A Buying Group asked: “What about Capitalism in South Africa”?


BUYING GROUPS, RETAILERS, SUPPLIERS, MEDICAL, INSURANCE & PROCUREMENT DIVISIONS

Competitions Commission Act

As a result of the previous 3 articles I have written on the subject of the latest competitions commission act, there has been substantial pushback and denial from suppliers, retail groups (across all retail genres), Insurance Companies, Medical Schemes and procurement divisions in corporate companies and others.

It is somewhat bemusing (more like huh?) to me that, otherwise intelligent people, actively seek out ways to interpret (more like re-interpret) the obvious intent of the competitions commission act, as it relates to leveraging volumetric buying power, and how that practice is now effectively outlawed.

So big was the pushback that I decided to be introspective and review the articles from the ground up, being as objective as possible, using the flurry of objections received as the basis for my review, including: (objections stated in bold)

  1. The topic of “what happened to capitalism”?
    When properly researched, the law actually promotes capitalism, by driving innovation and efficiency as the driver of growth. Deal-making based on volumes, actually has the opposite effect, stifling competition and capitalism.
  2. Statements by some that “their” Buying group or Retail group or… levels the playing fields for small players and therefore do not fall foul of the act.
    Yes but!…although this appears honourable, how does it stimulate growth? What it does, is line the pockets of the puppet-masters on the back of being seen as valuable…That WOULD be accurate IF the full 100% rebate/discounts were passed back to the member and the “Buying Group” is financially remunerated by value adding services and efficiencies etc ie: EARNS their keep, not leverage their (volume) muscle and KEEP slice as their “take”.
  3. That higher volume qualifies as a rebateable/discountable efficiency.
    Maybe, but now the burden of proof of HOW MUCH that it actually saves (as an efficiency) is on you to prove…Believe me it does NOT equal most rebates, discounts, settlements blah blah blah.. Remember, circumvention through “marketing contributions”, settlement discounts etc, ALL require proof of value as an efficiency….when challenged.
  4. That the “big guys” will easily circumvent this act by simply “creating” efficiencies to achieve the status quo.
    Yes, many of our corporates like to show how clever they are, and likely will…then be caught, prosecuted and pay massive fines. Remember it has become EASY and FREE for litigation to be filed with the Competitions Commission as it relates to this act. Yup, no longer is the cost of litigation a safety net that excludes challenges form the credible smaller businesses.
  5. That “Only in South Africa” do we see these “types” of laws as being a “drag” on business.
    SLAPDOWN – I was concerned with this comment as we are different to most countries, but was not concerned for too long. Check out the research from around the world deeper in this article. We’re just late to the party.
  6. That “nothing will come of this law, because how do you prove it?”
    The burden of proof is with the “giver and receiver” of rebates, discounts etc. If you have a credible complaint with sufficient evidence of pricing disparities (even Spaza shop vs corporate retailer). YOU must PROVE that the efficiencies YOU give/get equals the VALUE of discounts/other given…not simply “claim: a value.
  7. That in fact “my group INCREASES competition” by enabling small stores to buy better, levelling the playing fields”
    Sure, but to reconcile that equation to finality, ALL rebates, savings, discounts, settlements – YES 100% of them, must go back to the “member” and you should EARN your keep through membership fees, efficiencies, innovations, services etc. ie: Give it ALL back then sell back services, or you’re simply a non-value-adding broker (which is fine if you’re billing accordingly, and noy RETAINING a self-defined portion of someone else’s rebates)

QUESTION – How many “Buying Groups” actually BUY anything in the first place. Those that do and have DC’s, warehouses and central buying…and…and…and, GREAT as there are some efficiencies in that, however, just be ready and able to definitively prove the value those bring to provably reconcile to what you receive – accurately.

Look, as I  mentioned in a previous article on this topic, this is not about debating the merits of the new act as it is now law, and the debate stage of the merits has long passed. This SHOULD be stimulating discussion on what business can do to align with, and adopt new law, and not be about how to attempt to circumvent or re-interpret it to align with your business model…Move on! (mic drop)

Here’s my simplistic (non-legal) summary of the intended outcomes and ‘spirit’ of the latest Competitions Commission Act:

  1. That it is genuinely trying to level the playing fields.
  2. So that large companies do not get preferential deals based purely on POWER and VOLUME.
  3. Intends to stimulate efficiencies that drives collective growth for the economy as a whole.
  4. Attempts to stimulate a more inclusive economy. (ie: simply because big retailers are big and have huge buying power, they should not become incumbents that always get the better price based on volume. 
  5. The law is written and intended to hold business to legal accountability, without small companies being burdened with massive legal cost hurdles. ie: the law gives the smallest businesses real teeth to litigate, if credible and even aims to enable class-action cases when appropriate.
  6. To stop the bullying of suppliers into submission
  7. To stop large suppliers undercutting newcomers (competition)
  8. To discourage (unspoken) collusion between suppliers and retailers/wholeslaers.

My original intention was to simply write one article about this topic, mainly due to my participation in developing much of what must now change. That one article is now four, and I am more resolute in my opinion now, more than than ever, based on the additional research I have been required to do to reply to the objections of many.

After so seeing much negative pushback and denial in the marketplace, (and in some cases absolute arrogance by some big corporates with big legal departments and even bigger egos) it may be useful to pick a battle that tests this law, answers the negative pushback and denials, and tests the egos of “bring it on” legal departments. 
Hmmm tempting, and probably just what I need to fill the time…that I don’t have  (maybe later, as there are some cases underway, which I will follow with great interest.)

A GLOBAL PERSPECTIVE – yup, not unique to South Africa  – SURPRISE!

These following excerpts from “around the world” is a series of similar restrictions and interpretations that talk a similar language. Globally, however, references are made using language like Anti-Trust, Monopolistic behaviour, Buying Cartels, joint purchasing arrangements, volume buying, group negotiations etc.

In the U.S.A. they have “The Sherman Act” (Only in AmericaYou can, but you can’t, unless you will or you won’t…EISH!)

EXCERPTS:…
Federal antitrust laws may be enforced against a buying group (as well as its members, directors, officers and employees) both by governmental officials and by private parties through treble damage actions. In both cases, penalties are severe. An individual convicted of a criminal violation of the Sherman Act…

– more “…Joint purchasing arrangements are unlikely to raise antitrust concerns unless: (1) the arrangement accounts for so large a portion of the purchases of a product or service that it can effectively exercise market power in the purchase of the product or service; or (2) the products or services being purchased jointly account for so large a proportion of the total cost of the services being sold by the participants that the joint purchasing arrangement may facilitate price fixing or otherwise reduce competition. If neither factor is present, the joint purchasing arrangement will not present competitive concerns.” – Yes, if VOLUME dictates the agreement too much – oops trouble…and the burden of proof is on you WOW!

WHOLE ARTICLE: https://hme-business.com/Articles/2000/10/01/Legal-Issues-for-Buying-Groups.aspx

In the European Union this is covered under Anti-Trust Laws…
(E.U. lawmakwers are not short on words are they, check this out:
“The Lord’s Prayer is 66 words long. 
The Ten Commandments: 79 words. 
The Gettysburg address: 272 words. 
EU regulations on the sale of cabbage? 26,911 words.”)

THE E.U. Anti Trust Laws  (note wording on efficiency and innovation)
Competition encourages companies to offer consumers goods and services on the most favourable terms. It encourages efficiency and innovation and reduces prices. To be effective, competition requires companies to act independently of each other, but subject to the  pressure exerted by their competitors.

EXCERPTS: …Article 81 of the EC Treaty

“As set out above, some will see Buying Alliances as a pro-competitive development. Any alleged restriction under the first paragraph of Article 81, e.g., exchanges of information among competitors, would be justified by all the consumer benefits and efficiencies set out in the third paragraph of the same Article. However, others will consider these alliances as constituting de facto unhidden joint buying cartels, at least in their effects.4 In this latter point of view the emphasis is put on the situation where previously independent undertakings in the…”

Article 82 of the EC Treaty

“We shall take the legal and economic premise that sellers’ and buyers’ market power should receive the same treatment by the enforcer both in terms of analysis6 and metrics.7 Following on from this, the definition of collective dominance-market power in some procurement markets of consumer goods as a result of Buying Alliances’ market position8 cannot be excluded. Thus, as regards abuses of dominance within the meaning of Article 82 of the Treaty, nothing under standard evidence and burden of proof requirements in EU antitrust law would exclude…”

WHOLE ARTICLE: https://www.mayerbrown.com/en/perspectives-events/publications/2008/10/buying-alliances-and-eu-antitrust-law

In the U.K. (The land of Brexit trying to re-figure out which way is up)

The U.K. is largely guided by the same laws indicated in the E.U. section above ie:

  • anti-competitive agreements (under the Chapter I / Article 101 prohibitions); and
  • abuse of a dominant market position (under the Chapter II / Article 102 prohibitions).

READ MORE: https://www.pinsentmasons.com/out-law/guides/competition-law—the-basics

Down Under – Australia: YOH! This reads/feels like  a Federal State, but hey, each to their own. (AGAIN, note the references linking everything to efficiencies) 

EXCERPT:
…”In Australia, agreements between businesses to collectively bargain may be authorised by the ACCC. This exempts them from the operation of section 45 and the cartel provisions of the Competition and Consumer Act 2010 (Cth) (‘CCA’).

The antitrust evaluation of collective bargaining agreements, in both Europe and Australia, requires an analysis of the costs and benefits of these agreements. For example, when considering purchasing agreements the European Commission requires four factors to be satisfied:

1. the agreement creates gains in economic efficiency;

2. restrictions in the agreement must be indispensable to achieving the efficiency gains;

3. the agreement does not bring with it the possibility of eliminating competition in a substantial part of the products in question; and

4. a fair share of the benefits are received by consumers.

Conditions similar to the first three of these requirements must be met for ‘authorisation’ and ‘notification’ in Australia.

At the same time, both competition authorities and independent commentators have raised concerns about the potential anti-competitive effects of collective bargaining. For example, if businesses that are otherwise in competition with one another are able to cooperate for the purposes of collective bargaining”…

WHOLE ARTICLE: http://classic.austlii.edu.au/au/journals/UNSWLawJl/2013/5.html

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