T
he crippling drought in South Africa is causing
new problems for SA grocers as they tackle the
challenge of maintaining margins while trying
to keep prices low for strained consumers. Buying power has been eroded by poor employment prospects, tougher access to credit and rising utility costs,
while the drought is likely to result in price hikes due to
lower supply and increased imports, affecting many
items including fresh produce.
"The new threat is how the grocery retailers are going to
deal with the price increase that’s coming from the
drought. In the case of Shoprite, which arguably sells a
higher proportion of commodity-type foods, they’re
going to have quite a battle managing the inflation
rate," said Alec Abraham, Sasfin senior retail analyst.
"What is very clear is that all the retailers will try to keep
feet coming through the door and are going to invest in
pricing — we’ve seen this already from Pick n Pay in
their last results," he added.
Given the tough environment, grocery retailers have for
the past year become adept at absorbing cost increases
and launching price-reductions to attract shoppers.
Diversification is limited for grocery retailers, whose
complex supply chains cap expansion to Africa. Last
year, Woolworths, Truworths, Foschini and private equity firm Brait took stakes in developed market retailers.
"It’s certainly more difficult for a grocery retailer to expand (outside Africa). The continent doesn’t really give
you much diversification in earnings — because pretty
much most of the African emerging markets are in the
same boat. So, they don’t have the same advantage of
the clothing guys, who have hard currency exposure
and exposure to different growth drivers," Mr Abraham
said.
In 2006, Shoprite withdrew from Egypt, citing legislation and customs duties, and in 2010, it pulled the plug
on its Indian joint venture, in anticipation of foreign
ownership legislative changes, which did not materialise.
Meanwhile, Pick n Pay had two disastrous attempts in
Australia, first in the 1980s, when it was run out of the
country by unions and anti-apartheid activists and again
in 2011, when it was finally allowed to exit the country
after a protracted legal battle involving the Australian
antitrust regulator and the federal court.
Source: BDlive.co.za in http://www.freshplaza.com/
article/152173/South-African-food-retailers-affected-bydrought?
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Publication date: 1/22/2016