Market inquiry: retailers (mostly) cleared

The Competition Commission released its final report on the Fresh Produce Market Inquiry (FPMI). Retailers have, for the most part, been cleared of any wrongdoing regarding price gouging or keeping new or small-scale farmers out of this market.

Market inquiry: retailers (mostly) cleared
The Fresh Produce Market Inquiry has found no evidence that retailers are unduly increasing prices for fresh produce.
Photo: Lindi Botha
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The inquiry into the fresh produce market began in March 2023 to assess why participation by historically disadvantaged persons (HDPs) in the fresh produce industry was low, and if prices were being distorted, resulting in lower prices for small-scale farmers, while raising prices for consumers.

A provisional report was released in June last year and comments collected from stakeholders for the final report.

Findings

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The inquiry stated that their investigation into whether retailers are profiteering from the retail sale of fresh produce was inconclusive. The report stated that it was important to note that in some cases, there appeared to be greater mark-ups for certain produce (per pack size) for some retailers.

“In other cases, some retailers’ net profit margins are negative for some produce. There is a combination of high mark-ups and low (sometimes negative) net margins, implying that the business model of the top five retailers incurs costs in the supply chain that are passed on to consumers, thereby yielding prices that may be higher than what prevails in other routes to market.”

Routes to market that incurred higher costs included distribution centres, which ensured greater control over the cold-chain for the produce.

During the investigation the FPMI tested and confirmed the notion that retailers pay higher prices to farmers than what farmers would have obtained at the national fresh produce markets (NFPMs).

Another concern the inquiry dealt with was that large supermarket chains could be leveraging possible buyer power against farmers when contracting with them directly.

Response to findings

Commenting on the findings, Wandile Sihlobo, chief economist at Agbiz, stated that there was no clear evidence of any wrongdoing among industry stakeholders.

“The FPMI could not find evidence that large retailers have excessive buying power over farmers when directly contracting with them. They make an interesting finding: ‘Most growers appear not to be in a vulnerable bargaining position when dealing directly with large retail chains’. One reason is the way the contracts are specified, as well as the fact that fresh produce markets provide an alternative market outlet for farmers. This confirms the vital role of fresh produce markets and why local governments must play their part in maintaining them.”

In addition, the lack of volume commitments by retailers ensures that farmers are not severely prejudiced in instances where they cannot meet orders due to factors beyond their control such as inclement weather.

In relation to payment terms, the FPMI also noted that these terms from retailers are reasonable.

Barriers to entry

A bone of contention stemming from the inquiry is the barrier to entry that certifications such as Global GAP place on new and small-scale farmers. The inquiry stated that this additional standard impedes, restricts and distorts competition, and that retailers should therefore aid such farmers financially to obtain Global GAP certification.

Retailers, however, stated that they were already contributing a substantial amount to their supplier development funds. The initial proposal by the FPMI that retailers increase the amount paid to their supplier development funds by 10% annually over five years was rejected by retailers as being burdensome and would risk their financial viability.

The final recommendation was that the Department of Trade, Industry and Competition should work towards the creation of a fund to assist new entrants. The report also stated that “large retailers must use their best endeavours to maintain and expand supplier development programmes, in accordance with existing obligations”.

The Consumer Goods Council of South Africa, representing retailers, declined to comment, as more time was needed to study the FPMI report.

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