1. Barriers to entry/expansion in the beer industry: Case study on SA’s Soweto Gold Pamela Mondliwa Centre for Competition, Regulation and Economic Development University of Johannesburg 12 March 2016 www.competition.org.za

2. Barriers to entry and inclusive growth The challenge for developing countries-facilitating inclusive growth Expansion of capabilities occurs where there are opportunities for participation and dynamic rivalry is able to drive innovation and growth NB- ability of entrants to be successful competitors ‘on the merits’ BTE tend to sustain and reinforce the market power of incumbent firms at the expense of greater rivalry How BTE manifests in different sectors is nuanced- an understanding of the mechanism of competition in the industry is critical for understanding BTE, especially the strategic behaviour of incumbents

3. SA beer value chain

4. Barriers to entry/expansion Access to outlets Routes to market Marketing (economies of scales) SG has not invested sufficiently in advertising Incumbent determines advertising expenditure Scale, SAB 24 c/l vs BH R1.13/l (2013) Capital market imperfections Initially, SG struggled to find funding, investors believed that SG stood no chance against SAB-delayed entry Later funded by IDC through the Agro-Fund, settlement by Pioneer for the bread and flour cartel

5. BTE (strategic): Access to outlets Fridge loans to taverns and some bars and other incentives in exchange for exclusivity Incentives (discounts, free merchandise) provided to bars in exchange for dominance on bar space Smaller entrants cannot match this offering CC referred case (inducement), thrown out on technical grounds Referral was broader than the initiation SAB laid similar complaint in Mexico, authority settled with the incumbent firms Similar cases settled by Coca Cola Beverages in Singapore, Chile, Mexico, Costa Rica and EU Exclusive arrangements with retailers Agreed to amend supply agreements to allow rival drinks to stocked in its fridges-similarly in Chile Conduct ongoing in SA SG was (2013/early 2014) not able to market beer to taverns in Soweto

6. BTE (economies of scale): Routes to market SAB dominant firm has own distribution network and appointed distributors (exclusive) Incumbent firm approach to distribution, set the “rules of the game” Incumbent firm charges AD same price as wholesalers, independent distributors cannot compete-reducing options for other brewers CC brought a price discrimination case-lost at TB and CAC Courts: the case was about 10% of the market therefore failed to meet “substantial lessening or prevention of competition” “provides a barrier to entry for competitors”-SAB docs referring to AD system Micro-brewers have found alternative methods of distribution incl- agreements with national retailers, logistics companies However-A firm wishing to challenge the incumbent would need to have its own distribution business

7. Regulatory gaps?  The policy objectives incl encouraging competition and transformation  The record  the competition authorities’ failure to address market power;  the failure by the National Liquor Authority to ensure vertical separation and access by smaller producers to distribution and retail; and,  Initial policy draft proposed vertical separation, later removed – settlement-SAB BEE programmes incl AD, and supporting hops and barley farmers  Effect: incumbent becomes the gatekeeper  slow progress in transformation and diversity of ownership with regards to the objectives of the NLA.

8. Concluding remarks Entrants are typically up against well-entrenched incumbents Often incumbents are vertically integrated further raising entry barriers, and providing further opportunities for strategic behaviour Incumbents have substantial lobbying ability, including to influence regulations in their favour Increased participation? balancing interests of incumbents and entrants objectives of the Act: economic efficiency and equitable opportunities But “Substantial lessening or prevention of competition” vs “prevents, distorts, or restricts competition”. Transformation of production and supply raises fundamental questions about to what extent regulations and policies should proactively support entrants?