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May 29, 2019

Rebates under scrutiny in South Africa grocery inquiry

Rebates offered by FMCG companies operating in South Africa to retailers give national chains an "unfair" advantage over smaller rivals, the local competition watchdog has argued.

By Dean Best

Rebates offered by FMCG companies operating in South Africa to retailers give national supermarket chains an “unfair” advantage over smaller rivals, the country’s competition watchdog has argued.

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  • The performance of the online channel versus offline
  • Major trends in the market including rapid delivery, ambient retailing, supply chain disruption, and inflation
Assess developments within this sector to help your business thrive in 2022 and beyond.
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The discounts “entrench” the position of supermarket retailers and the practice should be shaken up, South Africa’s Competition Commission said as part of a report into the nation’s grocery retail sector.

In 2015, the Commission started an inquiry into the industry as it believed parts of the way the sector operated were affecting competition.

Today (29 May), the watchdog released its findings and the use of rebates by suppliers was found to be a factor limiting competition between different types of retailers in South Africa.

The Commission argued rebates offered by suppliers – as well as the long-term leases grocers strike in shopping centres – have the effect of “reinforcing the levels of concentration” in South Africa’s formal retail channel, “entrenching the incumbency” of the larger grocers and raising barriers to entry for smaller and independent retailers.

The inquiry has recommended a mandatory code of conduct through which changes in areas like leases and rebates could be implemented and has pushed for the introduction of an ombudsman to oversee the code. “The ombudsman will also be responsible for ensuring that all customers or suppliers are treated in a fair and transparent manner,” the report said.

Rebates are paid to independent retailers in South Africa’s informal sector but the inquiry said larger retailers benefited from higher discounts, even when smaller grocers were part of a buying group.

“The inquiry established that the national supermarket chains are a critical route-to-market for the suppliers of FMCG products, based on revenue and volume contributions. With few exceptions, there was evidence in relation to the inability of FMCG suppliers to walk away from negotiations with national supermarket chains and the rigidity of trading terms, particularly as it relates to the composition and quantum of same. In this context, the national supermarket chains are able to extract more favourable trading terms than those customers in the informal segment i.e. buyer groups, wholesalers, independent retailers etc.,” the report read.

“The findings of the inquiry suggest that there is no clear rationale that explains the difference in the quantum of the rebates paid to the national supermarket chains in comparison to those obtained by those customers in the informal segment other than simply differential buyer power. In some instances, even where the national supermarket chains were not the largest customers, they were still able to extract better and more favourable trading terms than buyer groups, who would be the larger customers in those particular instances. This differential treatment is indicative of the exercise of buyer power.”

The watchdog said national retail chains are “demanding” rebates to cover costs in areas like merchandising, store openings, access to shelf space and category management. It argued wholesalers and buying groups do not receive these rebates, meaning independent retailers, faced with a lack of vertical integration with wholesalers, “are placed at a material disadvantage to the national chains”.

Nevertheless, the report recognised rebates are “an entrenched business practice that may be difficult to move away from without material commercial upheaval for both supermarket chains as well as certain suppliers”. 

The inquiry is inviting submissions to suggest how to reform the system but said there could be moves to “non-discriminate” between larger chains and smaller retailers or to limit the rebates offered to supermarkets.

The report said any “remedial action” must fall under the “mandatory code of conduct” for companies in South Africa’s grocery retail sector that will come under the remit of a single government department and ombudsman.

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What’s the forecast for the food and grocery industry?

The food and grocery sector thrived during the pandemic, largely due to the shutdown of the food service industry and the sector’s subsequent necessity, panic-induced bulk purchasing, and spending more time at home. The market has grown as a result of inflation. Consumer unwillingness to go out and socialize, and the reopening of several hospitality facilities, helped maintain the demand for groceries, particularly online, in 2021. As consumer behavior changes, we consume more food and drink at home, and inflation increases basket sizes. GlobalData predicts that the sector will continue to hold a higher share than had been predicted prior to the pandemic. This is true despite the fact that the food and grocery sector's share of overall retail will decline from its peak in 2020. This report will discuss market forecasts and key themes in the global food & grocery industry in 2022 and beyond. It covers:
  • Market drivers and inhibitors
  • Five-year forecasts and the impact of COVID-19
  • The performance of the online channel versus offline
  • Major trends in the market including rapid delivery, ambient retailing, supply chain disruption, and inflation
Assess developments within this sector to help your business thrive in 2022 and beyond.
by GlobalData
Enter your details here to receive your free Report.

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