Who is brewing my tea? Tea brokers and dominant tea processors

The Kenyan and South African tea cases show that although competition adjudications are made to protect and promote fair competition among companies, competition authorities also protect and promote fair price setting for the benefit of consumers. Consumers should be protected from paying excessive prices for inferior goods, and should be given the freedom to choose from multiple, high quality and innovative products. Mmamoletji Thosago

April 5, 2018

Mmamoletji Oniccah Thosago

Competition authorities are meant to ensure the existence of fair competition among rival firms, ensure that firms do not charge excessive prices, and engage in price fixing to eliminate new entrants in the market. In doing so, they serve to prevent firms from acting in a way that may be to the detriment of consumers. Two recent competition cases in the tea industry of Kenya and South Africa serve as examples of competition authorities’ role in protecting the public’s interests.

The East African Tea Traders Association (EATTA) is based in Mombasa, Kenya and has members from several East African countries: Kenya, Rwanda, Uganda, Burundi, Tanzania, Democratic Republic of Congo, Malawi, Ethiopia, Madagascar and Mozambique. Its members comprise of tea producers, buyers (exporters), brokers, tea packers and warehouses. The EATTA operates the weekly Mombasa Tea Auction. The auction system does not allow tea producers to sell their own tea; rather, each producer is represented by a selling broker. The tea broker sets minimum tea prices at the auction.

In 2017 the EATTA applied to the Competition Commission of Kenya (CAK) to set fixed brokerage commission and warehouse prices [1] . These commissions and prices would be included in the minimum price level set by brokers at an auction, and would have to be absorbed across the entire tea value chain. Whereas this arrangement would undoubtedly benefit tea brokers and warehouses, it would not serve the interests of buyers, exporters and tea producers. Moreover, no improvement or innovation in tea production would be coupled with the price increase. In essence, consumers would be paying extra for a tea product without any quality improvement. Hence, and for good reason, the CAK rejected the EATTA application. The CAK’s key argument was that the setting of brokerage commission and warehouse fees would be a form of price fixing [2].

The South African competition authorities have identified a different set of challenges within our own unique tea industry. Rooibos Limited is the largest rooibos tea processor in South Africa and controls approximately 70% of the market. The company was a monopoly rooibos processor during the apartheid era, operating as the Rooibos Tea Control Board. The Rooibos Tea Control Board was implemented to “regulate the marketing, pricing and research in the rooibos tea industry”[3] From 1994, several processors entered the market and all processors, including Rooibos Limited, negotiated one-year supply agreements with rooibos tea farmers. These dynamics changed in 2014 when Rooibos Limited began implementing long-term supply contracts with certain farmers. The contracts required these farmers to supply a set portion of their output to Rooibos Limited for a 5 year period up to 2018. The contracted farmers were not allowed to supply any other processor with their produce until they had met the volumes set in these long-term contracts.

Around the same time, Rooibos Limited took over the production research function that was previously handled by the South Africa Rooibos Council. In doing so, it introduced a new arrangement, wherein it made access to output from this production research conditional upon the rooibos tea farmers supplying up to half of their produce to Rooibos Limited. The situation is further complicated by the fact that out of 220 rooibos tea commercial farmers, only a limited number (approximately 20%) make up 80% of the total production of rooibos tea in South Africa [4]. Moreover, rooibos grows nowhere else in the world, except in the Western Cape and Northern Cape regions. Therefore, introducing long-term contracts with a small number of commercial farmers in these areas, greatly increases the potential for Rooibos Limited exert undue influence in this market. It is for this reason that allegations of abuse of dominance against Rooibos Limited have been referred to the Competition Tribunal of South Africa for adjudication.

The Kenyan and South African cases show that although competition adjudications are made to protect and promote fair competition among companies, competition authorities also protect and promote fair price setting for the benefit of consumers. Consumers should be protected from paying excessive prices for inferior goods, and should be given the freedom to choose from multiple, high quality and innovative products. This includes the ability to purchase and brew the finest of Kenyan and South African teas.

References

1. Business Daily. 2017. CAK rejects tea traders’ plea on price fixing law. Available: http://www.businessdailyafrica.com/economy/CAK-rejects-tea-traders–plea-on-price-fixing-law-/3946234-4082716-3v41flz/index.html (Accessed: 29 September 2017).

2. Competition Authority of Kenya. 2017. East African Tea Trade Association (EATTA) Exemption Request. Available: www.cak.go.ke/images/new/CAK_DECISIONS_29_AUG_2017.pdf (Accessed: 21 November 2017)

3. Competition Commission of South Africa. 2017. Rooibos Limited Charged for Abuse of Dominance. Available: http://www.compcom.co.za/wp-content/uploads/2017/01/Rooibos-limited-charged-for-abuse-of-dominance.pdf (Accessed: 29 September 2017).

4. See note 3.