‘South Africa probably also needs legislation to limit the power and role of the retail chains.’
The retail sector plays a dominant role in the south African food market, allowing it to dictate to processors and farmers. Very few farmers sell directly to the consumer. Products usually go from the farmer to a processor, and then to the retailer where the consumer buys the goods.
A recent study by Lindie Botha, then of the Free State University and currently with the Agricultural Business Chamber, has pinpointed the important role retail chain stores play in the food value chain.
Table 1 shows the share of major retailers in total retail food sales. Economists use various measures to show the extent of concentration in an industry. Pick ‘n Pay has a 33% share in the total market. The top two firms handle 64% of total sales, while the top four handle 89% of total sales. Chain-related retailers generated a turnover of R34,6 billion in 2000. Pick‘nPay earned R31 885 million in 2005. The Shoprite group of companies had total sales of R30 328 million in 2005.
By comparison the 7 500 largest farmers, each with individual turnover of more that R2 million, had a combined turnover of only R51 billion between them.
More than 40 000 farmers must sell their products through the hands of a few retailers to get to the 43 million consumers. The face of the South retail scene has changed markedly. The rapid spread of supermarkets drives many traditional food retailers, such as the small corner stores, out of business.
Property developers provide space to retail chains at very low rates to get so-called anchor tenants. Smaller businesses pay higher rents than these anchor tenants. The social impact of the creation of shopping centres definitely need further study. This strong concentration of marketing power in the hands of a few retailers affects the rest of the food value chain.
Major processors cannot afford to oppose retailers and generally agree to all the conditions the retailer places on them.
They pay for shelf-space, provide shelf-packers, provide all types of discounts to the supermarkets and must take responsibility for all breakages. Processing industries lose millions yearly as crates disappear. Supermarkets refuse to take any responsibility for crates. Consumers pay cash for goods while the suppliers are paid after 60 days.
Some larger farmers entered into supply agreements with supermarket chains. They benefit from these agreements. However, in the case of vegetables this poses a problem for all farmers. smaller portion of total sales moves through the municipal markets, while prices on these markets are still taken as guide-prices by the retail chains.
In the long run, farmers who supply the retail chains will also lose out. Recently the Competition Commission recommended that the Tribunal prohibits Pick ‘n Pay from acquiring Fruit and Veg City. Between them they have a combined market share of 58% of national fruit and vegetable markets. In some local markets they have a market share in excess of 75%.
The commission concluded that the acquisition would result in substantially less competition in the market for fresh food. In the US, various pieces of legislation limit the power of the retailers to exclude products from their shelves, prescribe minimum payment conditions for retailers and limit uncompetitive behaviour. South Africa probably also needs legislation to limit the power and role of the retail chains. Farmers who become aware of strong-arm tactics by the retailers have a duty to report this to the Competition Commission.
There are a few cases where farmers and groups of farmers opened retail food outlets in urban and suburban areas and sell directly to the public – in many cases with exceptional results. However, economies of scale make it impossible for the majority of farmers to take this route. They can only hope for legislation to limit the power of the retail sector. Dr Koos Coetzee is an agricultural economist at the MPO. All opinions expressed are his own. |fw