Will the Competitions Commission tackle food retailers?
Fuel prices are down, soft commodity prices are falling and general consumer price inflation is trending lower; yet prices on supermarket shelves remain high. We’ve heard economists refer to this concept as ‘sticky down’ as price levels correct much slower on the way down than on the way up. Unfortunately consumers are powerless to force retailers to drop their prices. And these retailers refuse to accept any part of the blame, pointing instead to bottom-line food producers and the agricultural sector. But consumers might still win the battle.
A recent study conducted by the University of Pretoria’s Professor Johann Kirsten, in his capacity as a member of the National Agricultural Marketing Council (NAMC), infers that retailers have too much buying power and thus pose a real threat to farmers. The organisation hopes their report to the department of agriculture will motivate further investigation. “NAMC recommends that the minister of agriculture make the report available to the Competition Commission to consider an investigation,” they said. “Special attention should be given to the importance of new regulations to govern the relationship between suppliers and supermarkets.”
Profit pictures look the same
A number of readers responded to the initial Sake24 report posted at http://www.fin24.co.za/. One commented that he was “shocked by the retail prices consumers had to pay for meat.” The reader, with plenty of meat industry experience, noted that livestock auction prices and diesel prices fell while retail meat prices were constantly rising. “That does not look like normal market forces at work,” he concluded. And it doesn’t take too long to support the NAMC’s conclusions. We spent a few minutes looking at the latest results of three of the country’s top food retailers. And we compared these results to those of Tiger Brands, arguable the country’s largest food producer, and a company that’s run foul of the Competitions Commission on more than one occasion.
In the six months to March 2009, leading retailer The Spar Group increased turnover by 24.5% to R16.1bn, with a 20.5% surge in headline earnings per share to 242.5c. Pick ‘n Pay achieved turnover of R49.9bn for the full year to 28 February 2009. This was 17.3% better than its previous full-year. And Shoprite Checkers was on the ball too. The group’s latest interim covers the six month period ending 31 December 2008. Shoprite’s turnover was 27.3% higher, climbing from R23.260bn in the corresponding 2007 period, to R29.604bn. Management boasted of “excellent performances from all the divisions.” The picture is fairly clear. The country’s food retailers, without exception, reported growth well in excess of general inflation – and even exceeded food price inflation which is nearly twice that level.
But the food producers seem to be doing just as well. Tiger Brands says its six months to March 2009 yielded revenue of R11.3bn (up 24%) from continuing operations. And that leads us to suspect the bottom-line food producers and farmers are used by retailers as an inflation buffer. When input costs go higher – farmers are squeezed by retailers and processed food producers to keep their prices low. Companies like Shoprite, Pick ‘n Pay and Spar then keep the pressure on farmers and other bottom-line food producers when input prices are falling to bolster their gross profit margins and income statements.
Taking the fight to retailers
The NAMC report states that “retailers’ clout enables them to determine trade conditions.” The bulk of this clout stems from their buying power. But given the complexity and nature of the buying transactions that take place it remains to be seen whether the Competitions Commission has any success in tackling the problem. They’ve successfully brought down some big names. Tiger Brands was fined R98.8 for its part in fixing bread prices, Tiger’s then pharmaceutical division Adcock Ingram paid R53.5m for participating in medicine price fixing, Sasol was fined R188m for collusive pricing in its fertiliser business and Arcelor Mittal was fined R692m (but is challenging the ruling) for steel price irregularities. But food retailers – like the country’s large retail banks – will prove more difficult to nail!
Where there’s smoke there’s fire – and we believe the Competitions Commission might uncover a can of worms should it conduct the proposed investigation. Let’s see if NAMC can convince the department of agriculture to convince the Commission to take the next step!
Editor’s thoughts:
When we completed the ‘mandatory’ stint in England a few years back we remember stories about local dairy farmers pouring their milk into fields because UK retail giants (like Tesco and Asda) were paying them too little to even warrant driving it to the stores. There’s no doubt that large buyers like the three retailers mentioned in today’s article can influence prices for farm produce. Do you think farmers get a rough deal in South Africa? And are they to blame for high food prices? Add your comments below, or send them to [email protected]
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