UPDATE 1-South Africa's big supermarkets told to drop exclusivity clauses in mall leases

(Adds responses from retailers, more detail on report)

PRETORIA, Nov 25 (Reuters) - South Africa’s biggest supermarket chains could be forced to drop exclusivity clauses in shopping mall leases if they fail to do so voluntarily, the country’s competition watchdog said in findings from a sector inquiry published on Monday.

The grocery retail market inquiry was initiated in November 2015 to deepen understanding of a sector dominated by Shoprite Holdings and its chain Checkers, Pick n Pay Stores , Spar Group and Woolworths Holdings.

The inquiry found "features in the South African grocery retail sector that may prevent, distort or restrict competition", inquiry chairman Halton Cheadle said as the final more than 600-page report here was unveiled on Monday.

Among those features are exclusive leases and tenant mix clauses negotiated by the major chains in shopping malls across the country to deny opportunities for specialist, emerging chains and small, medium and micro-enterprises (SMME) in areas where the majority of consumers do their weekly and monthly shopping.

“Of even greater concern, these agreements also systematically deny the opportunity for specialist stores and independent entrepreneurs to locate in the mall if they compete with any of the national chains’ product lines,” Cheadle said, quoting the report.

One such retailer was Walmart-owned Massmart , which in 2014 lodged a complaint about exclusive lease arrangements that it said were hampering its expansion into the fresh groceries sector.

The inquiry found that more than 70% of shopping malls, which account for about half of all grocery sales nationally, are subject to exclusive lease agreements.


It recommended that national grocery retailers immediately cease enforcing exclusivity clauses against specialist and SMME stores in shopping malls and all grocery retailers in non-urban areas where there are fewer alternative malls.

Cheadle said the measures will be achieved through voluntary compliance within six months from Nov. 25 or the regulator would instigate “legislation in the form of regulations or a code of practice”.

David North, group executive for strategy and corporate affairs at Pick n Pay said the company had explained throughout the inquiry that the grocery retail market “operates fairly and transparently and in the interests of all consumers”.

“In terms of...phasing out exclusive leases, our view is that they are already a diminishing feature of the market, and Pick n Pay has for some time sought to ensure that small retailers who want to open in shopping centres where we are present are able to do so,” he said in an email to Reuters.

Shoprite said it was studying the report to “inform further steps to be taken by the company”, while Woolworths also said it was reviewing it.

Massmart and Spar were not immediately available to comment. (Reporting by Nqobile Dludla Editing by David Goodman and Emelia Sithole-Matarise)