It is tough being a food retailer. Doing business in these challenging times, said Spar’s CEO Wayne Hook after announcing the company’s first-half financial results , is a “challenge”. With double-digit food inflation squeezing consumers, Spar has had to sacrifice margin, and the company is constantly battling its suppliers for acceptable pricing, he said. You’d be forgiven for thinking Spar, and other food retailers, are struggling to survive. You’d be wrong.
The figures are revealing. In the six months ended March 31, Spar increased turnover by 24% and net profit by 39%, hardly signs of a company in trouble. 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 ends. A 39% profit increase in such circumstances is an exceptional perfromance. How do they manage?
Hook would have us believe that they are cutting their margins, and negotiating better prices from their suppliers. While that may be part of the story, the answer lies elsewhere. 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 cannot avoid raising prices because they have to pass on cost increases. 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 has 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 time that Hook and other food retailers stop trying to pull the wool over our eyes, and start explaining why their prices defy gravity. I am getting sick and tired of food retailers shedding crocodile tears over the difficulties their customers face, while continuing to rake in record profits.