THE COMPETITION AMENDMENT BILL AND FRANCHISING

By Ian Jacobsberg • March/April 2018 • Issue 60

We take a look at the proposed changes to the Competition Act and what this means for the franchise industry.

The purpose of the Competition Act, 89 of 1998 as recorded in section 2 of the Act, is to promote and maintain competition in South Africa, in order, inter alia:

To ensure that small and medium-sized enterprises have an equitable opportunity to participate in the economy; and
To promote a greater spread of ownership, in particular, to increase the ownership stakes of historically disadvantaged persons.

These two objectives are closely linked and were incorporated into the Act in recognition of the fact that, throughout the political and economic history of South Africa, most of the population were prevented from participating fully in the economy, especially as business owners. It was recognised, both in the private sector and in those government departments responsible for developing the economy and business, that, in order to create meaningful and durable transformation in the South African economy, the development of small, medium, and micro enterprises (SMMEs) had to be promoted. The Act represented one of the first legislative measures adopted after the inception of democracy that was designed to open up the economy, historically characterised by closely held private sector conglomerates and state-owned monopolies.

Since the Act came into effect (in January 1999), the Competition Commission and Competition Tribunal have had occasion in several cases to address the interests of SMMEs affected by activities of large and dominant corporations. Some of the notable cases include:

Walmart’s acquisition of Massmart in which, as a condition of the approval of the merger, the Competition Tribunal required the merged entity to establish a programme for the development of local suppliers, including SMMEs;
AB InBev’s acquisition of South African Breweries, where the merging parties were required to invest in creating a supply chain incorporating SMMEs and to continue sourcing supplies from local SMME suppliers;
Coca-Cola Beverages Africa’s acquisition of various bottling operations in which, as a condition of the approval of the merger, Coca Cola agreed to create a fund to support and train historically disadvantaged developing farmers and small suppliers, and to develop downstream distribution and retail capabilities.

These measures were, however, restricted to the isolated transactions concerned in each case, leading the competition authorities and the Department of Economic Development to conclude that legislation would be required to address the structural issues that had created, and perpetuated, inequalities in the market. In 2009 the Act was amended by the insertion of Chapter 4A, which came into effect in 2013. The Chapter authorises the Commission to conduct an inquiry into the general state of competition in a market for particular goods or services,

if it has reason to believe that any feature or combination of features of a particular market prevents, distorts or restricts competition within that market; or
to achieve the purposes of the Act (to promote the interests of SMMEs and a greater spread of ownership in the economy).

Several market inquiries have been initiated by the Commission, including an inquiry into the retail grocery market which is likely to directly impact the franchise sector. This particular inquiry was originally announced in 2015 and is still ongoing. The terms of reference of the inquiry require the panel to inquire into, amongst other issues, the impact of franchise retailers on smaller and independent retailers in townships, peri-urban areas, rural areas and the informal economy.

On 1 December 2017, the Minister of Economic Development published a bill proposing further extensive amendments to the Act, several of which were specifically designed to enhance the powers of the competition authorities to protect and promote SMMEs. Principal amongst these are substantial amendments to Chapter 4A. The amendments contemplate that, when conducting a market inquiry, in addition to investigating specific conduct of market participants, the Commission should be empowered to investigate the market structure, including the level and trends of concentration and ownership. The proposed new Section 43C provides guidance to the Commission as to how the adverse features of a market should be evaluated. It requires the Commission to decide whether any feature, or combination of features of the relevant market, prevents, restricts or distorts competition within that market. In making its decision, the Commission must regard the impact of the adverse effect of competition on small businesses or firms controlled, or owned, by historically disadvantages persons.

A further proposed change intends to ensure that the outcomes of inquiries result in effective remedial action that will promote competition. In terms of the existing provisions, the Commission is only empowered to make recommendations. The proposed new Section 43D obliges the Commission, if it finds that any features of a market have an adverse effect on competition, to take whatever action it deems reasonable and practical to remedy, mitigate or prevent the adverse effect. The findings of the Commission (including remedial actions) following a market inquiry will be binding, unless challenged before the Competition Tribunal by any of the affected parties.

The opportunity for the public to submit comments on the Bill closed on 31 January 2018 and the bill will now be put before Parliament for the legislative process to proceed. It is anticipated that the amendments will be passed by mid-2018.

The increased emphasis on the interests of SMMEs and a wider spread of business ownership, as well as the more proactive role that the Bill proposes for the competition authorities in promoting those interests, should be noted by everyone involved in the franchise sector. By definition, business expansion through franchising results in the creation of a network of owner-managed SMMEs that can contribute significantly to achieving the objectives the Legislature has targeted in the proposed amendments. It is unfortunate that, in South Africa, franchised business models are sometimes identified as a way in which powerful consumer brands attempt to encroach on the markets served by ‘traditional’, less formal retailers and service providers. In this regard, the inclusion in the terms of reference of the retail grocery market inquiry that the Commission should investigate the impact of franchise retailers on smaller and independent retailers in townships, peri-urban and rural areas as well as the informal economy, is significant. Franchisors and other stakeholders in franchising should take note of this negative perception and move to counter it. The inherent nature of franchising as a vehicle for enterprise creation and expanded business ownership, as well as the support offered by franchisors in the form of expertise and access to supplies, must be highlighted. At the same time, franchisors, in conjunction with their advisers and the State, should explore ways to assist traditional SMMEs, especially micro-enterprises, to access the resources franchises are able to provide in a way that makes business sense to all involved. Several progressively-minded franchisors have already made significant strides in this regard and others will hopefully follow suit.

Disclaimer: SA Franchise Warehouse is not associated in any manner to any of the brands listed on this website apart from listing details of their respective franchise opportunities. We do not underwrite their viability as a business opportunity nor the quality of the service or products offered by their franchisees. Any complaints need to be directed to the franchisors directly.