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Retailers, please explain: Why do food prices defy gravity?

I am getting just a little bit irritated by food retailers who shed crocodile tears over the difficulties of their cash-strapped customers, while raking in ever-increasing profits.

Take, for example, Spar, which reported first-half financial results this week. Doing business in these challenging times, CEO Wayne Hook said, is a “struggle”. With double-digit food inflation and high interest rates squeezing consumers, Spar has had to “sacrifice” profit margin while battling its suppliers for better prices.

“It is very competitive out there; everyone is fighting for market share and it’s an ongoing struggle to keep our suppliers honest,” Hook told Fin24.com. “For us to sit back and accept price increases would be crazy.”

Listening to Hook, you’d be forgiven for thinking that Spar is struggling to survive in these fire economic times. But you’d be wrong.
In the six months ended March 31, Spar increased turnover by 24%, operating profit by 22% and net profit — the bottom line — by 39%. Those are hardly the figures of a company in trouble, or, for that matter, one forced to “sacrifice” its profit margins in the interests of its hard-up customers. Remember, these figures are for six months in which, most economists now believe, South Africa was technically in recession.

Mining companies are retrenching staff, manufacturers are battling to survive, but for the food retailers, the bonanza never seems to end. A 39% profit increase in such circumstances is an exceptional performance in any language. How did Spar manage it?

Hook would have us believe that the company earned higher sales volumes by shaving its margins (in other words, by making a little less profit on each individual item sold), and by negotiating better prices from its suppliers. But that is only part of the story.

Hook speaks about inflation as if it is a business hazard, and as if retailers’ pricing has nothing to do with it. But inflation is a consequence, not a cause, of rising food prices. In other words, inflation is caused by retailers increasing their prices. Hook and other retailers argue that they have no choice but to increase their prices, because their costs are rising. But if you take a close look at South Africa’s inflation statistics over the past year, they have some explaining to do.

Why, for example, have consumer prices for food – the prices you and I pay at the till — increased by 14.9% in the year to March 31, while producer prices — the prices charged by farmers and food producers — declined by 8.1% over the same period? Why has the price of bread and cereals sold by retailers such as Spar rocketed by almost 20%, while the price farmers receive for grain plummeted by 15.8%? Who is pocketing the difference? Millers and bakers have increased their prices by 7% over the same period, so the rest of the 20% increase could only have come at retail level.

It is clear that farmers and food processors — Spar’s suppliers — are not primarily responsible for our double-digit food inflation. It is also clear that there is lots of room for sacrifice in Spar’s margins. The only sacrifice at the moment, it seems, is made by you and I, who keep paying higher prices for food at the till even as producer prices and the cost of petrol continue to decline.

I have nothing against companies making a profit; that is why they are in business. But they should be honest about that, and not try to convince us that they’re in there fighting for the little guy. Spar is increasing its profits because it can — because, although in theory there is competition in the food retail industry, in practice consumers often don’t have the luxury of choice, or the inclination to exercise it. That is not Spar’s fault, but please: stop trying to pull the wool over our eyes, and start explaining why your prices defy gravity.

(A version of this post ran on my personal blog, Low Opinions.)

Author

  • Robert Brand teaches media law, ethics and economics journalism at Rhodes University. Before joining academia, he worked as a journalist for the Pretoria News, the Star and Bloomberg News.

16 Comments

  1. Tman Tman 8 May 2009

    “Why, for example, have consumer prices for food – the prices you and I pay at the till — increased by 14.9% in the year to March 31, while producer prices – the prices charged by farmers and food producers — declined by 8.1% over the same period?” Brand, you said it all. When I read these stats last week, I asked myself the very same question.

    On washing powder I spend R42 for 1kg OMO in February, last week it was R56 from the same shop. Is this the supply demand effect? No. Someone is reaping us off big time. We are waiting to see their annual bonuses and salaries. Look out for their annual reports.

  2. Alan2 Alan2 8 May 2009

    Easy answer – because it makes them money and they can. Same as the banks. Barclays (who own Absa) have just announced approximately 15% increase in profits over last year, yet Absa are about to launch increased customer costs that will see charges of about R17 being charged for a customer to deposit R100 into their account. Same question you ask – Why? Same answer – Because they can and no-one in this country is brave enough to stop them.

  3. Hugh Robinson Hugh Robinson 8 May 2009

    Oh please do some homework. Get off your high horse and give us some investigative reporting that take hard word. How about an investigation into the profits made by the producers?

    Retailers are a far smaller problem that one is led to believe.

    The cost of medicine remained stable until the retail price issue was settled with government.

    An example: From September Last year Seritide 50/250, an Asthma pump has increased from R264.00 to R349.00 = 75.00 extra. The pharmacy takes
    R26.00. No matter how one looks at it this is a 35% INCREASE IN SIX MONTHS.

  4. Mark Mark 9 May 2009

    A worthy post indeed!

    We South Africans do not offer enough resistance.
    We have identified THE BEAST – we moan about THE BEAST amoungst ourselves and then we promptly drive down the road to feed the thing, because presumably, it’s convenient.

    Practical solutions:

    Tighten your belts [cut out the frilly stuff – we will be healthier for it] and support farmers markets, where we have an opportunity to “deal direct”. Many farmers will deliver door-to-door these days. Or grow your own.

    Instead of going to The Mall, support our local service providers – do an inventry of all the services available in your immediate area. You may be suprised at the opportunities to save money you are missing. Keep the mula in the “family” [The Spider web mentality is really usefull – ask almost any South African of Asian extraction]

    Offer your services locally. Encourage neighbours to reciprocate

    Find creative ways to stop feeding THE BEAST!

  5. Michel Michel 9 May 2009

    This has traditionally been a weakness of the SA Consumer – we allow them to rip us off, and the Consumer watchdogs have no teeth to help. Nobody is opposed to a company making profit, but 39% is exorbitant. A bloody rip-off. They – banks and supermarkets – are fleecing us. And they sooth the consumer by making as if they are on our side…..
    What happened to the investigation into banking charges? Docket lost????

  6. Sentletse Diakanyo Sentletse Diakanyo 9 May 2009

    This is called Capitalism!!! Maximisation of profits is the primary driver of every business. While we complain, we must realise that in a Capitalist society, business never pretends to be a charity orgnisation.

  7. Lyndall Beddy Lyndall Beddy 9 May 2009

    According to some expert on the radio – people might have to give up their cars, and their houses, but they can’t give up eating.

  8. David Bullard David Bullard 9 May 2009

    Good points Robert but we don’t yet have consumer activism in this country. When people complained that car prices were too high I always replied that they couldn’t be because people were buying them at those high prices. Not so easy to not buy food as it is cars but a bit of consumer fury would be good or….better still….some govt intervention just in case there is a cartel.

  9. Hugh Robinson Hugh Robinson 9 May 2009

    True David, When doing a market analysis one of the first objectives is to gauge the retail value.

    The survey group are asked to guess the articles retail worth. A comparison of competing prices is done. Whether the actual unit price is far below that of the survey estimate the competitor’s price is used as the selling price. T

    Ever wondered why an introduced product can be sold some 30% below the nearest competing price. Then as the competitors respond the price increases.

    Ever noticed there is never a retailer or inter Brand price war even on the most basic of foodstuff. Ever noticed that the 20% free is 25% more expensive.

    Ever noticed how the perishables like Meat and Vegetables are rather thrown away than discounted.

    I am so sick and tired of seeing Pigswill at today’s prices. All one needs do is visit the rear of any supermarket and see the expired sell by date stuff. What are they afraid of that people will wait for the prices to drop before buying?

    I resent having to have retailer greed calculated into the price. I might add I have never seen such low grade fruit and vegetables as sold in SA. The good stuff is exported and we pay top dollar for that which is only fit for pigs.

    If the SA supermarkets only did what Tesco and Sainsbury’s do. Mark down any perishables in their second day until sold.

  10. mundundu mundundu 10 May 2009

    don’t forget the fact that there is not allowed to be an extreme price differential between domestic and imported items [including food]. so anything that is produced locally as well as imported can only be sold at either closer to the domestic price [which would probably mean ruin for the companies spending all that jet/boat fuel to get their goods to south africa] or closer to the imported price, which is fair to the companies sending goods to south africa, and an absolute bonanza to companies that produce goods locally.

    you’ve got the wto to thank for that, folks. for larger economies it’s great, but for smaller ones [and let’s face it, there are less consumers in south africa than there are in, say, new york or florida] it’s not so good.

    if south africa really wanted to lower its food prices considerably, it could always opt out of the wto.

    oh, i didn’t think so.

  11. Robert Robert 11 May 2009

    Hugh – read my post: producer prices for food have declined over the past 12 months, while retail prices continued to rise.
    Sentletse: my point exactly – but let’s be honest about it!

  12. Hugh Robinson Hugh Robinson 11 May 2009

    Sorry Robert maybe my definition of Producer is somewhat skewed.

    Let us for argument sake call them re-manufacturer’s or resellers as in Milk companies.

    These are paying the farmer/ milk grower anything from R2.00 and below for Litre of milk. To that they are by law allowed to add, I think 20% water. Ever noted the grey blue colour of some milks.

    The fact is that between the grower/farmer, – who has been paid below market value for some time – and the reseller / producers or whatever name is commonly applied, the end user price is, in some cases 400% mark-up.

    Milk grower R4:00 /2 lt., Re-manufacturer R12.00, Retailer R15.75. We will forget the low cost imported milk powders that are added to SA milk by some manufacturers.

    Imported clothing T-shirts with print, cost to import + taxes R26.00 per unit. Some are bought by the tonne costing $0.21 each. These we buy in the big stores at anything up to R150.00.

    Swimwear from China as imported buy the big business can cost as low as $2.61 per set for a standard string bikini no embellishments.

    Since late December 08 the bunker surcharge has been dropped swimwear this coming season will remain at R210.00 to R350.00 for a bikini.

    Forget PPI High Horse there is a whole bunch other stuff where we are ripped off. Why always the Farmer. What about the middle men in the chain?

  13. Themba Themba 12 May 2009

    Valid points and concerns indeed. But there is no need to investigate of there is a cartel or not, it won’t help. Look at banks and cellphone companies, we all know they exploit and abuse us consumers daily (and get away with it), whether the authorities think theyare a cartel or not.

  14. Hugh Robinson Hugh Robinson 12 May 2009

    There is a way. Change the price parity laws.

    For as long as I remember parity between import and locally made product was the name of legalised rip off.

    In past years we had SA manufactures charging the import price for local goods and it was accepted as necessary.

    Now the roles are reversed. SA goods are far too expensive and imports dirt cheap.

    I feel the parity law have to be revised to ensure far pricing and not this B.S. of adding import surcharges. The latter does not help the man in the street with lower prices. Surcharges like the competition fines feeds an already overfed government.

    The retailer rental and turnover surcharge clauses should be investigated. Comparison populations show that our Mall rental prices are almostr as expensive as Bond street London.

  15. NoMoreFarming NoMoreFarming 24 June 2009

    Consider this: A small-scale farmer is only offered 50c per bunch of (organically grown, nogal) carrots by the retailer – AND the farmer has to carry all the costs of seeding, cultivating, processing, transport etc. But lo and behold: That very same bunch of carrots is sold by the retailer for R5.99!!!

    Greed. Pure greed. That’s all it is.

  16. Joanne Joanne 25 June 2012

    It really is terrible – Clover Butro has gone up to R37 or something ridiculous! It’s so true though – it’s bad enough that their prices are that high, but to “pull the wool over our eyes” as you say is really just unnecessary. Come on, Spar! Thanks for the post – was really informative!

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