THE LITTLE GUY GETS SHAFTED

Wow, is this article an eye-opener or what! There must be somewhere that we can go and get some sort of justice. I will be doing some research on this and let's see where we can take it.

The little guy gets shafted


Barrie Terblanche


22 May 2007 11:59

The major retail chains and franchises — found mainly in shopping centres such as Tyger Valley and including branded garage shops — make up only 6% of local retail outlets, but sell 70% of all goods.

As the retail boom continues in South Africa, fears are mounting that the concentration of power in the hands of large retailers and shopping centre landlords is growing unchecked in tandem with excessive mall development, which is wreaking havoc among independent retailers in the country’s CBDs and high streets. “You’ve had a mall culture developing across the world -- in India, in China, in Eastern Europe. America has been the forerunner of it. But in South Africa it’s been more extreme,” says Marcel Joubert of the South African Council of Retailers (SACR), an association set up to protect the interests of independent retailers.

Joubert -- whose Platinum group owns the mall-based clothing stores Hilton Weiner, Jenni Button, Vertigo and Aca Joe -- says he is not against mall development, but warns against uncurtailed power building up in the hands of South African mall landlords. He raises the spectre of “privatised cities”, where the shopping mall manager is the de facto mayor and sheriff. “In a big city you’ve got 50 000 landlords to choose from; even in a small town you’ve got 200 to choose from. That’s a free market operation. You’ve got freedom of association, freedom of choice. But now let’s say you’re a small black trader and you want to get into Tyger Valley [Shopping Centre in Cape Town], you’ve got one landlord, they’ve got absolute power. You’ve got a privatised city,” says Joubert.

In 1960, there was 100 000m2 of shopping centre space in South Africa. Today, there is close to 6,5million square metres. The “land grab” by major retailers continues unabated, says Joubert. Excessive mall development in South Africa is increasingly displacing the market away from the CBDs -- which are governed by municipalities and freer market forces -- and into shopping malls, where 80% of the tenants are large national chains. Joubert cites a litany of abuses of power by the landlords against independent retailers, including excessive rentals, ruthless cancellation of leases and anti-competitive exclusion of traders from malls. Large retailers are charged as little as R25 a square metre, while small shop owners can be charged as much as R750 a square metre -- a difference so large that it cannot be explained by simple volume discount, says Joubert.

So eager are shopping mall developers to sign up anchor tenants -- the large national chain stores that pull shoppers to the centre -- that they are given 20-year to 30-year leases, often with minimum escalation of rent and as little as 1% or 2% turnover rental. The mall owner then tries to extract as much rent as possible from the small tenants in order to fulfil his return on investment. Small tenants, especially the flourishing ones, are sometimes charged as much as 15% turnover rental and are given leases as short as three years. Reid Corin, a Cape Town-based lawyer who has represented independent retailers in disputes with shopping centre managers at Tyger Valley and Gateway in KwaZulu-Natal, says years of toil and millions of rands of investment are wiped out when a landlord refuses to renew a lease, because the value of the small shop lies in the goodwill built up in its location. If it is forced to move out of a shopping centre, it loses all its custom, even if it opens elsewhere. “It’s strange that a landlord can, by deciding unilaterally not to renew a lease, destroy an entire business, force people out of jobs and all kinds of other repercussions just because one oke feels he can get R25 a square metre more from someone else,” says Corin.

Exclusion, another form of abuse, is pointed out by George Skinner, executive chairperson of the South African Council of Shopping Centres (SACSC), which is widely regarded as the industry body representing large retail and shopping centre management. He says it is “common knowledge” that some landlords agree with their anchor tenants that certain shops, for example butchers, greengrocers and even pie shops, are not to gain entry into the shopping centre. Some lease agreements even refer to the excluded competitor by name, a practice he describes as “utterly contrary to the Competition Act”. Skinner agrees that the system has caused an “unfortunate dominant sameness” throughout South Africa’s shopping centres, and that it has become “almost impossible” for new chains to emerge. But while he favours self-regulation of the industry as a solution, Joubert and Corin believe that government regulation is needed. “One wonders, in fact, if the time hasn’t come for Nedlac and the department of trade and industry to sit down and see just how you protect [small businesses],” says Corin.

Concentrated cross ownership between property developers and retail giants can lead to a situation in which the landlord can also be a retailer’s competitor. For example, Old Mutual, which owns many shopping centres, also owns a significant stake in Mr Price. Even if such a landlord has never abused its power, “it’s something that needs to be regulated from an independent point of view,” says Corin. Joubert points to many countries where retail tenants are protected by law against landlord abuses. In the United Kingdom, there is a virtual moratorium on mall developments because of government concerns over the displacement effect. France has a statutory lease period and protection against arbitrary non-renewal of a retailer’s lease. Australia protects small retailers by outlawing any “unconscionable” treatment by a landlord.

Is there hope that the South African system will change? Skinner says the Competition Commission has sent a strong warning that it is concerned about anti-competitive practices in the industry. The commission started a dialogue with the SACSC about a year ago. But Joubert says the SACR has lost faith in the commission after it refused to take forward complaints by small retailers in shopping centres across the country. “It seems to us that the commission is understaffed and overworked and, therefore, does not have a firm grasp on the issues.” Commission staff told the Mail & Guardian that no retail case is currently under investigation, apart from one concerning supermarket shelf space. It is one of 80 cases being investigated by the commission’s 18 investigating officers. It seems more likely that change will stem from the massive political will behind BEE. The same oppressive forces apply to independent black retailers in local malls.

Shopping centre bosses may well try to sign a cosy charter with the usual BEE tycoons in an effort to keep real regulation at bay. Small shop, big risk. Small retailers who are lured into newly built malls are “like cannon fodder” to unscrupulous shopping mall developers, says Marcel Joubert of the South African Council of Retailers. While acknowledging that some landlords are sensitive to the survival needs of small retailers, Joubert describes how others mercilessly exploit the growth cycle of shopping centres and the small shops inside them. Just before a shopping centre opens, small retailers are drawn in on what seem to be reasonable terms. At that time, the negotiating balance between them and the landlord is at its most equal, because he needs to draw them off the high street or out of the CBD and into the centre.

“Experienced retailers know that a centre has an incubation period. We know to expect to sweat it out for two, three years. But the little guys don’t know that. So they go in with [their] life savings and they expect the centre to boom from day one,” says Joubert. But the beginning is always slow and small tenants find they usually have to put all they have into the shop: money, loans, savings and three to four years of extremely hard work just to stay afloat. “These stores are expensive. It costs you a million rand to open a little store.” After three or four years, the shop usually turns around, and it is at this point that the shop owner is at his or her most vulnerable, says Joubert. Behind them is R1million’s worth of sunk cost and years of toil. In front of them is the promise of the first profit. But the lease is structured so that it comes up for renewal at more or less that vulnerable point. A shop owner in such a situation has little choice but to accept huge rent escalations. If they are unwilling to do so, he or she is simply replaced by another tenant. -- Barrie Terblanche