Robert Brand
Robert Brand

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.)