.

The Tribunal was not persuaded by the merging parties’ arguments that the need to check labels or the presence of specialised in-store processes necessarily implied weak substitutability. It reasoned that certification, separation of products, staff assistance, monitoring mechanisms, and audits could provide consumer assurance, and that these features reduced the claimed barrier between halaal-focused outlets and general grocery retail stores offering halaal-compliant products.

The Tribunal also evaluated claimed differences in product range and consumer behaviour. It accepted that Foodworld had a halaal focus and that some consumers might prefer halaal-only environments. However, it reasoned that Muslim consumers could shop at non-halaal stores for items other than prohibited food, and that consumers generally had access to public transport enabling shopping beyond immediate walking distance. It further noted that non-Muslim consumers could also shop at halaal stores where price or promotions made them attractive. In this setting, the Tribunal treated the segment of consumers allegedly confined to Foodworld stores as relatively insignificant for market definition and competitive constraint.

On the extent of product overlap, the Tribunal acknowledged disagreement on the numbers but drew support from two considerations reflected in the record. First, the Commission’s finding that a substantial portion of Foodworld’s range overlapped with general retailers was consistent with a broader grocery retail market. Second, Foodworld’s own identification of major retail chains as competitors, as well as Shoprite’s hearing evidence suggesting competitive pricing on the bulk of products (with only a few unique items possibly supporting higher margins), supported the Tribunal’s conclusion that the two businesses operated in overlapping competitive space.

On the geographic market, the Tribunal rejected a national market, largely because Foodworld operated only in the Western Cape. It considered that the relevant geographic market was likely regional or local, noting that, in similar FMCG retail mergers, it had previously held the geographic market to be local. It also observed that Shoprite’s own commissioned studies assessing opportunities for new store development in multiple separate localities tended to support local market analysis. However, the Tribunal considered it unnecessary to choose definitively between a regional and local market definition because, on either definition, the merger raised no competition concerns.

Turning to competitive effects, the Tribunal relied substantially on the Commission’s analysis of competitive constraints, including the presence of multiple competing outlets of larger retail chains within defined local radii around Foodworld stores. It accepted that, in each catchment area, consumers had a choice among competing outlets, and it took into account that the Commission’s count excluded independent retailers, implying that the competitive alternatives may be greater than reflected in the Commission’s tables. In addition, the Tribunal accepted Shoprite’s post-merger intentions regarding maintaining halaal formats where demanded and integrating pricing, recording that prices at the former Foodworld stores would likely reduce in line with Shoprite’s pricing structures.

Finally, on public interest, the Tribunal recorded that there were no public interest concerns that would alter its competition conclusion. This formed part of its basis for approving the transaction unconditionally.

5. Outcome and Relief

The Competition Tribunal approved the merger unconditionally and issued a Merger Clearance Certificate approving the transaction in terms of section 16(2)(a).

No conditions were imposed, and the reasons record no adverse public interest findings. The reasons as provided do not reflect a specific costs order.

Cases Cited

Pick n Pay Stores Limited and Boxer Superstores (Pty) Limited (Competition Tribunal Case No: 52/LM/Jul02).

Legislation Cited

Competition Act 89 of 1998, section 16(2)(a).

Rules of Court Cited

No rules of court were cited in the provided reasons.

Held

The Tribunal held that the relevant product market extended to the general retail market for grocery products, including halaal products, rather than a narrowly defined niche market limited to stand-alone halaal retailers. It further held that the relevant geographic market was not national and was likely regional or local within the Western Cape, but that the precise delineation was unnecessary because the merger raised no competition concerns on either plausible geographic definition.

The Tribunal found that the merger would have no effect on competition on any feasible market definition and that there were no public interest concerns warranting intervention. The transaction was therefore approved unconditionally.

LEGAL PRINCIPLES

Market definition in merger analysis is an evaluative exercise grounded in substitutability and competitive constraints. Where demand-side considerations suggest a distinct preference (here, halaal compliance), supply-side factors and institutional arrangements (such as the ability of general retailers to obtain and maintain halaal certification and compliance) may support a broader market definition encompassing both specialised and general retailers.

Geographic market definition in grocery retail mergers may be approached at multiple levels (national, regional, local), and prior Tribunal practice recognises that local catchment areas can be appropriate given the nature of consumer shopping behaviour and retail competition. However, where the outcome is unaffected by the choice between plausible geographic market definitions, the competition assessment may proceed without a definitive determination of the precise boundaries.

In assessing competitive effects, the presence of multiple competing outlets within plausible consumer travel distances, together with the availability of alternative retailers (including independents), can support a finding that a merger is unlikely to substantially lessen competition, particularly where the merged entity remains constrained by existing competitors and where integration is expected to reduce prices rather than raise them.

AVI Limited and Denny Mushrooms (Pty) Limited (47/LM/Jun04) [2004] ZACT 56 (27 August 2004)