Johannesburg - The Competition Commission won't succeed in bringing food prices down by punishing retailers for their trading practices, as these groups are already trading on razor-thin margins.
This is according to asset management group RE:CM director Daniel Malan, who claims the premise of the commission's investigation is flawed.
In June, the commission announced it would investigate food retailers - including Pick n Pay, Shoprite, Woolworths, Spar, Massmart as well as Metcash - for anti-competitive conduct.
This includes the practice of negotiating long-term leases with landlords, which effectively bars potential new entrants from acquiring retail space, as well as abusing buying power to bully suppliers.
A third aspect of the investigation focuses on excessive mark-ups.
Malan said it may appear the bulk-buying power of large food retailers gives them the stick over smaller suppliers and opens the market to abuse, but a look at the groups' profitability and mark-ups suggests otherwise.
Over a 10-year period, Pick n Pay and Shoprite on average showed mark-ups (the margin added to cost of products) of 21.7% and 21.8% respectively, posting trading profit margins (the difference between selling price and all other expenses) of 2.9% and 3.2%.
Malan said retailers would have to close shop if they were to lower their prices by 5%, far less than the decline expected by those who complain about food costs.
'Bullying has little impact'
"Even a general lowering of prices by as little as 2% to 3% would probably result in these businesses generating sub-economical returns on capital," Malan said.
Malan said a comparison of return on equity and profitability between Pick n Pay and Shoprite and their international counterparts shows both South African firms coming in at the lower end of the scale.
Pick n Pay showed an average return on equity of 59.4% over the past 10 years, while that of Shoprite was 23.8%.
The UK's Tesco is an international firm which uses lower mark-ups - but its strategy is to acquire properties rather than lease, which results in lower fixed operating expenses.
However, the use of leases enables South Africa's retailers to operate with less capital invested in the business than would have been the case if they had owned the properties.
Another argument dismissed by Malan is the theory that "bullying" tactics by the SA food retailers has a negative impact on the farming and processing sector of the economy, which supplies many products sold in retail stores.
"The reality is that in most of these cases, the suppliers find themselves in an industry with few barriers to entry [as opposed to the retailing sector], where there are many eager to compete for any available profits," Malan said.
"Yes, they have a dominant position against their suppliers, and yes, they earn very high returns on equity, but the facts suggest that they earn these high returns in a way that actually benefits the public at large."
- Fin24.com
*The writer holds shares in Shoprite.