Dis-Chem fined R1.2m for overcharging for face masks during Covid-19 pandemic

Competition Tribunal statement: 

The Competition Tribunal (the Tribunal) has found Dis-Chem Pharmacies Limited (Dis-Chem) guilty of charging excessive prices for surgical face masks during the Covid-19 pandemic.

The Tribunal has also ordered that Dis-Chem is liable to pay an administrative penalty (a fine) of R1.2m.

In its order and reasons, the Tribunal has found that Dis-Chem contravened section 8(1)(a) of the Competition Act (the Act) in that it charged an excessive price for three types of surgical face masks (SFM 50, SFM 5 and Folio50) to the detriment of consumers during March 2020.

The Tribunal’s reasons will be available publicly in due course. Below, is a brief summary containing several excerpts:

Covid-19 and economic context

The Tribunal considered the background to the Covid-19 pandemic as the economic context in which Dis-Chem had increased its prices on three occasions. This included, among others, the fact that the virus was spreading globally and at an alarming rate:

“Although the first case of Covid-19 in South Africa was only reported on 5 March and the National Disaster proclaimed on 15 March 2020, South Africans were already affected by the rampant spread of Covid-19 from January, with global supply chains being disrupted, international travel and events being cancelled.  Fears of infection already started to influence consumer behaviour in January and February. It is common knowledge that the Covid-19 outbreak has led to an increase in global demand for personal protective equipment (PPE) of which surgical masks constitute an essential component.  This increase in demand is reflected in the massive increases in Dis-Chem’s own sales volumes from January onward.”

Market power

According to the Tribunal, the Competition Commission (the Commission) has established that Dis-Chem exerted market power in its pricing of the face masks by increasing its prices to significant levels in the context of the Covid-19 pandemic. One such increase took place on the very day that South Africa’s first Covid-19 case was announced:

“We find that in the context of a global health crisis, with excess demand of surgical masks, considered to be essential in the fight against Covid-19, Dis-Chem has demonstrated that it enjoyed and exerted market power by materially increasing its prices, without a significant increase in costs, and significant increase in margins. But for the economic conditions brought about by the outbreak of Covid-19, it would not have been able to implement such material price increases in surgical masks…”

Excessive pricing – a prima facie case

The Commission has shown a prima facie case of excessive pricing in relation to the three types of face masks.

Reasonableness

The Tribunal has found that Dis-chem failed to show that its price increases were reasonable:

“In our view, Dis-Chem’s massive price increases of surgical masks during the complaint period, which constitute an essential component of life saving first line protection in a pandemic of seismic proportions, without any significant increases in costs, are utterly unreasonable and reprehensible. Accordingly, we find that Dis-Chem has failed to show that its price increases for SFM50 and SFM5 and Folio50 were reasonable in the circumstances of the Covid-19 pandemic.”  

Detriment to consumers

The Tribunal has concluded that the Commission has shown that Dis-Chem has engaged in excessive pricing to the detriment of consumers:

“Material price increases of the magnitude of 47%-261% without corresponding increases in costs, of any goods in a country such as South Africa with a long history of economic exclusion and deep inequality would seriously affect the public interest adversely. Material price increases of surgical masks, without corresponding costs justifications, in the context of Covid-19 for which there is no discernible cure and where health services are skewed towards the wealthy, would seriously impact vulnerable and poorer consumers even more. Poorer customers would have been excluded from accessing the masks by such exorbitant increases, other customers would have spent more on these items as a percentage of their disposable income.”

Penalty

In determining an appropriate penalty, the Tribunal has considered the extent of Dis-chem’s overcharge, aggravating and mitigating factors as well as the deterrent effect:

“… the exploitative conduct of Dis-Chem of excessive pricing was particularly reprehensible. It exploited customers desperate to lay their hands on an essential item in the fight against a pandemic of global proportions, with potential consequences for consumers and public health… Notwithstanding its professed commitment to the interests of consumers, Dis-Chem elected to increase its prices of surgical masks by exorbitant percentages in the context of the life-threatening outbreak of Covid-19. To this end we consider its conduct was not only exploitative of vulnerable consumers, especially the poor, but was especially egregious.”

The Tribunal adds:

“Having regard to the aggravating and mitigating factors in totality we find that the aggravating factors far outweigh any mitigating factors. While we would be hesitant to impose a penalty of the magnitude requested by the Commission, we are of the view that Dis-Chem’s conduct was not only exploitative to the detriment of consumers but also reprehensible in the context of Covid-19, and requires serious sanction. Accordingly, we find that an appropriate penalty in this case would be R1 200 00 (one million and two hundred thousand rand).”

Applicability of Consumer Protection Regulations

The Commission alleged that Dis-Chem contravened section 8(1)(a) of the Act, read with regulation 4 of the Consumer and Customer Protection and National Disaster Management Regulations and Directions (consumer protection regulations).

Dis-Chem argued that there was no basis for the retrospective application of the regulation because its last price increases were implemented on 9 March 2020, prior to the promulgation of the regulations. The Commission submitted that the regulations were applicable.

The Tribunal concludes: “It is a fundamental principle of the rule of law that legislation, whether subordinate or not, cannot apply retrospectively… The national disaster was proclaimed on 15 March 2020 and thus a price increase implemented prior to that cannot fall within the ambit of the consumer protection regulations. Furthermore, the regulations themselves were only proclaimed on 19 March 2020 and any price increase that took place between 15 and 19 March would not be caught within its ambit. Thus, as a matter of law, the consumer protection regulations cannot apply to Dis-Chem’s price increases in early March 2020.”

The Tribunal has, thus, evaluated Dis-chem’s price increases and the prices charged during March 2020 under section 8 of the Competition Act.

Section 8 of the Competition Act

The Tribunal notes that South Africa’s competition authorities, as evidenced in section 8 of the Act, are expressly empowered to regulate the conduct of firms that abuse their market power. This conduct includes excessive pricing:

“This also includes protecting vulnerable consumers from exploitative conduct on the part of firms who in the context of a natural disaster or health crisis such as Covid-19 seek to profiteer from the impact of such a disaster. Put another way, a competition authority might be in dereliction of its duty if it did not intervene in a timely manner in states of natural disasters or emergencies to protect vulnerable consumers against exploitative firms… In our view material price increases of life essential items such as surgical masks, even in the short run, in a health disaster such as the Covid-19 outbreak, warrants our intervention.”  

Background

On 23 April 2020, the Commission referred a complaint against Dis-Chem to the Tribunal.

The Complaint alleged that Dis-Chem had contravened section 8(1)(a) of the Act, read with regulation 4 of the Consumer and Customer Protection and National Disaster Management Regulations and Directions (consumer protection regulations). The Commission claimed that in March 2020, Dis-Chem engaged in excessive pricing of surgical masks which are essential items in the fight against Covid-19. Dis-chem denied the Commission’s claims.

The Tribunal heard the matter on an urgent basis via video conferencing in early May 2020.