One of South Africa’s biggest employers worth R1 trillion under investigation
The Competition Commission has issued the Terms of Reference for its market inquiry into the sector, which has drawn scrutiny for its business practices.
The commission issued the terms, which lay out the investigation, including an examination of the industry and a focus on identifying business practices which could impede fair competition.
“[The inquiry] will examine whether there are any features, or a combination of features, in the franchise sector that impede, distort or restrict competition,” it said.
A market inquiry is designed to investigate an industry’s nature of competition, rather than specifically analysing the conduct of one specific business.
The franchise sector is one of South Africa’s largest employers, supporting roughly 500,000 jobs across its businesses.
The sector also includes over 800 brands and more than 30,000 franchisees nationwide, generating nearly R1 trillion in revenue every year.
The commission said the industry is an important driver of employment, entrepreneurship, and access to goods and services in South Africa.
It noted that it had received numerous complaints over the years about the industry, regarding potential competition concerns.
It was therefore determined that an inquiry was a necessary step towards determining if there are any aspects of the industry that impede competition.
“A market inquiry is an appropriate instrument through which to assess if there are any features in the franchise sector that impede, restrict or distort competition,” it said.
It said the inquiry would focus on understanding the industry’s competitive dynamics and how franchise agreements affect competition.
It would also investigate information imbalances among potential franchisees and the industry’s financial conditions.
Information asymmetry occurs when the franchisor has far more information than the franchisee, leading to unfair negotiations.
This would look at the capital requirements for prospective franchisees and how this affects entry into the sector.
The inquiry has been opened to public comment until 7 August 2026, to help the commission ensure that the franchise industry promotes competition.
What the inquiry might mean
Experts have previously commented on the implications of a market inquiry into the franchise sector.
Werksmans Attorneys said the inquiry could create significant changes to how businesses in the sector operate.
It said businesses may be forced to change long-standing business models in accordance with remedial actions.
It added that franchise businesses should expect detailed information requests and might be called on to give presentations on their current business practices.
Businesses that may be examined include fast-food chains such as KFC and Chicken Licken, as well as grocery retailers like Spar.
Werksmans said smaller businesses may use this inquiry as an opportunity to raise concerns regarding pricing and funding challenges.
It said supply chain exclusivity clauses and mandatory procurement clauses may be under scrutiny by the commission.
Companies often require franchisees to use products from specific suppliers, placing pressure on smaller businesses.
These businesses cannot access local suppliers, which could procure items for lower prices and increase profits.
Werksmans advised franchise companies to review their franchise agreements and operating policies to ensure they are ready for the commission’s investigation.
The commission said it would be reviewing the circumstances surrounding franchisees when they negotiate agreements with companies.
The commission believes that franchisees have limited bargaining power in these negotiations, leading to unfair agreements.
This limited bargaining power comes from both information asymmetry and a lack of funds from the franchisee.
Prospective franchisees may not have the capital to support themselves during negotiations, forcing them to accept potentially unfair agreements.
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