The Eswatini Competition Commission (ESCC) has noted growing public and policy interest in the use of exclusive supply agreements within key economic sectors in Eswatini.
Exclusive supply agreements are arrangements where a supplier agrees to sell goods or services only to a particular buyer or distributor. These agreements, while common in many commercial arrangements, can raise serious competition concerns when they limit market access or entrench dominance to the detriment of smaller firms and consumers.
This article seeks to outline the ESCC’s position on exclusive supply agreements, highlight their potential pro-competitive and anti-competitive effects and educate businesses to comply with competition laws, in relation to such agreements.
DEFINITION AND PURPOSE OF AN EXCLUSIVE SUPPLY AGREEMENT
An Exclusive Supply Agreement is a vertical agreement between a supplier and a buyer (e.g., a distributor or retailer) whereby the supplier agrees to sell all or most of its particular products only to that one buyer within a specific territory or customer group.
PRO-COMPETITIVE RATIONALE (THE BENEFITS)
These agreements are common and often efficiency-enhancing. They are not illegal per se. Key benefits include:
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Investment and relationship-specific Investment: The buyer has a guaranteed supply, incentivising it to invest in promoting the brand, staff training and specialised equipment.
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Avoiding free-riding: Prevents other retailers from ‘free-riding’ on the investment and promotional efforts of the appointed buyer.
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Supply chain stability: Guarantees the supplier a stable, predictable outlet for its goods, which can facilitate production planning and reduce costs.
WHEN DO EXCLUSIVE SUPPLY AGREEMENTS BECOME PROBLEMATIC?
The central concern under competition law is that such agreements can foreclose the market to competing suppliers or buyers, ultimately harming consumer welfare through higher prices, reduced choice, or stifled innovation. When the conditions described below exist, competition can be impeded:
Theory of Harm 1: Input Foreclosure
This occurs when a powerful buyer (e.g., a large retailer) locks up the key suppliers in a market, denying rivals access to essential products. This is also known as ‘downstream foreclosure’.
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Result: A new retailer cannot enter the market because it cannot stock the popular, ‘must-have’ brands. Consumer choice stagnates.
Theory of Harm 2: Customer Foreclosure
This occurs when a powerful supplier (e.g., a dominant brand) locks up the most important distributors or retailers, denying competing suppliers access to customers. This is also known as ‘upstream foreclosure’.
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Result: A new or smaller innovator cannot get its products onto the shelves of major retailers, significantly impeding its ability to scale and compete.
PROMOTING VOLUNTARY COMPLIANCE AND WAY FORWARD
The ESCC has adopted an educational and advocacy-driven approach aimed at promoting voluntary compliance. This approach is intended to enhance awareness and understanding of competition law principles through public awareness initiatives and engaging sector associations.
The ESCC encourages all businesses and industry players to:
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Undertake internal assessments of existing and proposed exclusive supply arrangements for compliance.
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Seek independent legal or compliance advice where necessary.
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Participate in sector consultations and sensitisation initiatives hosted by the ESCC.
ABOUT THE ESWATINI COMPETITION COMMISSION
The Eswatini Competition Commission (ESCC) is a statutory body established by the Competition Act of 2007 to promote fair competition and prevent anti-competitive practices, mergers and acquisitions and protecting consumer welfare in local markets.
As the country’s competition regulator, ESCC works to create a level playing field where businesses compete fairly, consumers are protected from exploitative practices and economic growth is driven by innovation and efficiency.
For more information, visit the ESCC website (www.compco.sz) or contact the Advocacy and Communications Manager at mancobam@compco.co.sz or call: +268 7606 2959.
