Sharing out the pain of food price squeeze
● The government has called on retailers to help ease the pressure of higher prices on consumers, but it is unlikely that South African households will escape the impact of rising international oil costs and a weakening currency.
Last week, the government announced it would place more products on the VAT exemption list to ease the consumer burden — and has asked retailers to do their part.
In particular, it asks that retailers do not increase the prices of other products.
But retailers couldn’t absorb all of the impact on wholesale prices of rising fuel costs and higher import prices, said Kevin Lings, chief economist at Stanlib.
“If they absorb all of it they run the risk of floundering or starting to incur losses and then the damage would be that they would likely incur store closures and you would get retrenchments.
“It’s got to do with market forces . . . [before the currency slump] the economic environment was more buoyant and retailers were looking to increase prices,” Lings said.
“We’ve seen some margin compression, but retailers are not in a position where they can simply afford to absorb everything.”
The current zero-rated basket includes 19 household staples such as brown bread, maize meal, milk, eggs and vegetable oil.
With consumerism the biggest driver of economic activity in South Africa, adding more items to the list — and thus gathering less tax — will place further pressure on the economy.
Zero-rating more products does not unduly strain retailers’ margins as VAT is passed on to the National Treasury in any event — but raising VAT itself may have bruised the bottom line.
Stefan Salzer, partner and MD at Boston Consulting Group, said the increased tax had affected retail sales.
Stats SA reported that April’s total retail sales were R80-billion, down from R83-billion in March. ( The VAT increase from 14% to 15% came into effect on April 1.)
“It is important, though, to acknowledge that it’s not the VAT increase alone that caused retail sales to fall below expected levels,” said Salzer.
“The increase in the general fuel levy and the steep hike in the petrol price make transportation costs much higher — which in turn affects retailers’ bottom lines.”
Is there any risk that retailers might take advantage of the extra zero-rated products to increase prices on other items?
Not at all, said Mark Prentice, group marketing executive at Spar.
He said that, given “the pure market forces in South Africa, with three or four major supermarkets competing that heavily, there is no chance any of us would profiteer off that.
“Any zero-rating will be passed directly on to the consumer.”
David North, group executive of strategy and corporate affairs at Pick n Pay, said the grocery chain would work constructively with any proposals from the government on making food more affordable.
Africa’s largest retailer, Shoprite, which caters to lower-income shoppers, said it would issue a response once official information regarding the VAT-exempt items had been received.