By Jannes van der Merwe and James Outram

On 26 June 2026, the South African Competition Commission (the “Competition Commission”) published draft Terms of Reference (“Terms of Reference”) for the following concerns that there may be features of the franchise market that prevent or distort competition (“Franchise Market Inquiry”).

The Franchise Market Inquiry is initiated in terms of section 43B(1)(a) of the Competition Act 89 of 1998, as amended (the “Competition Act”), and follows a series of recent market inquiries by the Competition Commission, including the Media and Digital Platforms Market Inquiry, Fresh Produce Market Inquiry and the Online and Intermediation Platforms Market Inquiry.  

Market Inquiries

The Competition Commission is empowered to initiate and conduct a market inquiry as set out in Section 43 of the Competition Act, with Sections 43A, 43B, 43C and 43D being of particular importance. Following the initiation of the Franchise Market Inquiry in terms of Section 43B, the Commission has a duty to determine whether there exist any adverse effects in the market on competition that affect SMEs or firms owned/controlled by HDPs as found in Section 43C. Where such adverse effects are established, the Commission is empowered, under Section 43D, to take any remedial action necessary to prevent, mitigate or remedy any adverse effect on competition. 

In the recent past, there have been several notable instances in which the Commission took binding remedial action against firms identified in the market inquiries. Notably, following the Online Intermediation Platforms Market Inquiry, the Competition Commission imposed binding remedies against Takealot, requiring Takealot to implement significant changes to its marketplace operations and commercial structures to promote fair competition.

In light of the objective of a Market Inquiry and the Competition Commission’s powers, it is reasonably foreseeable that the Franchise Market Inquiry’s final report may similarly give rise to remedial action, which would have a direct and substantial impact on franchisors’ commercial operations and competitive positioning, with particular impetus on how franchise agreements are to be structured and enforced on franchisees. 

Franchising in South Africa

The Terms of Reference define a ‘franchise’ as a business arrangement in which a franchisor grants a franchisee the right to operate a business using its established brand, business model and operational systems in exchange for the payment of fees or royalties. This model enables businesses to expand through independently owned outlets while allowing franchisees to operate under a recognised and proven commercial system.

The Terms of Reference sets out that the franchise business market has become a major role player in the South African economy, with the franchise industry representing approximately 15% of South Africa’s GDP, estimating the industry turnover at R999  Billion, and employing approximately 500 000 people. The vast majority of franchise businesses are homegrown and represent an export opportunity. 

The Competition Commission’s Reasoning for Initiating the Market Inquiry

The Competition Commission initiated the Franchise Market Inquiry following concerns that certain features within the franchise sector limit the equitable participation and ownership of small and medium-sized enterprises (“SMEs”) and Historically Disadvantaged Persons (“HDPs”). Franchising provides an underutilised avenue for SMEs and HDPs as it allows them to invest in an established and reputable company, circumventing some of the barriers that the ordinary industry presents. As a result, this provides an important point of entry, as financial institutions are likely to provide financial assistance for investment into this business model and, as such, allows for an opportunity to address disproportionate ownership in the South African economy. 

The Competition Commission, following several complaints, identified the power imbalances between the franchisor and franchisee as a potential barrier or market feature that prevents negotiating on equal terms. The Terms of Reference indicate that these imbalances may create exploitative practices and terms in agreements that limit effective competition and participation by the identified groups. The Competition Commission posits that the concentration and increased prevalence of acquisitions of franchisees’ businesses by franchisors or other well-established chains further support the concern of franchisors’ overarching power over franchisees, impeding market participation and entry.

The Competition Commission further identifies that financial arrangements in the funding requirements pose a barrier for those attempting to enter the sector, as there are instances where the franchisors require a 50% unencumbered investment as a commitment by the franchisee. This factor, coupled with the need for robust financial support mechanisms, has the unintentional impact of excluding certain groups from entry and participation.

The Competition Commission, in dealing further with the power imbalances, identifies the undue influence of the franchisors through exercising the terms of the franchise agreements in a way that results in a hindrance to market participation and competitiveness. These practices have been identified as causing liability and financial strain on franchisees. The Competition Commission identifies the following unfair practices:

• Restrictive supply requirements and conditions imposed by franchisors that compel franchisees to purchase products and /or stock exclusively from preferred or approved suppliers, or the franchisor itself, even where cheaper substitutes exist.

• The franchisors fail to attribute the supply discounts that they obtain as a result of the franchisee’s purchase of supplies from designated suppliers.

• Non-negotiable promotional, pricing or strategic goals set by the franchisor regardless of the impact or capabilities of the franchisees. The Competition Commission identified instances where the franchisor required the franchisee to sell a product at below cost price or promotion/discounts which unduly impact their cost margins.

• Franchise fees and royalty agreements that are only required by certain franchisees, as others are exempt or on lesser fees. Often representing discriminatory practices as franchisees are given unequal treatment.

The Competition Commission posits that these practices limit the transformation and growth of SME and HDP franchise businesses, as well as a reduction of competition following the exit of franchisees as a result of the oppressive terms and conditions.

The scope of the inquiry

The Terms of Reference state that the objective of the Market Inquiry into all levels of the franchise business sector is to determine whether there are any features of the franchise sector that:

i. impede, distort, or restrict competition in the Franchise sector; 

ii. hinder the entry, growth, and meaningful participation of SMEs in owning and operating franchise businesses; and

iii. negatively affect the increased ownership of franchise businesses by HDPs.

To assess these objectives, the draft Terms of Reference further states that these objectives will be investigated along three broad themes:

i. Finance, Funding and Terms and Conditions – including the availability and accessibility of finance for franchisees and whether funding arrangements or commercial terms give rise to competition concerns;

ii. Franchise Agreements’ Terms and Conditions and Practices – to determine whether contractual provisions or franchising practices impede effective competition or result in unfair outcomes within the franchise sector; and

iii. Exploitation of Information Asymmetries – the collection, use and exploitation of information, to determine whether information-related practices, including the use of commercially sensitive information within franchise systems, distort competition or place franchisees at a competitive disadvantage.

Conclusion

The inquiry will determine whether the features spoken about above do in fact have the effect of creating an impediment to competition in the franchise sector and/or a barrier to entry by SMEs or HDPs into the market. Specifically, the Terms of Reference identified the sectoral focus as the fast food, construction, automotive, grocery, fuel stations and health and beauty sectors. 

The Market Inquiry provides an opportunity for franchisors, franchisees, creditors, funders and any party with an interest in the franchise market to be involved and influence the conduct and eventual outcome of the commission’s report.

Once the final Terms of Reference are published, the Competition Commission will commence the Market Inquiry.

The Competition Commission has invited the public to provide comments on the Terms of Reference on or before 7 August 2026. Any comments can be submitted to MolebohengM@compcom.co.za and KhomotsoM@compcom.co.za.