Cutting food prices fine

In June, reacting to the ongoing debate about the reasons for persistently high food inflation at the consumer level, the competition commission said it would probe SA's biggest retailers and wholesalers for anticompetitive behaviour.

Independent report

Since then the commission has distanced itself from the report by the NAMC, which is a policy adviser to agriculture minister Tina Joemat-Pettersson. “Our decision to investigate is not based on that report. We've been working on our own preliminary report. That was the main reason for the investigation,” deputy commissioner Thembinkosi Bonakele told the Cape Argus in July.

The commission is continuing its investigations, but has warned retailers that it could take as long as 18 months to reach a verdict. Retail bosses are dismayed by the time-frames. “I can supply the commission with detailed information — copies of leases, supplier agreements, rebate structures, whatever it needs — within a matter of days. This process is damaging our reputations and a long investigation will not help,” Massmart CEO Grant Pattison tells the Financial Mail (FM).

Pressure is on

Now it seems the pressure on food retailers could increase — again. A subcommittee of the economic cluster has conducted its own investigation into high food prices and a report is being drafted, Joemat-Pettersson told the FM in an exclusive interview this week.

Economic development minister Ebrahim Patel will present the report to cabinet in a few weeks. Joemat-Pettersson would not expand on the contents of the report.

Testing competitive effects

Meanwhile, retail executives are devoting considerable time to the investigation. Says Woolworths CE Simon Susman: “The retail industry in SA and around the world is fiercely competitive. As far as we understand, this investigation is not about price-fixing, it's about testing pro-competitive and anti-competitive effects of certain practices.”

The Agricultural Business Chamber (ABC) has defended supermarkets and their business practices. CEO John Purchase says margins in agriculture and food production are generally small throughout the value chain, and that supermarkets are profitable because of their economies of scale.

“In food there is no more than a 4%-6% return on investment. Retailers are very concentrated and trade in large volumes but the return on investment is not very big,” he says. “The advantage that supermarkets have is their size. Being big allows them to absorb market shocks.”

The chamber's economic intelligence manager, Lindie Stroebel, says: “People often react negatively to the huge purchasing power of supermarkets but, in the food chain, being big means better management and logistics.”

She believes that, for those reasons, concentration in the supermarket industry can actually lead to lower food prices.

Impact on farmers

“Many farmers, on the other hand, are hit hard by fluctuations in supply and demand and in commodity prices, and volatile exchange rates also affect viability and risk in the sector.”

In the food chain, Stroebel and Purchase say it will be worth investigating opportunities in the supply and production of farming inputs, storage and packaging.

Purchase says bringing food prices down further will not be easy.

He suggests that the effect on food prices of “monopolies of state” in administered prices, such as for electricity and transport, needs to be seriously analysed. And he warns that any regulation of the food industry beyond ensuring that the market system is working fairly will simply create inefficiencies and push up prices further.

Source: Financial Mail

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