Alex Constantinou and Sarah Truen

In December 2006, the Competition Commission was informed of a potential bread cartel in the Western Cape. This escalated into the investigation of four firms for cartel activity, namely, Pioneer Foods, Premier Foods, Tiger Brands and Foodcorp. Pioneer, Premier and Tiger Brands were named in the Western Cape cartel, while they, along with Foodcorp, were named in a national/inland cartel.

The offending firms were penalised by the Competition Tribunal for their behaviour. The penalties imposed by the Tribunal are collected by the National Treasury, so they function mainly to punish the firms, rather than to compensate market participants for the damage caused. However, an interesting development in the case has been that a private collective action by end consumers has also been initiated against the offending firms. The class action seeks to claim damages arising from the anti-competitive conduct which the Tribunal ruled upon. This is the first time in South Africa that consumers have sought to recover the damages directly caused to them by anti-competitive behaviour, and thus the case has the potential to set precedent in the local market.

Part of the class action is to quantify the damages arising from actual overcharges for standard white and brown bread by cartel members in the relevant geographic areas, over the relevant time period, sustained by the relevant class of consumers. In summary, the damage was centred on sales of bread by informal retailers (spaza shop owners mainly) in Cape Town and the Cape Winelands areas, who received bread manufactured by cartel members from December 18, 2006 through February 14, 2007, when the cartel was in operation.

The fact that the damages arise mostly from sales through spaza shops highlights the vulnerability of the consumers who were damaged by the cartel behaviour. Moreover, bread is a staple fare in the diet of consumers, resulting in a relatively inelastic demand. In other words, despite bread price increases, many consumers will still purchase bread. Consumers would thus likely not have substituted bread for another foodstuff following the unlawful price increase, but would instead have likely paid more for their bread as a result of the cartel activity that took place. And the poorest consumers, who struggle to afford enough to eat, may have actually been able to afford even less food as a result of the cartel.

Calculating the damage caused ultimately translates into working out the ‘overcharge’ which can be applied. The overcharge is the cartel price that was charged minus what the price should have been charged absent the cartel. This also takes into consideration how much overcharge was passed through to consumers and how much was absorbed by entities (such as spazas and distributors) in-between the bread manufacturers and consumers. That difference in price is the overcharge, and this is multiplied by the volume sold over the relevant period (which is only 58 days). This yields the damage value that the Class ought to be entitled to recover.

The actual size of the final damages claim is fairly small, because the affected region and period are small. However, the case has the potential to establish an important principal about the right of consumers to directly seek redress for the damage done by firms who abuse the competitive process, and as such, DNA Economics is glad to have been involved in this case. The class action is currently being heard in the South African courts.