An Academy Conversation on the Strength of Food Retailers
Nov 17 2009
Retail Wrap >>

A while back we invited responses to the article at the bottom of this page, entitled “Food Retailers too Strong.” We mentioned that it provides an interesting perspective on the hot topic of food prices, but that it is interesting to note that while this message would explain why prices are kept low, it does not necessarily tell us why the retailers have been increasing prices – which is what the Competition Commission’s enquiries are meant to be testing. 

The following responses were submitted:

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A couple of things... Rebates etc. are just tools to re-structure the cost. You can either pay R4.00 net or else R5 with a 10% rebate and a 10% warehousing allowance. Of course the bigger retailers (and suppliers) will have more bargaining power, but that in itself should be advantageous to suppliers / producers in that one discussion sorts out big volume! Marketing is done for you! Of course the risk is all eggs in one basket (from the small guy’s point of view). I wouldn’t go for exclusivity with a big retailer if I was a farmer, but I wouldn’t mind a supply contract in addition to some bread and butter outlets.

Re competition: Retail is exceptionally competitive in SA. This keeps consumer prices in check relative to one another. However, I think that retail ( in an attempt to improve the overall offering) has added value and consequently additional cost in the supply chain (eg. Uniformity / production specs, cold chain, hygiene, distribution systems, packaging, display etc.) Fruit trees and cows on their own offer none of this.

Producers should not play victim here. They need to find ways to be efficient. If they don’t like the price a big retailer or supplier is offering, then don’t supply them. Brutal, but simple. Supply somebody else... re-package your offering, Go into something else... This is all supply and demand. If nobody can supply at a price, then the price must go up. If somebody can, then those that can’t have some lessons to learn...

Rob Speedy (Retail Consultant)

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I would suggest that once again we are confusing issues! There are two issues being debated here:

• The tactics used by large discount food retailers in their negotiations and trading; and
• The profits so generated.

In respect of the first issue I will not comment, as firstly one cannot "tar all with the same brush" and secondly, without research, the comment becomes nothing more than pure emotion.

In respect of the second issue. I would suggest that discount food retailers generate between 2.5% and 4.5% profit before tax (and this includes all of the "allowances" so often quoted) and I would question the expectation that this should or could be reduced without placing organisations at risk.

Let us compare the above with the percentage profits generated in other industries and we will find that they, the discount food retailers, are at the bottom end of the scale both globally as well as in South Africa. The other argument is that while the percentage is low the volumes are so high that the final profit number is unwarranted and undeserved. To those people - I would suggest you have a look at the pre tax profits generated by mobile phone companies, to highlight but one industry.

I find it strange that detractors have chosen one of the most competitive industries in South Africa to target – surely they are aware that intense competition will ensure that the market forces of the "invisible hand" referred to by Adam Smith, will serve to keep excessive profiteering in check?

(Bill Nash, Retail Consultant)

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There is sufficient evidence that retailers' purchasing power is being used at the expense of their suppliers, and in the long run this can have negative consequences leading to food shortages. And farmers will be worst hit. This is one of the issues highlighted by Professor Johann Kirsten of the University of Pretoria during the past week at an agri-economist conference on the Competition Commission's proposed investigation into retailers.

Kirsten says that a scientific analysis of the food chain indicates that market forces to some extent play a role in the chain, but their true scope becomes evident only from confidential discussions held with retailers' suppliers to get an indication of how the retailers use - and often abuse - their power when negotiating supply contracts.

He says it is difficult to describe the negative consequences of such actions if the real facts are not put on the table. But it's not easy to establish the whole truth, since the suppliers fear retribution if they talk.

"The retailers are meanwhile regarded as consumer champions because they allegedly keep food prices low and affordable," Kirsten declared.

"This can be ascribed mainly to the political sensitivity of food prices and the fact that chain store groups generally compete on prices."

He points out that retailers have the ability to hold back price increases by using various techniques in their relations with suppliers.

The techniques they use to twist their suppliers' arms for lower prices include the negotiating of confidential rebates, returning unsold goods, or carrying the costs for breakages, and taking long to settle accounts.

Kirsten reckons the strong-arming is, however, not limited to retailers' relations with their suppliers, but also major suppliers' relations with primary producers of agricultural commodities.

Adapted from source: www.fin24.com, 28 September 2009