Walmart/Massmart merger: public hearings (day1)

Economic Development

18 July 2011
Chairperson: Ms E Coleman (ANC)
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Meeting Summary

The Economic Development Portfolio Committee had called for public comment, and was now holding public hearings on the Walmart /Massmart merger. The Chairperson tabled a one-page document in which the Committee’s position was outlined. The Committee, although it had to report to Parliament on questions of employment, industrial development, local manufacturing and economic development, had postponed the public hearings on this merger, pending a decision by the Competition Authorities. The Committee noted that unions had now indicated that they intended to appeal the ruling of the Competition Tribunal. The Chairperson stressed that the Committee and presenters should not address issues that related directly to the appeal, and said that she would rule on any questions that may not be answered.

Business Unity South Africa (BUSA) regarded the
decision by the Competition Tribunal as pragmatic and realistic, and said that the merger should result in greater competition, and therefore the lowering of prices to consumers. This would, in turn, lead to growth in the retail sector, and increased employment, which was in line with the New Growth Path policies. However, BUSA felt that there was a need for more clarity as to what would be regarded as “public interests”, and more certainty on the conditions that could be imposed, and the appropriate mechanisms. BUSA would support measures that sought to enhance certainty and transparency. BUSA raised some concerns as to whether the conditions imposed were effectively penalising companies seeking to invest locally, and was also concerned that if no stipulations on local procurement were placed on long-established domestic retailers, this could amount to undue discrimination and violate South Africa’s compliance to World Trade Organisation (WTO) requirements. Members asked whether Massmart had violated any South African laws.

Walk-In-25, an organisation that partnered with local communities and business owners, and promoted cooperatives, submitted that small business owners had proved themselves very resilient and innovative, despite the many hurdles that they faced. However, their economic circumstances had suffered when foreigners were able to enter their local domain. Walmart had indicated that it intended to establish a presence in local townships, and this posed an immediate threat to the existing spaza shops, who collectively turned over about R7.4 billion per annum throughout South Africa, and who probably employed about 750 000 people.
South Africa was not according enough importance to small business. They would not be able to compete with Walmart’s prices, particularly since Walmart engaged in predatory pricing to force out competitors, as well as driving down suppliers’ prices. Walk-In-25 urged that strong interventions must be made to assist local small business owners, and to protect them against financially-stronger outsiders. Members asked about the numbers of spaza shops, whether they were likely to survive such mergers, and what could be done to ensure survival of small businesses, and to ensure that monies generated within poorer communities was also spent there. They asked if small enterprises tended to be aware of government assistance, and whether the problem lay in the regulations being inadequate, or incorrectly implemented.

In the afternoon session, a journalist from a community radio station commenced his presentation, but it soon
became apparent that he was objecting to the labour practices of Walmart. At this point, the Chairperson stopped him, indicating that the Committee would be unable to hear him on these points. It was agreed that he should send a further and more detailed written submission, and may be invited to address the Committee again at another session.

Meeting report

Walmart / Massmart merger: public hearings
Chairperson’s opening remarks

The Chairperson tabled a written statement from the Committee in regard to the public hearings. She noted that the public hearings on the merger had been postponed for some time pending the decision by the Competition Authorities. The public hearings would not address facts or questions of law involved in the merger enquiry, and the Committee wanted to make this clear, to avoid any perception that it was stepping into the Competition Authorities’ area of jurisdiction.

The Chairperson noted that a notice of appeal, dated 27 June 2011, had been filed with the Competition Appeal Court by the South Africa Commercial, Catering and Allied Workers’ Union (SACCAWU). Although the Committee could again postpone the hearings, it had decided not to do so, because it still had to report to the National Assembly on questions of employment, industrial development, local manufacturing and economic development. She stressed, however, that Members and presenters should not address the issues that were still subject to judicial decision. She also emphasised that the principle of separation of powers must be fully respected.

For this reason, the approval of the merger, and the conditions imposed by the Competition Tribunal would not be addressed. The conditions related to labour affairs, including the upholding of existing labour agreements, avoiding retrenchments and the possible re-employment of those workers retrenched in June 2010. In addition, the status of SACCAWU as the largest representative union, and the setting up of a supplier development fund and establishment of a training programme would not be addressed.

The Chairperson asked all presenters to focus instead on the impact of this merger, and mergers in general, on employment, industrial development, local manufacturing and economic development. She further invited the parties to the appeal to alert the Committee to any issues which they felt may be subjected to judicial decision. She also noted that if she felt that comments or questions were straying into this field, she would make a ruling.
 
Business Unity South Africa (Busa) Presentation
Mr Coenraad Bezuidenhout, Acting Executive Director: Economic Policy, Business Unity South Africa, noted concerns about the short time frame given to submit comments. However, he said that Business Unity South Africa (BUSA) viewed the decision by the Competition Tribunal (CT) as a pragmatic and realistic solution to a complex scenario, which should be accepted by all parties concerned. The limits to the mandate of the Competition Authorities should also be respected. The merger was likely to fuel competition in the retail sector which would, in turn, lead to a better deal for consumers who were trying to make ends meet. A better deal for consumers would also lead to growth within the sector which would, in turn, lead to higher employment levels. The merger was seen by BUSA as being in line with the provisions set out in the New Growth Path (NGP).

However, there was a need to set a clearer definition of “relevant public interests”.
Not only was there no clear definition of what types of public interest issues need to be considered in a transaction such as the Walmart/Massmart merger, but there was also no certainty as to what sorts of conditions could be imposed in order to address any public interest concerns, nor what would be the appropriate mechanism to consider these issues. BUSA said that it would support measures that sought to enhance certainty and transparency in this regard.

BUSA also noted some concerns around the need to protect the local manufacturing industry. There was concern around whether South African rules and procedures penalised companies seeking to invest locally. This was evident in the fact that, despite Massmart lawfully retrenching 503 workers prior to the merger it was ordered to reverse these retrenchments when application for its merger with Walmart was made. Although it would be desirable in principle to try to promote local manufacturing as well as job creation, t
here were no stipulations on local procurement for long-established domestic retailers. This posed the risk of violating South Africa’s World Trade Organisation (WTO) obligations. In order to encourage further investment in South Africa, BUSA believes that the regulatory environment must provide certainty to potential investors.

Mr Bezuidenhout noted that the written submission (see attached document) also discussed whether the labour issues should properly be dealt with by the Competition Authorities.

Discussion
Mr G Boinamo (DA, Portfolio Committee on Labour) asked how it was alleged that Massmart had transgressed the laws of the country. In addition, he referred to slide 6 which stated that “[Massmart] lawfully retrenched 503 workers” and questioned if the word ‘lawfully’ implied that there had been unlawful retrenchments.

Mr Bezuidenhout answered that Massmart had followed the laws of the country. However, there were concerns that despite the fact that it had retrenched its workers lawfully (which had been done in order to ensure its continued growth and secure the employment of its many other employees) it had been ordered to reverse these retrenchments upon application for the merger. This was of concern as it could possibly have affected potential investment. If South Africa was looking to increasing employment figures, more investment was needed. If barriers towards foreign investment were raised too high, this could result in actually dissuading such investment.

Walk-in-25 submission
Mr Basil Manganadelis, Managing Director, Walk-In-25, explained that Walk-In-25
partnered with local communities and business owners, utilising the structure of co-operatives, and would be making this submission for small businesses, particularly in townships and rural areas. Walk-In-25 concentrated on creating and sustaining local economies, by actively supporting small businesses in the townships and rural areas through the co-operative business model.

He noted that despite the numerous hurdles faced by small business owners, which included lack of access to capital and credit, no direct access to suppliers, lack of business training and other hurdles, their tenacity had seen them through troubled times. Their economic circumstances had, however, deteriorated even further with the sudden influx of foreigners into this previously locally-controlled domain. In addition, Walmart had given a strong indication that its immediate growth area would be the local townships. This posed an immediate threat to spaza stores. Townships and rural villagers had become “economic deserts”, and even where there were malls, these were largely facades, populated by tenants who were stock-exchange listed entities whose profits did not benefit local communities.  According to a study done by the Bureau of Market Research of University of South Africa, there were over 100 000 spaza shops located in South Africa, with 40 000 estimated in Gauteng alone. They collectively turned over R7.4 billion per annum in 2000, a larger combined turnover of the branded superettes that included chains such as 7/11, Rite Value and Sentra. Each spaza employed two to three people, which translated, in 2004, to 750 000 jobs.

Mr Manganadelis said that not enough importance was accorded to small businesses. Although other countries actively engaged in assisting them, there was not enough done in South Africa. There were also concerns around Walmart’s selling prices. In 2003, in Germany, the High Court ruled that Walmart’s low cost pricing strategy “undermined competition”. Walmart had since sold its stores and no longer had a presence in Germany. Brazil, India, Korea and Russia had also been troublesome trading stops for Walmart. Walmart had been accused in several places of predatory pricing, and he noted that other smaller spazas could not afford to match its prices, as this would result in them making a loss. Walmart was also known to drive down suppliers’ prices.

Mr Manganadelis concluded that although foreign investment was welcomed, South Africa should not allow anything to happen, and he urged that strong intervention should be made to assist and sustain local small business owners, and to protect them against financially-stronger outsiders. Although spaza shops were able to join banner groups, this was not sufficient, and previously disadvantaged shop owners should have access directly to the supply chain, and be offered opportunities to upgrade and empower communities with direct ownership, especially through cooperatives.

Discussion
Mr P Rabie (DA) asked whether the number of spaza shops in South Africa had increased or decreased. He also asked why Walmart was not permitted to conduct business in Germany and some other countries.

Mr Manganadelis answered that the number of spaza shops was dwindling. He noted that the issue of predatory pricing by Walmart was taken up by the German courts, and after their ruling, Walmart then withdrew operations from that country. There were well-documented cases of a similar nature in other countries.

Mr M Nchabeleng (ANC, Portfolio Committee on Labour) asked what could be done to ensure the survival of small businesses.

Mr Manganadelis answered that small businesses needed direct access to suppliers and easier access to credit.

Ms D Tsotetsi (ANC) asked whether spaza shops would survive this merger.

Mr Manganadelis answered that, although there was strong entrepreneurial spirit within this sector, there was  need to maintain a “look and feel” that would draw customers and instil a sense of pride. The biggest concern was predatory pricing as this threatened the survival of the spaza stores if it was allowed to continue.

The Chairperson asked whether small businesses in the sector were generally aware of the programmes initiated by Government which sought to assist them.

Mr Mangandelis answered that the sector was not well informed of this, and much of the information, when there was awareness, was perceived as being too daunting or difficult to access.

Mr S Marais (DA) asked whether the problem lay in the current regulations being inadequate, or whether they were not effectively implemented. He asked whether it would not be advantageous to spaza shops if their suppliers merged into larger companies, and could then achieve economies of scale, which might result in the reduction of prices to the spaza customers.

Mr Mangadelis answered that he could not answer this as he was not particularly familiar with any of these regulations and policies. There was some question as to whether Walmart’s pricing structures were formulated to assist the consumer, or rather to drive out any competition.

Mr X Mabasa (ANC) asked what could be done to ensure that monies generated within poorer communities stayed within those communities.

Mr Manganadelis answered that it was essential that monies were both made and spent in the same area, as this would ensure the local economic growth of that area.

The Chairperson suggested that Mr Manganadelis should familiarise himself with the laws and policies affecting the sector in which he worked, particularly since his organisation sought to improve the lives of those in rural and poorer communities.

Mr Riyaaz Ismail submission
The Chairperson noted that the written one-page submission that Mr Ismail had sent to the Committee when it called for public comment had seemed to indicate that he might touch on issues that related to the appeal proceedings, and she reiterated that she had cautioned presenters in the morning session that these issues could not be addressed. She said that she would ask Mr Ismail to stop speaking if such issues were raised.

Mr Riyaaz Ismail, Journalist, Voice of the Cape Radio, said that he had responded to an advertisement in the Sunday Times. He was a journalist to a community radio station, which had about 300 000 listeners. Since the indication that Walmart and Massmart were merging, various listeners had expressed serious concerns. When doing some cursory research, he had found that the management style of Walmart left a lot to be desired and that it was not able to operate in Germany. Even some American states did not allow Walmart to operate. Where there was strong union activity, Walmart tended to close its stores and move to smaller towns, annihilating all opposition there. The BUSA representative indicated that Walmart wanted to enter the country to invest. This was not so. Massmart had a Southern African footprint and that was what Walmart wanted to capture.

The Chairperson cautioned that these statements were already touching on issues that the Committee could not consider. When the Committee had received the earlier submission, these issues were not set out in writing. She understood the concerns that he was raising, but requested that the presentation should not continue. Instead, Mr Ismail would be allowed the opportunity to make an expanded written submission, and from that, the Committee could assess whether he could still be asked to make a presentation on Thursday.

Mr Mabasa suggested that perhaps this could be taken as a caution, and Mr Ismail should be allowed to proceed.

The Chairperson responded that she had already made a ruling and would prefer that he make a written submission. She apologised that the matter had taken this route.

Mr Ismail explained that he had been unsure how to prepare for this.

The Chairperson explained that normally the Committee would request written submissions, and may invite oral submissions as well. The Committee had assumed that Mr Ismail, having requested the opportunity to make an oral submission, would be presenting an expanded comment. As an aside, she indicated that community radio stations were in general doing excellent work and reaching a number of people.

Mr Ismail said that he would forward a further written submission on the following morning.

The Chairperson noted that on the following day, the public hearings would continue, from 09h00. She would try to communicate with the presenters, so that they understood exactly what they could present, and could indicate whether they wished to continue.

The meeting was adjourned.

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