South African consumers are feeling the pinch as they continue to pay steep prices for essential foods, even as inflation and producer costs in the country have significantly decreased. This alarming trend, highlighted in the Competition Commission’s latest Essential Food Pricing Monitoring (EFPM) Report, has raised concerns about the state of the nation’s economy.
Retailer margins in South Africa
The report delves into the comparative trends of grocery retailer margins in South Africa, in contrast to their global counterparts. One of the key findings is that South African retailers have seen their profits grow, while international retailers have witnessed diminishing margins. Over the past three to four years, local retailers have either maintained or increased their profit margins, leading to a stark contrast with global trends.
While the Commission acknowledges that multiple factors could contribute to this discrepancy, one concerning phenomenon it has identified is the “rocket and feather” effect in food pricing. This phenomenon sees shelf prices rapidly rise during periods of high inflation but take much longer to decrease, even when inflation rates decline rapidly. This effect has been particularly pronounced in essential staples such as maize meal, cooking oil, and bread.
Despite an overall decrease in inflation, the report notes that food inflation remains nearly twice as high as the inflation rate for all goods and services. The Competition Commission emphasises its commitment to monitoring essential food prices and investigating the factors driving food inflation to ensure transparency regarding profit margins set by producers and retailers.
One aspect the Commission is closely scrutinising is the speed at which falling commodity prices translate into lower prices for consumers. In the first half of 2023, upstream commodity prices have indeed decreased, prompting the Commission to focus on the extent to which this reduction benefits South African consumers.
Load shedding, a recurring issue in South Africa’s energy sector, has been suggested as a potential reason for persistently high prices. However, some food producers, excluding poultry producers, have informed the Commission that power outages have not significantly impacted their operating costs. Interestingly, some of the major food companies have recorded substantial revenue increases due to price hikes rather than volume growth.
Load shedding mitigation efforts
Further down the supply chain, retailers, who receive no government rebates or tax breaks for their load shedding mitigation efforts, have invested billions of rands to cope with power outages. This investment could potentially affect retail prices. Despite the costs associated with load shedding, revenue and profits in the retail sector remain robust.
South Africa’s escalating consumer price index
This glaring disparity between local and global price trends has far-reaching implications for South Africa’s economy. Despite its considerable potential, the nation continues to grapple with economic challenges driven by both structural and cyclical issues. The persistent trend of high local food prices in the face of falling global prices exacerbates these challenges, including high unemployment rates and rising food price inflation. The latter, in particular, contributes significantly to South Africa’s escalating consumer price index inflation rate, increasing the likelihood of further interest rate hikes and placing additional strain on the economy.
In conclusion, the Competition Commission’s EFPM Report underscores the urgent need for measures to address the divergence between local and global food prices in South Africa. The nation’s economy, already facing numerous challenges, stands to benefit from solutions that promote transparency and affordability in the essential food market while ensuring the sustainability of both producers and retailers.