#10things on how to manage rising prices & consumer hardship
How do retailers and brands deal with rising commodity prices and inflation? A recent Trade Intelligence webinar on rising food prices sought to find the answers.Friday, 08 Jul 2022
The rising cost of food and fuel is concerning for both consumers and retailers. The Pietermaritzburg Economic Justice and Dignity Group reported in May 2022 that the price of cooking oil had increased 52% year-on-year; cake flour by 13%; samp up 12%; potatoes up 22%; and bread prices have increased by 10%. The average household food basket now costs 11.4% more than in May 2021, or in more concrete terms, an additional R473. This takes the cost of the basket to R4,609 per month, a cause for major concern when 70% of households earn under R10,000 per month and still need to cover other expenses.
We have seen high food and fuel prices before as Trade Intelligence research points out: “Brent Crude reached a record high of US $133 a barrel in 2008, and the drought of 2016/2017 in many parts of South Africa pushed up food prices locally. However, in 2008 it cost us ‘only’ R7 to buy a US dollar while now it is more than twice that at R16. Even just looking back over the last 12 months, it costs R400-R500 more than last year to fill up our cars, and over R3,000 more to fill a truck with diesel. It is not difficult to see that such increases will be very difficult to absorb along the supply chain.”
We all knew that economic recovery from Covid would be tough; plus with the war in Ukraine affecting the price of commodities and increasing supply chain challenges; and Stage 6 loadshedding in South Africa now seems to have pushed many South African businesses and their customers to breaking point in recent weeks. And now that we are in this ‘dark’ place, thanks to Eskom, how do we get out of it? A recent Trade Intelligence webinar on rising food prices sought to find the answers. Here are 10 things you should know:
1. Uncertain times will continue in the medium term: With Covid, everything was affected, including doing business, and inflation was always going to rise in the wake of the pandemic due to the quantitative easing policies adopted by many central banks (i.e. the introduction of new money into the system to stimulate growth), causing an increase in demand and thus higher prices. With the Ukraine-Russia conflict expected to continue for some time, the world needs to settle in for a more unstable medium term going forward, explained analyst Daniel Silke.
2. Global volatility in commodity prices will continue: Global food commodity price indices are significantly higher than last year, especially for vegetable oils and cereals, said Carey Leighton, analyst and economist at Trade Intelligence. As a net importer of wheat and sunflower oil – meaning we consume more than we produce locally – South Africa is exposed to global prices and exchange rate volatility. Supply of sunflower oil and wheat were hard hit following Russia’s invasion of Ukraine since the two countries account for around 70% of global exports of sunflower oil and over 25% of wheat exports, she says.
3. Price pressure across the supply chain: The result is year-on-year price increases per ton recorded by Grain SA, with the sunflower seed price having increased by +23% and wheat +57%. Although South Africa is less exposed to international maize prices thanks to its substantial local production; prices in maize too have increased +30% per ton, impacting not only food costs, but feed costs, putting pressure on the prices of meat, dairy and egg production.
4. Retailers and brands need to change strategy: Retailers cannot continue to trade the way they did before, said Roelien Havenga, director of business intelligence at Daymon, a global private brands solutions provider, speaking on the webinar. “The stressors around us are driving worry in consumers. They are telling us that they are foreseeing extreme hardship, and they are worried about their buying power.”
5. Consumers are becoming brand agnostic: To find out just how consumers plan to negotiate these tough times, Daymon conducted research among LSM 5 to 10 South Africans. They found that shoppers are becoming increasingly retailer and brand agnostic – going to the retailer that offers the product they need at the cheapest price regardless of the brand. Consumers are also more willing to ‘experiment’ in categories where they were once especially brand loyal, a recent (and surprising) example being laundry detergent.
6. Bulk buying on special: Shoppers are saying that they will buy in bulk when a product is on special, and this trend has been reported recently by Massmart in particular.
7. Global market challenges: It’s not really a comfort, but South Africa is not alone in its struggles with inflation and the economy, as the war puts pressure on global supply chains and markets. Trade Intelligence reports that shrinkage in take-home pay is happening across the developed world too, with inflation and interest rates rising everywhere, and set to continue as many European countries and the US look elsewhere for their food and fuel supplies; and the Russia-Ukraine conflict has been particularly hard on emerging markets so far this year. South Africa actually fairs better than many due to its natural resources and exports. “There is always someone who will do well in a time of disruption,” said Silke on the webinar. “Growth rates in sub-Saharan Africa are likely to remain relatively intact, with African markets seen by investors as ‘frontier markets’ and investment interest is quite good.”
8. From globalisation to localisation: Daniel Silke questioned whether the world was shifting away from globalisation. “We are really moving out of an era of globalisation to something else. Global trade has started to drop off, the world has been trading less with one another. Because of Covid and supply chain issues, there is a lot of pressure to begin to source closer to home… can we move from globalisation to localisation?”
9. Localise production: South Africa needs to develop the tools and invest in local skills to localise production, creating much-needed employment in the process. We have the capacity – what we need is a competitive regulatory environment and labour force. We’ve just experienced how organised labour can take down the economy, forcing unsustainable wage increases and bringing our economy to its knees by forcing Eskom into Stage 6 loadshedding with the recent strike.
10. Create opportunity out of adversity: The call is to government and business to work together to create opportunity out of this adversity, concluded Natasha Smith, Trade Intelligence MD. “It’s not just the retailers’ responsibility but also manufacturers and all stakeholders in the FMCG industry. We all have something positive we can contribute towards easing this burden on the consumer.”
Main image credit: Pixabay.com.
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