What goes up, never comes down

Why do we keep paying more for food at supermarkets even as the petrol price and producer prices fall? Business Day’s explanation in an editorial this week is far from convincing. It starts off praising Woolworths for cutting the price of 245 “selected food lines” (what is the difference between food lines and food?) — good publicity stunt by Woolworths — and then ventures a general defence of retailers: “As it happens, retailers who have been under pressure from all sides since food prices first began rising, have been squeezing their margins anyway. If the pressure on retailers had been any less effective, food prices would have spiked a lot higher than they did. A degree of price stickiness on the downside must be expected now as retailers try to claw back the margin they lost during the worst of the food price rises.“

Seems to me that Business Day’s editorial writer is somewhat gullible. A cursory glance at the major retailers’ financials shows that, far from being under pressure over the past year or two, their margins have at worst been maintained, and in most cases widened. Shoprite’s trading margin widened to 4.8% in the fiscal year ended June 2008, from 4.1% the year before. Woolworths’ gross margin increased to 34.8% in the same period, from 34.4% (and profit in its food business increased by more than 18% — hardly a sign of stress). Pick n Pay maintained a gross margin of 2.9% in the six months ended August 2008. All three these retailers showed good profit increases over the past year, while consumers have had to struggle with double-digit food inflation.

While retailers were padding their profit margins, food prices at the producer level have been falling, according to Statistics South Africa. Overall, producer prices for food — that is, the price the farmers receive — dropped by 5.7% between December 2007 and December 2008. That is an average, and the decline for certain categories of food was much sharper. Prices for fruit and nuts, for example, plunged by 20%.

Given this data, I don’t think Woolworths deserves much of a pat on the back for cutting some food prices. The question is why food prices haven’t been falling more, and across a wider range of products. There may be a perfectly valid reason why the retailers have not passed on lower petrol and food prices to us, the consumers — but instead of simply accepting the corporate spin, our business journalists should do some more digging of their own.

(A version of this post also appears on my own blog Low Opinions)