Takealot: the Competition Commission wants to open the box

The Competition Commission recently announced that it will investigate Takealot’s dominance over the e-commerce market, likening the company to Amazon and Alibaba.

Commissioner Tembinkosi Bonakele said the Commission would take a proactive approach to determine any behaviour by ecommerce platforms “which may be excluding rivals and entrenching dominance” before it happens. This implies that the Commission hasn’t identified any market abuse by Takealot thus far but isn’t ruling out that any has occurred.

This is Takealot’s first antitrust (or competition) law test. Its spirit animal in the United States, Amazon, is no stranger to judicial enquiries about its business practices – most recently facing charges from European regulators over its use of seller data.

Does the Competition Commission have a case against Takealot? Plus, what can Amazon’s run-in with authorities teach us about how Takealot may approach this enquiry?

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How big is the pie?

Naspers’ interim financial statements for the six months ended 30 September 2020 gave us a closer look at how Takealot fared amidst the pandemic:

  • Revenue increased 41% to $238m (~R3.8bn).
  • Gross Merchandise Value (the total amount all merchandise sold through the Takealot Group’s platform) increased 85% to $407m (~R6.5bn).
  • Takealot’s trading loss improved 36% compared to a 27% improvement in the prior year.
  • First-party sales (1P – where a manufacturer sells inventory directly to Takealot, which then sells it on customers) grew 69% while third-party sales (3P – where sellers use Takealot as a marketplace to sell directly to consumers) boomed 119%.

To put that into context:

  • The South African e-commerce market has been estimated at $3bn – $4bn
  • Assume the e-commerce market grows at 30% in 2020, it could reach over $5bn depending on which estimate you use
  • If we estimate $800m in GMV for 2020 (double the interim performance), Takealot will have somewhere between 16% and 20% market share of the South African ecommerce market.

Takealot is still growing ahead of the overall market and could get to 25% fairly soon, but that’s still no monopoly.

In contrast, Amazon’s share of United States ecommerce is estimated to be 35%, although the United States House Judiciary subcommittee considers it to be closer to 50%. Amazon’s main go-to defense has been the argument that it shouldn’t be measured against its performance in the digital commerce market, but rather in the whole retail market, where it only has a 4% share.

It’s an important distinction, and aids Takealot’s case. Takealot competes against Makro’s online store just as much as it competes against Makro’s physical stores. Takealot’s share of the total South African retail market is miniscule (around 0.5%).

Show me the data

A large proportion of the antitrust furore surrounding Amazon relates to its use of third-party seller data.

Amazon has been accused of using the data from third-party sellers, which are largely small businesses, to copy their best-performing products and undercut the price, thereby marginalising third-party sellers and capping their ability to grow.

Amazon has denied this multiple times, although Jeff Bezos has conceded that he can’t guarantee that it doesn’t happen.

As stated above, Takealot’s 3P sales are growing ahead of its 1P sales. Just like Amazon, Takealot has a trove of seller data at its disposable that it can use to make business decisions.

Superbalist has previously disclosed that it expects its private label business to grow to R1bn in revenue. While Takealot itself doesn’t sell any private label brands, the company will need to be alert to the Amazon developments and ensure that it doesn’t stray into territory that the Competition Commission might not like.

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The House Judiciary found that Amazon employs “strong-arm tactics” in negotiations with vendors. Third-party sellers stated facing “bullying”, with threats of account suspension or product de-listing causing some sellers to “live in fear of the company.” An unnamed company stated that Amazon “repeatedly referenced” its ability to destock the unnamed company’s products on as a “bargaining chip to force terms” that were “unrelated to retail distribution.”

Again, these are just examples of what is going on at Amazon. There’s no evidence at all of similar issues at Takealot, but the Competition Commission is certainly going to get under the hood and have a look.

There is an inherent conflict of interest in providing a marketplace to third party sellers and selling products as a retailer on the same platform. Takealot will have to prove that it has the appropriate controls in place to lessen that conflict.

At present, it’s positive for Takealot that substantial growth is coming from a portion of its business where it doesn’t set the price. It assuages immediate concerns about predatory pricing and would help Takealot argue that it isn’t favouring 1P sales, but instead allowing its 3P sellers to grow without interference.

An acquisition Spree that may be scrutinised

In discussing the investigation, Bonakele highlighted that the Commission will also consider how platforms came to be so dominant: “It is clear that in digital markets it is easy for vertical integration to lead to what is referred to as the ‘tipping’ of the markets, which means there is a likelihood for the rapid expansion of one large dominant platform within a particular market.”

This would be Takealot’s biggest stumbling block, as its merger with Kalahari was specifically highlighted in the Competition Commission’s report. Superbalist’s merger with Spree will most likely also face scrutiny. While both were part of the Naspers group, the merger had the effect of rapidly expanding Superbalist’s dominance in fashion e-commerce.

It’s unclear how the Competition Commission would address the Spree merger, if at all, as the merger did not require the Commission’s approval. Ultimately it may lead to increased scrutiny surrounding future Naspers or Takealot investments in digital platforms.

What’s next?

Clearly, the issue of e-commerce regulation is far from cut-and-dried.

A lot of the variables relate to information that requires a view beyond the numbers, such as the company’s conduct regarding data and how its algorithm prioritises products. Beyond Takealot, consideration will also have to be given on how to regulate Amazon and Alibaba as they grow their footprint in South Africa.

Takealot and other stakeholders had until the end of October to make submissions to the Commission on its whitepaper regarding the digital economy in South Africa. Bonakele said that the next step is for the Commission to assess these submissions and have further engagements with key stakeholders before publishing a final report.

The final report will outline the way forward for South Africa in dealing with these markets.

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