A Game store, operated by Massmart, in Rosebank, Johannesburg. Picture: SUNDAY TIMES
A Game store, operated by Massmart, in Rosebank, Johannesburg. Picture: SUNDAY TIMES

A RETAIL rumble over lease exclusivity clauses is being roused by the country’s spending slowdown as supermarket giant’s square off for market share, and landlords of South Africa’s biggest malls reserve ringside seats.

Massmart will, in the next month, file a complaint with the Competition Commission as its ambitions to rollout its fresh food business “Foodco” in struggling Game stores in some malls is being stymied by Shoprite and Pick n Pay.

In centres where the big gun grocers are anchor tenants, they often have exclusivity provisions in their lease contracts which block the sale of certain types of perishable food and dry groceries by other large retailers.

Massmart CEO Guy Hayward said this was “intuitively anticompetitive”.

The Walmart-owned company intends to roll out Foodco at most Game stores over the next few years, lessening its exposure to durable goods, which are usually last on the list when money is tight.

An anchor or draw tenant is usually the first and leading tenant in a shopping centre, whose prestige and name recognition attracts other quality businesses and, it is hoped, shoppers.

In October last year, Shoprite was granted an interim interdict banning Game from selling certain food products at Hyprop Investments’ CapeGate Mall in Cape Town — even though there were already more than 30 Game Foodcos trading against Shoprite in other malls. Pick n Pay earlier this year instituted similar legal action at both CapeGate and Liberty Group’s Midlands Mall in Pietermaritzburg.

Exclusivity provisions have long been a feature of South African retail development.

The main rationale behind anchor stores wanting exclusivity was to protect their investment, Preston Gaddy, the divisional director for strategic retail leasing at Broll Property Group said on Friday.

“Yes, the landlord does spend a huge amount of money to get them into a centre but equally they spend… sometimes up to R25m setting up a new store and want to protect their interest in that respect and not have the trade affected by another large anchor. If the landlords are not prepared to give exclusivity, the anchors are not going to be willing to commit and ultimately the financial institutions are not going to be willing to fund the scheme, so it does have a ripple effect,” he said.

Massmart’s complaint will come just months after the commission wrapped up a four year probe on supermarket lease agreements. While its investigation did not find sufficient evidence to meet the tests set out in the Competition Act for demonstrating anticompetitive effects, the watchdog did say that lease exclusivity raised barriers to entry into the grocery market.

Pick n Pay said its beef was not with Massmart.

“Our position is simple. If landlords enter freely into an agreement, they should honour it. We don’t want to go to court any more than anyone else does. Unfortunately, in a couple of cases, we have had to do that to stop our lease agreements from simply being ignored,” David North, group strategy and corporate affairs director said.

Individual mall owners have been decidedly mum on the issue, taking cover under the South African Reit Association. The body, which represents the JSE’s R250bn listed-property sector, said it considered exclusivity clauses “undesirable”.

“Landlords have become the ham in the sandwich. The landlord is left in the objectionable position of either having to prevent the opening or trade of that national retailer or facing claims for damages for breach of contract due to the exclusivity clauses,” it said in July.

Leases are not, however, set in stone — addenda to specific terms can and have been made by retailers.

At the Westwood Mall in Durban, anchor Pick n Pay’s lease was renegotiated to allow Fruit&Veg City’s Food Lovers Market into the development, similarly at Weskus Mall in the Western Cape where Checkers was the anchor, exclusivity was relaxed to let Food Lovers Market trade.

One market commentator, who could not be named in line with company policy said: “It’s convenient for some to present this as a fight … that somehow retailers woke up one day and decided to war on this issue… I guess it’s quite easy to use anticompetitiveness when there’s financial incentive to have collective amnesia over leases, which is in fact just thinly disguised greed. The developers find it very helpful to agree an anchor tenant at the outset, exclusivity is part of the deal because the tenant does their calculations on the return that they are likely to make — obviously that return is going to be impacted depending on the number of other grocery retailers in the centre.”

Retailers are under pressure as rising living costs, debt and poor job prospects crimp household budgets and make the contest for consumers’ rand’s fiercer. Shoprite reported its slowest annual profit growth in 15 years last month, Pick n Pay launched a price match tool to gain footfall and Woolworths is going guns blazing with its “more bulk, more brands” supermarket strategy.

Massmart’s move away from more cyclical general merchandise into food in Game was strategically sound, but fresh food was a notoriously competitive, lower-margin and difficult retail format to get right, according to Kagiso Asset Management investment analyst Dirk van Vlaanderen.

“…the 20% comparable food sales growth reported in the half-year period is encouraging but still not enough to shift the business into a positive trajectory at this stage … the jury is still out on the ultimate success of fresh food in Game,” he said last month.

Foodco is now in 55 Game stores.

Cliffe Dekker Hofmeyr, competition director Chris Charter who is advising Massmart, said one should also not underestimate the power that incumbent big retailers had over landlords.

“In many cases, the properties have changed hands, so that the landlord now in possession did not negotiate the terms of the lease. In other cases, while there conceivably may have been some justification for limited exclusivity in earlier times when mall culture was in its relative infancy and the risk of a development needed to be shouldered by landlords and key tenants together, the market has since matured so that justification has fallen away,” he said.