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SA supermarkets aren’t ‘robbing us blind’

A recent article in Daily Maverick that blames the “rampant profiteering of big food retailers” for child malnutrition argues from false premises to a mistaken conclusion. Supermarkets aren’t the bogeymen that keep the poor mired in poverty and hunger, writes Ivo Vegter, another Daily Maverick opinionista.

In the article, Rebecca Davis writes about the “profiteering” of supermarkets, holding them responsible for poor nutrition, particularly among children. Her article is based almost entirely on An Empty Plate, a book by agricultural economist Tracy Ledger.

The article starts by observing a very real problem: far too few children in South Africa are fed a balanced diet, which results in malnutrition and stunting. This is especially true among the very poor, of course, but it also occurs in ordinary working-class and middle-class families, where price and convenience often trumps a balanced diet.

The fault, says Davis, lies with “rampant profiteering of big food retailers” and “a food system which has seen supermarkets retail food products at skyrocketing prices with little consumer resistance”.

Other than an anecdotal example of of kilo of potatoes which cost R2.50 at the farm and were sold for R9.60 on the shelf, which suggests a dramatic 384% markup, Davis does not specify what the net profits of supermarkets really are. Nor does she point out what food price inflation is, or whether it is uniform across all major retailers.

Since Woolworths is obviously an upmarket brand catering to the rich, let’s consider the large chains that are most likely to serve the poor, Shoprite, Spar and Pick n Pay.

According to Shoprite’s integrated annual report for 2016, its after-tax profit is 3.7%. However, this includes a liquor chain, a furniture chain and a fast-food chain, all of which enjoy higher margins than supermarkets. It doesn’t break out profit margins for its supermarkets alone, but it is reasonable to suppose its supermarket profit is below 2%.

Spar’s after-tax profit, according to its integrated annual report for 2016, is 1.7%. Pick n Pay, in its integrated annual report for 2016, reports profits after tax to be 1.6%.

In the US, the average supermarket makes a profit of between 1% and 3%, so this is in line with expectations. Natural, organic or gourmet food stores can make up to 6%.

This is the scale of “the rampant profiteering of big food retailers”, in Davis’s words.

The latest consumer price index had yet to be announced at the time of writing. Hilton Tarrant, in an August 2016 article for Moneyweb, reported that year-on-year food price inflation at the time was 10.8%. This is based on a basket of about 100 food items, and is certainly cause for alarm. The article was prompted by Massmart reporting a massive 13% increase in the price of a basket of 23 food items in just six months, which suggested an eye-watering 26% annual food price inflation rate.

However, Shoprite reported internal food price inflation over some 80,000 items to be only 3.5%. This shows that the claim of “skyrocketing prices” is at best a gross generalisation, which ignores the fact that consumers do have choices about where to do their shopping.

Unpicking food inflation

But the claim that food inflation is the fault of retailers is itself spurious. The major contributors to food price inflation in recent years, according to Agri SA, have been the nationwide drought and the exchange rate.

So the accusations against retailers, about both profiteering and inflation, are baseless. Yes, food prices have been rising and this has a disproportionate impact on the poor, but the blame does not lie with the big food retailers.

Davis’s argument does not consider what retailers actually do besides buy pockets of potatoes from farmers and sell them to consumers at a markup. They operate vast distribution networks that rapidly get fresh food from distant rural farms to shelves in population centres. This is expensive. They provide refrigeration along the supply chain, and maintain health standards that prevent customers from risking deadly food-borne diseases every time they buy fresh produce. This is expensive.

Supermarkets contract food processing services to offer easy-to-prepare or ready-made meals, saving customers precious time. They offer convenient one-stop shopping, complete with vast parking spaces. All of this is expensive.

Supermarkets serve as anchor tenants for shopping malls and districts, so customers don’t have to go far to find a pharmacy, clothing retailer or hardware store. They compete against charming mom-and-pop stores, certainly, but they do so by offering better quality, better prices, and more variety. None of these are bad for the consumer.

If they were, supermarkets would simply fail to attract business. Instead, they set standards that competitors have to match and surpass in order to earn the right to make a profit. This is why niche retailers, specialising in luxury items such as organic food, survive perfectly well alongside supermarkets.

Pick n Pay and Shoprite together employ 190,000 workers who earn a total of R16.4-billion per year. The Spar Group has created business opportunities for 2,033 independently owned retailers in South Africa.

Retailers are also active in their communities. Shoprite, for example, reports that it has donated over R100-million worth of food, subsidised prices to the value of R32-million and served 4.5-million meals of bread and soup to the poor. Other retailers have similar programmes.

But even discounting all the benefits that supermarkets bring to a society, the mere fact that they run on razor-thin profit margins of a couple of percentage points is enough to demolish an accusation of “rampant profiteering”…..

Daily Maverick: Read the full article

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