Shopping centre bullies or victims?

* Francois Froneman
2014-10-09 06:00
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 Francois Froneman.

AMID INDUSTRY pressure, the Competitions Commission is being asked to once again review exclusivity clauses held by major retailers in many shopping centres. If enforced, this could change the landscape of how leases are determined in future and open up new opportunities for smaller retailers.

Traditionally, large retailers have been able to use their position as anchor tenants to ensure exclusivity in shopping malls. The big players in the food retail industry are few - Shoprite Checkers, Pick n Pay and Woolworths - and their position in the market is already strong.

This strength is enhanced even more by exclusivity clauses. Landlords are hesitant to react – because to do so might bite the hand that feeds. Yet some in the property industry believe these exclusivity clauses are hindering the overall growth of the market.

A rock and a hard place

Those most affected are property developers, landlords and smaller retailers or distributors. The latter find themselves unable to procure leases in popular shopping malls due to exclusivity clauses. Landlords are forced to turn away prospective tenants and sometimes sit with empty shop fronts. Shoppers too do not get to benefit from a greater variety of products or more competitive prices.

The landlords unfortunately find themselves in the middle – weary of the big retailers who are holding anchor on one side and smaller retailers and property agents that are pushing for more freedom and flexibility on the other end.

Commission’s influence

Would a ruling by the Competitions Commission have the influence to change the balance of power?

Since 2009, most major retail merger or acquisitions that have passed through the Competition Commission have had the recommendation to negotiate the exclusivity clause out of the lease contracts. Yet landlords are finding this very difficult to achieve.

The most important matter to be established by the Competition Commission is the question of any unjust price-collusion due to these clauses. This is a difficult matter to prove and is one of the reasons why there has not been stricter enforcement on this matter.

Big retailer’s argument

Big retailers insist that they would not be able to compete with smaller retailers or distributors who have lower overheads and more flexibility on profit margins.

But is this really the case?

Can small retailers really make that much of a dent in the big retailer’s pockets? Are big retailers not large enough to retain market share without the exclusivity?

Anchor tenants make their largest profit margins in shopping centres partly because of their low rentals compared to the rest of the retail space. It is therefore unlikely that they would move in the short term.

In addition, most major retail leases are 5-10 years. Their major branding exposure, the benefit of frequent foot traffic and low long-term rentals already provide big retailers with a competitive advantage in the industry.

Why do they need more?

Market far from saturation

If the exclusivity clauses were to be done away with it would give landlords far greater flexibility in terms of making property investments work for them. It is the smaller tenants that provide higher rentals to landlords, which would in turn translate into higher profits for investors. The ability to offer shoppers a greater mix or variety of retailers to choose from is another benefit.

Retail experts believe that the market is far from saturated with at least 20% more capacity still available for development in major cities around South Africa. The opportunity exists to stimulate growth and offer emerging small businesses a fair opportunity to reach shoppers in the retail sector.

Trends reflect that the majority of customers prefer to have multiple options in the same centre to choose from. Property developers would like to support those trends.

However, if big retailers dig in their heels and insist on exclusivity, landlords might find themselves unable to take advantage of such opportunities.

The key to unlocking industry?

It is this somewhat aggressive and restrictive business practice by big retailers that has encouraged property owners and retail associations to bring the matter before the Competitions Commission.

Does the Competition Commission hold the key to unlocking the retail industry? Will a finding that exclusivity contracts are in conflict with a free market economy open the door to a more competitive retail environment?

In an ideal world the answer to that question is simple. Technically exclusivity clauses can be seen to hinder competitive opportunities and encourage collusion. However, a solution is somewhat of a grey area.

Even if the application is successful, the challenge will be in how to implement or enforce a ruling, if it is passed. Who will take on that role or responsibility and how will it impact existing lease contracts? Will it really provide landlords with more negotiating power or will big retailers still be able to wield their influence?

Proactive owners would benefit

These are questions that are yet to be answered, but property owners could benefit from being proactive. Preparing for changes in the industry could help them lead the way in negotiating better terms for new lease contracts.

In the absence of exclusivity clauses landlords may be able to attract new and emerging small businesses that have competitive product offerings.

Taking possible options into consideration can help property companies plan strategically. Whether shopping centre exclusivity clauses can be given the boot will depend on the industry’s resolve. And regardless of the Competition Commission’s ruling, it will ultimately be the ability to negotiate that will have the most influence.

* This guest post is by Francois Froneman, a Johannesburg-based partner for the specialist audit and advisory firm Middel & Partners. He has 17 years’ experience and is an expert in the property, manufacturing, and import/export sectors.

* Photo credit: The photo of Canal Walk is by Jimmy Baikovicius.

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