Retailers pay some of the VAT hike themselves
● Major retailers are at least temporarily absorbing some of the one percentage point VAT increase themselves in hopes of retaining their cash-strapped customers.
Spar Group chief financial officer Mark Godfrey said this week: “There is a very real concern that consumers will experience increased grocery costs, which may well lead to a reduced number of items in the basket as consumers are possibly forced to cut back.”
He said it would take some time before it became apparent which items were being deleted from shopping lists as consumers tried to cope with the VAT increase by tightening their belts.
Godfrey noted that many costs apart from groceries would go up, and an immediate drop in spending on luxury items and impulse buys could be expected. “This will possibly take a few weeks or months to stabilise.”
The range of zero-rated staple foods will not be affected by the VAT hike, for example brown bread, milk, eggs, maize meal, samp, rice, mealie rice, legumes, pilchards and fruit and vegetables.
Three-month moratorium
Spar announced last week it would absorb the VAT increases for more than 1 500 of its private-label products for three months to ease the burden on consumers.
Godfrey said Spar wanted to assist its customers, who would all be affected by the VAT increase regardless of income level.
“We felt that our statement would be best made on our own private-label Spar products . . . While we have an internal estimation, we are hoping to reduce this final cost through an increase in overall business,” he said.
Africa’s largest grocery retailer, Shoprite, said it expected certain categories to come under pressure from the VAT hike in the medium term but that its margins should stabilise over the longer term.
“Needless to say that retail promotion activity over the medium term will be closely watched by consumers looking for bargains — further putting pressure on sales margins,” the company said in an e-mail.
Help the poor
“Our default approach as a group is to try as much as possible not to lift any prices of products bought by the poorest of the poor and, as far as it is possible, those products at lower price points bought by price-sensitive customers,” it said.
“For example, we do not want to push up the price of our R6.99 cans of baked beans as it is priced for affordability, so we will absorb the VAT increase and keep the price at R6.99.”
Shoprite said customers should bear in mind that a one percentage point increase in VAT did not equal a 1% increase in price.
At 14%, VAT on a R20 product was R2.80. At 15%, VAT on the R20 product would be R3. The price increase at the till for the product, from R22.80 to R23, was 0.88%.
The retailer said it had been charging customers more for some of its 24 000 products since the VAT hike came into effect a week ago, but not for all of them.
“We will be phasing them in and, where possible, absorbing the increase and. . . shielding customers sensitive to price increases as much as we can from an increase.”
Shoprite said it would look at subsidising products that were bought by price-sensitive
Clearly from a marketing viewpoint this [R10.06] is not a desirable price Mark Godfrey Chief financial officer, Spar group
customers. “A VAT subsidy programme will see the group subsidise the prices of some products and absorb the additional VAT increase itself,” it said.
A dozen discounts
“Throughout April, Shoprite will run a VAT subsidy by discounting 12 products — including products like cereal and coffee — to help customers who may be feeling the effect of the VAT hike on their pockets.”
At Pick n Pay, David North, group executive on strategy and corporate affairs, said that in some cases the retailer was paying the government the new VAT rate, but was still charging customers the old rate of 14%.
Easter respite
“Prices were adjusted on the shelf and at the till. We absorbed the costs in a number of areas, for example keeping the price of promotional items unchanged throughout the Easter weekend,” North said.
Godfrey said implementing the new VAT rate, which was announced by then-finance minister Malusi Gigaba during the budget in February, meant Spar had to amend IT platforms throughout its operations.
“Fortunately, this was relatively easy to achieve, but it did take a dedicated IT team the full duration from the budget announcement until ‘go live’ last week to complete, test and implement and release operationally,” he said.
Godfrey said each item on the shelves needed to be reviewed and reset where appropriate, while taking into account the retailer’s need to remain competitive.
The magic of R9.99
“We were very sensitive to not increasing pricing beyond the VAT impact. This price monitoring focus will continue for some weeks as the retail markets readjust,” he said.
“Our marketing teams throughout the country had to then review the calculated consequence on the entire range of products carried to address the impacts of the rate change on the retail price.
“For example an item marked at R8.75, exclusive of VAT, would have previously sold for R9.99. Simply adjusting for the VAT increase would have resulted in a selling price of R10.06.
“Clearly from a marketing viewpoint this is not a desirable price,” Godfrey said.