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The full decision rendered by the Competition Authority reveals the extent to which Choppies Distribution Centre and Payless Supermarket lied to the Authority in order to be exempted from certain requirements of the Competition Act.
The matter goes back to June 11, 2014 when Choppies, Payless and another player named Woodblock made a joint application to the Authority for an exemption to participate in a Choppies-helmed buying group contract. The Authority’s Exemptions Review Committee rejected the application and ordered Payless and Woodblock to wean themselves from the Choppies buying group. Following an appeal to the Competition Commission, the parties entered into a settlement agreement through which the parties agreed that the time within which Payless and Woodblock would have to wean themselves off the Choppies Buying Group would be extended to November 30, 2017.
On April 22, last year, Choppies and Payless entered into a buying group agreement in terms of which the two would purchase goods together from their suppliers. The agreement specified how the goods would be apportioned and distributed between the two parties. Three days later, they applied to be exempted from Section 27 of the Competition Act in anticipation of the looming November 2017 deadline. Section 27 requires competitors to purchase goods independently of each other. Reasons that Choppies and Payless gave for entering into the buying group agreement were that it would enable better purchasing power which would translate into lower prices and better quality products and that such benefits would also accrue to both consumers and employees.
The application said that Payless was in desperate need of this arrangement because it was operating in a highly competitive, facing stiff competition from other chain supermarkets like Spar, Shoprite, Woolworths, Shoppers, Metsef, Game Stores, Trans Africa, Jumbo and Pick-N-Pay. The exemption would be vital for the chain’s business strategy for the following commercial reasons: its performance had improved on account of being part of the Choppies buying group but was yet to return to profitability; ithad stabilised due to being in this buying group and the financial stability could only be maintained by keeping it in the group; its staff complement had increased from 400 to 650 and if forced to leave the group, it would have to reduce it ; and, if the exemption was not extended, then it would be forced to undergo liquidation.
The applicants (Choppies and Payless) claimed that despite being part of this buying group, they remained rival businesses; that their goods were priced independently of each other and there has never been any collusion or disruption of the market or lessening of competition; and that the buying group had merely allowed them to negotiate better pricing and discounts from their mainly South African suppliers.
In an 11-page decision written by the Competition Authority’s CEO, Tebelelo Pule, it emerges that prior to receiving the application, the Authority “had received complaints from customers, employees of Payless and competitors that Choppies had taken over Payless.” The allegations were to the effect that Choppies and Payless were being run by the same entity because Payless staff members wore Choppies uniform, that Choppies’ banners were displayed inside Payless stores and that Payless was selling Choppies house brands. The Authority would itself later find that there was no competition between Choppies and Payless, that the two supermarket chains had monthly promotions wherein they had the same goods on promotion at identical or similar prices and that the pamphlets were an exact replica of the other.
Pule’s decision says that Choppies, which was not supposed to benefit from the arrangement, was actually benefiting based on the quantity of its in-house brands sold in Payless’ 11 stores in Gaborone, Mochudi, Tlokweng and Molepolole. On the other hand, Payless did not have any in-house brands but instead sold a variety of Choppies’ goods in large volumes. All in all, the Authority’s investigations revealed “a price-fixing pattern and a distortion of competition.”
Pule’s decision was announced via a three-page press statement that summarised it. Using tempered language, the statement says that “initially when the application was made, the two stores claimed that Payless had been able to retain the same number of staff and even increased its staff complement. Upon scrutiny this claim was found to be untrue.” Pule’s more detailed decision reveals the stark form this deception took. In the application, a claim had been made that Payless’ staff had increased from 461 to 650, which figure was then revised down to “only 300 employees” when the Authority asked for the names and telephone numbers of employees. However, following a “thorough analysis” of documents submitted, it emerged that Payless actually had less than 200 employees.
Pule decision on this point reads further: “The Parties submitted two documents. The first document had indicated the names, date of engagement, position held, the store the employee worked at and their employment status. Whilst this document was bulky, it emerged that most of the employees were no longer working for Payless. The second document contained the names, cell phone numbers and the stores the employees worked at. It was after the analysis of the two documents that the Authority came to the conclusion that the employees were less than 200 in number. It would appear therefore that the parties submitted misleading information to the Authority.”
Where they were not falsifying information, Choppies and Payless were not too keen on sharing it. In their application, they had claimed that a majority of Payless’ plans - such as its expansion plans - were reliant on it staying in the buying group. However, the Authority found “no substantive evidence” to back up that claim.
“Save for the list of employees and suppliers, the parties failed to submit substantive information with supporting documentation on Payless’s financial position in the form of annual profit margins from 2012 to date. The parties merely submitted that sales had started picking up after the drop in 2015 and continue to be sturdy despite robust competition. There was no economic and factual evidence that Payless had been doing well in the last three years and that the buying group was the sole reason for this,” Pule’s decision says.
Choppies and Payless had claimed that profits had remained low because of some projects (such as refurbishing its stores and rebranding) that Payless had undertaken to revamp its brand. Independently, the Authority found that “there are no documents to support these plans and cost thereof. There is no factual or economic evidence that shows that though Payless’s trade has improved, profitability remains low due to the projects it has undertaken to revamp and rebrand itself.” While figures were provided, they were not supported by any documentation.
“In addition, allegations of arrears and outstanding payments to employees and creditors have been made but there is no evidence of the amount in arrears that was owed to employees or creditors.”
Pule’s decision doesn’t say how much less money both chains would have made had they played by the rules. However, it found that Choppies annual turnover for the financial year ending 30 June 2016 was P1 569 381 984 and that Payless’ - for the same reporting period – was P98 913 099.