Johannesburg - Food distributor Spar says it is engaged in a constant battle with its suppliers and has had to cut its own margins to keep food prices down.
"It is very competitive out there; everyone is fighting for market share and it's an ongoing struggle to keep our suppliers honest," Spar CE Wayne Hook told Fin24.com.
Hook's comments come as the company posted a 24.4% increase in turnover to R16.1bn for the six months to end-March. Operating profit rose 21.9% to R605.1m.
The six-month average food inflation rate ran at "about 16%" for the reporting period, according to Hook. Statistics SA reported the annual food inflation rate to be 14.7% in March 2009.
Retailers have borne the brunt of the blame for the high price of food. Trade union Solidarity, which releases a monthly price monitor of a basket of 25 goods and what they cost at various retailers, on Tuesday said SA's food inflation rate is consistently higher when compared to that of similar countries.
"Part of the answer will be found in the competition commission's long-term study about the food supply chain that must be completed so the culprits can be named," the union said.
In late January, Pick n Pay CEO Nick Badminton sent a letter to 30 of that company's biggest suppliers, urging them to "exercise serious restraint" with their increases.
Shoprite CEO Whitey Basson said the company had been "controlling suppliers for 30 years and not just in the last month when it became nice to talk about it".
House brands break new ground
Spar's Hook said the group's buyers deal with suppliers on a "day-to-day basis. We don't splash it around the press, calling the suppliers in."
Hook said buyers "bring the suppliers in and make sure we get the benefit or get them to justify why the cost has gone up. For us to sit back and accept price increases would be crazy because volumes go the other way.
"From a promotional point of view, we have had to cut prices and take out of our margin as a wholesaler and of our retailers' margin to be competitive. In high inflationary periods, we have to sacrifice margin."
Spar's gross margin fell from 8.1% for the first half of financial 2008 to 7.9% due to its "continued focus on responsible, competitive food pricing".
Hook said the economic recession has seen customers downsizing and opting for house brands over premium brands.
Coronation Fund Managers analyst Quinton Ivan said Spar's "exceptional" performance was buoyed by high food inflation, and its rural and peri-urban footprint benefits from volume growth in those regions.
He said this is stronger than food retailers with a predominantly metropolitan footprint, where volumes have been flat or negative as consumer spending is adversely affected by high interest rates. "This is less relevant for rural consumers who do not have a lot of interest-bearing debt."
Spar has upgaded two of its six distribution facilities, with another three upgrades under way. "We have spent R1bn upgrading our facilities since 2007," said Hook. "We have almost doubled the size of our South Rand (located in Jet Park, Boksburg on Gauteng's East Rand) distribution centre and have built a new 34 000m² centre in the Western Cape, moving out of the old one."
Ivan said Spar's distribution facilities make a significant contribution to its success: "These provide the infrastructure Spar uses to service its franchisees, streamlining the delivery process to individual stores and ensuring that franchisees receive minimal deliveries only instead of several from individual suppliers."
Hook said that food inflation will come down over the next six months: "This is great for the consumer and everyone in the long run, but this will put pressure on growth. However, interest rates going down and petrol price decreases will counter this."
- Fin24.com