Competition Tribunal
of South Africa
Hearing in the matter between
WAL-MART STORES INC
and
MASSMART HOLDINGSLTD
Case No. 73/LM/Nov10
held at
DTI Building
Sunnyside
on
16May2011
Panel:N Manoim
\Y Carrim
A Wessels
Case Manager:R Badenhorst
K Moodlaiyar
AMB Recordings and Transcriptions CC
P O Box 326, Derdepoort Park 0035
Tel: (012) 819 1013/5; Fax: (012) 349 8218
Competition TribunalPage1Wal-Mart Stores and
Case No. 73/LM/Nov10Massmart Holdings
16 May 2011
CHAIRPERSON:Good morning everybody. We are here to deal with final arguments in this matter. We’ve already agreed the time limits for arguments and in terms of the program we will start with the Commission who have got 15 minutes.
ADV MTSHAULANA: Thank you Mr Chair. Mr Chair, because of the time limit we have prepared a short statement, which I will try to speak to very briefly. I don’t know whether we will distribute it after or according to your program?
CHAIRPERSON: You can give it to us now.
ADV MTSHAULANA: Okay, thank you Chair. Mr Chair, today is the final day as argument will be presented by the Commission. The Commission has prepared a very short argument, limiting itself to very few aspects of what was appearing in the Tribunal last week. Very briefly, Mr Chair, the merger which is before the Tribunal today was reported to the Commission in 2010 and following the notification by the merging parties, the Commission conducted an investigation into the merger and engaged the various stakeholders in order to determine whether or not the merger was likely to substantially prevent or lessen competition, as well as to determine whether the proposed merger can or cannot be justified on public interest grounds.
To that end the Commission assessed the trends of the competition in the relevant market as well as the probability that the firms in that market after the merger would behave anticompetitive. Based on a number of factors, which inter alia included the fact that the relevant geographic market for the purpose of the proposed transaction is local, the fact that there is no geographic overlap between the activities of the merging firms, the Commission concluded that the proposed merger is unlikely to substantially lessen or prevent competition.
In determine whether the merger could or could not be justified on public interest grounds, the Commission in addition to the factors listed in Section 12A(3) of the Act considered the concerns addressed to it by various stakeholders, in particular the trade unions and the business forum, small business forum. The nub of the submissions of these stakeholders was that the merger could not be justified on public interest grounds, because inter alia the pre-merger retrenchments, the likely impact of the merger on employment in general, on small business enterprises, on suppliers and on certain sectors of the economy.
After considering the submissions of these parties together with other factors that are listed in the section ne have referred to, the Commission recommended that the merger be approved without conditions. During last week, before the Tribunal, new evidence emerged. That evidence was largely based on the documents, which were discovered by the merging parties subsequent to the Commission making its recommendations. At paragraph 9 of our arguments we list the documents that were not before the Commission when it made its recommendations. I will not go through all of them. I will just refer you specifically to a few. At page 5, paragraph (c) we refer to a latter of 1 September 2009, which came from Massmart where Massmart indicated that we will be in a position by no later than the end of the year to provide additional insight to you as to our thoughts on moving forward in South Africa.
At (d) we refer to the fact that in September Wal-Mart had already identified Massmart along with two other firms as priority targets. At paragraph (e) we refer to the record, a document appearing at 2653. In paragraph (f) we refer to Mr Bond’s evidence. At paragraph (i) to (l) we refer to exchanges of e-mails between Massmart and Wal-Mart in the month of April 2010, showing what went through between those parties. We refer in paragraph (n) and (o) to e-mails detailing exchanges between Massmart and Wal-Mart in the month of May.
In particular at paragraph (p) we refer to an e-mail of 9 July where the CEO of Massmart refers to an interview he had with Manuel where he seems to say that he was asked about the relationship between the parties and he gave what he describes as our now standard response.
Mr Chair, I want to, because of the time, take you to our conclusion, the conclusion of the Commission, which is appearing at page 11. Having considered the evidence before the Tribunal and in particular taking into consideration the new documents, evidence and answers that were given during cross-examination, the Commission has concluded that the relationship that existed between Wal-Mart and Massmart prior to and during the retrenchment process was deeper than was projected by the documents submitted to it for consideration by the merging parties.
The evidence and documents referred to above project that a potential acquisition of Massmart by Wal-Mart was in fact imminent. In the Commission’s view the inference is therefore irresistible that the retrenchments were linked to the merger. In those circumstances the Commission recommends that the merger be approved with the following conditions: That all the 503 employees who were retrenched be reinstated and that the merged entity will honour the existing agreements with trade unions for at least a period of 3 years. That is the Commission’s submission, Mr Chair.
CHAIRPERSON: Mr Mtshaulana, thanks very much. The merging parties?
ADV UNTERHALTER: Thank you Chair and members of the Tribunal. Chair, the only issue before the Tribunal is whether this merger is justified on public interest grounds or not. There are no competition concerns that arise in respect of this merger and indeed rather more importantly affirmatively there are pro-competitive consequences, which will flow from this merger. That fact is one that is highly relevant to the public interest and it’s one which we shall revert to.
Those who oppose the merger essentially raised two categories of concern. The first concerns procurement issues and the second employment issues. As to the employment issues it is said that what will transpire from this merger is a reduction of wages and benefits in accordance with what is assumed to be Wal-Mart’s more muscular attitude to these matters. As to the procurement issue, it is said that the effect of the merger will be to give rise to significant import substitution that will be harmful to local manufacture and with it there are consequences for employment.
In consequence, those who oppose seek either that you do not approve the merger or perhaps more plausibly, at least as their submissions have developed, that they would seek a large variety of conditions. The merging parties submit this; that firstly, as I’ve indicated, there is no competition concern that arises. We submit secondly that if you make a judgement on the basis of what is likely, there is an overwhelming case that there will be very significant consumer welfare gains that flow from this merger by way of the price reductions that will accrue from the acquisition that is contemplated and those will be widely enjoyed by members of the South African public.
It is also a consequence of that that there will be employment gains that accrue for the benefit of the economy as a whole and that is to be taken together with the fact that the merger is predicated on the quickening of the expansion possibilities that Massmart has already begun to engage. So, there will be job creation possibilities that flow from the merger that are likely to result, as well as export enhancement that is going to come about from this merger.
So, there is a very substantial package of likely benefits, all of which go to the public good and all speak strongly to why this merger is strongly justified in the public interest. The question is what is to be weighed on the other side and here the question is, well, what showing has been made firstly in respect of the employment effects and secondly in respect of the procurement import substitutability threat.
We submit to you that there is no affirmative case that is being made on either of those scores. The burden rests upon those who raised this objection and if one looks carefully at the evidence, and we will come to deal with it in some detail, there is simply not a case on the evidence that is made out that would give rise to any significant concern on the part of the Tribunal that there is any likelihood of those adverse effects arising.
So, we start therefore from a weighing exercise where on the one hand there are likely, very substantial gains that accrue to the public good from the merger and there is then a case that is sought to be made out, mostly resting on an apprehension that Wal-Mart, because it is a large and powerful company, will have deleterious effects of the kind that are suggested, but ultimately when public interest is judged, it cannot be judged by perception. It cannot be judged by apprehension. It has to be judged by facts and when you consider the evidence, we will submit that those facts are simply not proven before you.
That means that this merger is justified and there is simply no legal basis under 12A for the imposition of any conditions in this merger. That said, our client is well aware and particularly here we speak of Wal-Mart, that there is and has been evidenced in these hearings an apprehension about Wal-Mart and the way in which its size and capabilities may impact upon the economy of this country and the settled labour practices that exist in this country. We say that apprehension is ill-founded. We say that the undertakings that have been given will be adhered to and have been adhered to by Wal-Mart.
But we will also say this; that there are some voluntary undertakings that Wal-Mart will make and which we will come to in the course of our argument before you, which we invite you entertain. They are offered not because they need to be offered or are legally required to be offered. They are offered simply so show as a matter of good faith that the apprehension that is entertained is simply ill-founded and the proof of that is in the voluntary nature of what we mean to do and that is both in respect of the employment dimension and in respect of an aspect of the procurement dimension.
Now, as between my learned friend Mr Gauntlett and myself, we have divided up the argument that we will make before you and do it within the time that is available and if I could possibly just sketch for you the topics and the division of labour and to that end, if I might hand to the Tribunal our written submissions. Chair, we have compiled these submissions on the basis that they do not contain confidential information. There are a few passages where we simply create square brackets, which refer to matters that are confidential, but they are readily ascertainable from the record and we will, if you need any further clarity on those points, we can provide that to you with a separate document, if you wish it.
Chair, obviously these Heads are lengthy and neither my learned friend Mr Gauntlett nor I intend to read them to you. We would probably only get to page 20, if we sought that approach. Rather we will seek to capture what we think are the central points that arise and which we hope will be helpful to you in coming to your conclusion in this matter.
So, if I could then just indicate how we’ve divided this up and I would ask you then just to turn to the index at the front of the submissions, I will deal firstly with the question of procurement questions, which goes up essentially to page 43 of the Heads. My learned friend, Mr Gauntlett, will then tackle the employment question, which is from 44 to 52. I will then consider the likely effects on employment and in particular some of the aspects that flow from the concerns raised, both as to procurement and the employment issues.
My learned friend, Mr Gauntlett, will then tackle the legal principles and some questions of international law that are pertinent to the public interest questions arising in this merger and I will then deal with the application of those principle – that is from page 74 to 86 of the Heads of Argument and then finally my learned friend, Mr Gauntlett, will conclude and he will deal with the voluntary undertakings that I have indicated in my introductory remarks. So, that is the plan of action, as it were.
If I may then, without further delay, go immediately to the question of procurement. Now, we begin this debate essentially by pointing to what we consider to be a central feature of public interest that arises from this merger and that is, what are its consumer effects? I need hardly point out to this Tribunal that consumer that consumer welfare lies at the very heart of the competition law project and lies at the very heart of the mandate that this Tribunal is put in place by parliament to secure and therefore it matters greatly what are the likely consumer benefits that are going to flow and we say are likely to flow from the merger. That counts, because we say when you do your ultimate reckoning on public interests, consumer welfare is a significant public good. It is a public interest and we say is a central public interest and if, as we think the evidence overwhelmingly establishes, there is a likelihood of very substantial consumer benefit, then that is a heavy weight that is to be placed in the scales that you must ultimately look to for the purposes of making your determination on justification.
Now, we have in the Heads of Argument set out the evidence that has been placed before you in respect of where consumer welfare will be served by this merger and the benefits accruing. Plainly because this is a merger, it is a probabilistic inquiry like every other aspect of merger control, but we say there is a formidable body of evidence, which speaks directly to the overwhelmingly likelihood that this merger will give rise to very substantial consumer benefits and hence consumer welfare and we mean that particularly in the most basic and obvious way, which is that there will be reductions in prices in the retail sectors that Massmart engages and will engage, because it is now part of its corporate strategy to enhance its showing at the retail level, particularly in food and in particular in lower income areas.
So, we set out at page 9 and thereafter the essential evidential basis and we list it and I will simply make very brief reference to this, but in the independent studies in the US, which show the average household’s gain in a year of $3100.00. Now, that is and was supported indeed by Mr Jacobs who himself referred to studies, which indicated a range of price gains between 8 and 27%. That is again broadly confirmed in other markets in which Wal-Mart operates, such as Chile where the figure is between 5 and 8%, Brazil where it is 6% and more, Mexico 8% and the experience in the UK, which was where, when Wal-Mart took over ASDA, again there were very substantial price gains of the order of 20%.
So, there is a great deal of comparative empirical evidence that this is the effect that Wal-Mart has. It is also a function of its business model, which has not been placed in contention in these proceedings, which is everyday low prices. It is a low price, high volume strategy and that is the fundamental basis upon which Wal-Mart engages the markets.
So, we do submit that that body of evidence is very considerable. It is also relevant that the likes of Mr Ackermann of Shoprite apprehends that there will be competitive pricing effects in the retail market and so he speaks about having to gear up to meet the competitive threat. Now, that in very basic terms is of course exactly what one wishes. One wants the retail sector to be even more competitive than it is at the moment and to the extent that Wal-Mart will secure very substantial efficiencies and have substantial pricing effects, that will naturally have a spill-over into the competitive responses of Shoprite, Spar, Pick ‘n Pay and others.
The other very significant feature of a consumer welfare gain is that, as I’ve indicated, Massmart is already engaged in an expansion through the 100 Cambridge stores that it means to open, which have a focus on food, which has not historically been a Massmart specialty and that, together with the expansion plans in respect of Game Food Co and the Makro’s that rollout will happen more quickly, more efficiently and at pricing points, which are likely to be more aggressive and with very substantial efficacy and hence efficiency for the consumer.
That program is important and it amounts effectively to an increase in output, which again is a major welfare enhancement within the South African retail sector at large. Therefore you can weigh, we say, very comfortably on all the evidence you have before you, which is not contested by the unions and is substantially, we suggest, not really in issue in these proceedings, save for one or two matters I will mention concerning what Mr Hodge had to say, but that you can comfortably weigh that consumer welfare gain in the balance and that is a major public interest gain, which simply would be lost if this merger could not proceed as a result of unwarranted conditionality.