The South African Competition Commission will on Monday release its hotly anticipated final report flowing from its online intermediation platforms inquiry. The final report, publication of which has been delayed several times, is what the commission calls a “proactive” measure to prevent monopolies from forming in the e-commerce space. But a preliminary report has already got many industry players hot under the collar, with the commission taking aim at companies such as Google and homegrown e-commerce player Takealot.

For example, the preliminary report, released a year ago, listed several findings regarding “self-preferencing conduct” by Takealot resulting from its “hybrid platform” business model.

Takealot runs both an online marketplace for third-party sellers and its own retail division that competes with it. The Competition Commission proposed forcing the separation of Takealot’s retail and marketplace operations.

Takealot Group CEO Mamongae Mahlare was quoted as saying that the commission should be careful to support rather than obstruct the development of e-commerce in South Africa.

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The commission seems to be of the opinion that small businesses in South Africa and local app developers are negatively affected by large global companies. It is concerned that these entities either charge too much for the average South African consumer, or that they have the lion’s share of business in the country, thus reducing opportunities for local entrepreneurs.

Online intermediation platforms include e-commerce marketplaces, online classified marketplaces, software application stores, and intermediated services such as accommodation, travel, transport and food delivery, the commission said. This means that large online websites like Booking.com also fall within the scope of the inquiry. 

The Google Connection.

Tech giant Google also did not escape the commission’s attention. The provisional findings recommended that Google be forced to make it much clearer to South African internet users which search results are paid for – and said it may even seek to end its status as the default search engine on smartphones sold in the country.

The commission proposed a raft of regulations that cut to the heart of Google’s business model. “The inquiry has provisionally found that Google Search plays an important role in directing consumers to the different platforms, and in this way shapes platform competition,” it said.

“The prevalence of paid search at the top of the search results page without adequate identifiers as advertising raises platform customer acquisition costs and favours large, often global platforms. Preferential placement of their own specialist search units also distorts competition in Google’s favour.”

As a result, the inquiry found provisionally that paid search results should be “prominently labelled as advertising, with borders and shading to be clearer to consumers, and that the top of the page is reserved for organic, or natural, search results based on relevance only, uninfluenced by payments”.

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Bowmans competition lawyer Heather Irvine said the inquiry by the commission is particularly important because it is a kind of road map for the commission to test the new powers of the amended Competition Act, which was gazetted in 2019.

“The current powers are far more extensive, and it will be very interesting to see what happens as this will be a test case for the limits of their powers,” Irvine said. “It will also be a very expensive undertaking.

“We have had no clarity on any adjustments from the preliminary report, so it will depend on their recommendations and whether they are reasonable and practical. Of course, firms can appeal if the commission moves too far outside the scope of the remedial actions.” 

The Free Market Foundation said last year that the commission wanted to punish leading enterprises in the digital space for being successful and made a submission opposing the provisional recommendations of the commission’s online intermediation platforms market inquiry.

“The recommendations in the report seek to institute more regulations on the country’s economy by punishing leading enterprises for being successful,” the foundation said in a statement about its submission to the commission.

“The Free Market Foundation views the recommendations as a continuation of the commission’s misguided activities that serve to punish successful businesses that acquired their market position through voluntary transactions that satisfied consumer preferences. The potential for competition from new entrants or other, not-as-successful, competitors is there for these companies, yet they are being sanctioned,” it said.

“The barring of contractual terms, which were agreed to in the market – like price parity clauses, a recommendation of the report — undermines the freedom to contract, which is central to any market economy. The barring of ‘self-preferencing’ violates property rights and amounts to making it illegal for businesses to use their resources to favour themselves and their interests in the market,” the foundation said.

“The economic social engineering proposed by the report will see historically disadvantaged persons being given preferential treatment over the companies that were the subject of the market inquiry. It represents a worrying trend in the commission’s work, taking its cue from legislation. Any change in market dynamics must be spearheaded by the market itself; this includes the demographic transformation of that market. The aim ought to be making sure that the institution of private property is protected, and valid contracts enforced. Forcing private companies to associate or give preference to historically disadvantaged persons is an egregious intervention in market processes.

“With the South African economy experiencing record high unemployment levels and dim growth prospects, it makes it harder to do business in the country. This is what the implementation of these recommendations will do, and should not be a course of action we pursue. As such, the recommendations of the online intermediation market inquiry provisional report should be opposed,” the foundation said.

On Friday, foundation legal researcher Zakhele Mthembu told TechCentral that the preliminary report released last year was opposed on the grounds of its being anathema to general market freedom. “It operated on the premise that other businesses – competitors – are entitled to markets and customers that voluntarily patronise these ‘big’ online intermediation platforms like Google, Takealot or the Google Play store,” he said.

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“Judging from the press release of the commission, the situation has not changed that much. The final report could be damaging to our economic growth prospects. The tech sector, which is being targeted by the inquiry, is one of the few sectors of the economy that is growing worldwide, and the commission seeking to strangle it with more regulations is not the answer.”

Mthembu said consumers, through patronising these platforms in their billions, have chosen freely with whom they want to do business. “Seeking to punish successful companies that have high market share is not the answer to our economic woes.”

Kelechi Deca

Kelechi Deca has over two decades of media experience, he has traveled to over 77 countries reporting on multilateral development institutions, international business, trade, travels, culture, and diplomacy. He is also a petrol head with in-depth knowledge of automobiles and the auto industry

South Africa’s largest online store Takealot is facing major challenges as its latest financial results showed that the ecommerce giant is feeling the impact of increased competition, labour issues, and a Competition Commission investigation.

Takealot’s results for the six months ended 30 September 2022 showed that it grew gross merchandise value (GMV) by 15% and revenue by 13%.

Although the growth looks encouraging, it has slowed significantly over the last few years.

Between 2019 and 2021, Takealot increased its growth over the interim period from 25% to 63%. This growth has slowed significantly to 13%.

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Takealot’s gross merchandise value sales growth also plummeted from 72% to 15% over the last year.

An even greater concern for Takealot is that its loss increased from $2 million for the six months to September 2021 to $13 million for the six months to September 2022.

Takealot’s trading margin has also worsened to -3% versus -1% in the prior period.

Takealot owner Naspers said profitability decreased because of higher fuel surcharges, investments in new warehouses, and discounted inventory clearance.

Former Takealot CEO Kim Reid said the company was set to become profitable in 2021 and was on track to achieve this goal.

Between 2019 and 2021, Takealot significantly reduced its losses which gave the market confidence that it would reach profitability in the 2022 financial year.

However, Naspers’ 2022 financial results revealed that Takealot recorded the same trading loss as the previous year – $7 million.

The $13 million loss over the last six months has now raised doubt about Takealot turning profitable in the 2023 financial year. The chart below shows Takealot’s interim losses for the past four years.

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Takealot’s slower growth rate and bigger loss raise concerns that it has reached the end of its strong growth phase.

It also means that Takealot is struggling to contain costs, with its operating costs outpacing its revenue growth. For Takealot to turn profitable, it will have to increase margins, reduce costs, and become more efficient.

However, it is easier said than done. The ecommerce giant is under increasing pressure from competitors, labour, and its marketplace partners.

Traditional brick-and-mortar retailers, including Massmart (Game, Makro, and Builders), JD Group (Everyshop), and TFG (Bash.com), are after a slice of Takealot’s market share.

The increased competition puts pressure on prices and margins, which may partly be why Takealot is struggling to turn a profit.

Another problem for Takealot is that it has become big enough to attract the attention of labour unions.

Hundreds of Takealot workers joined an unprotected strike at the company’s Montague Gardens warehouse in July. Work stopped, with employees demanding permanent positions and saying they were not treated fairly and equally.

It is now more difficult for Takealot to cut employee expenses and optimise its workforce for low and high seasons.

Another headache for the online retailer is the Competition Commission’s Online Platforms Market Inquiry’s provisional report.

The inquiry found a conflict of interest in Takealot operating a marketplace for third-party sellers and selling its own retail products. 

It argued that this could result in self-preferencing conduct, including product gating, preferential display ads and promotions, and unfair access to third-party data about successful products.

The report recommended an internal structural separation of retail from the marketplace to implement equitable and competitively neutral processes.

Although Takealot does not agree with some of the findings, it is an issue which can have significant implications for the company.

To add even more fuel to the fire, the world’s largest ecommerce company, Amazon, is planning to launch a local marketplace in South Africa next year.

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Amazon’s Prime membership programme will also reportedly be available to South Africans shortly after launch.

Amazon is well-known for its aggressive prices, and should it launch an online shopping marketplace in South Africa, there will be significant pricing pressure on Takealot.

Takealot must navigate all of these challenges with a new management team under the guidance of CEO Mamongae Mahlare. Mahlare, who served as Illovo Sugar South Africa managing director before joining Takealot, is new to ecommerce.

Numerous former executives, including founder and CEO Kim Reid, CFO Gary Altini, Superbalist founders Claude Hanan and Luke Jedeikin, and Mr D Food CEO Devin Sinclair, have left the company.

Takealot’s mounting challenges are clearly visible in the company’s financial results shown below.

Kelechi Deca

Kelechi Deca has over two decades of media experience, he has traveled to over 77 countries reporting on multilateral development institutions, international business, trade, travels, culture, and diplomacy. He is also a petrol head with in-depth knowledge of automobiles and the auto industry