FEEDING THE PROBLEM OP-ED
Don’t force big retailers to cut profits margins on essential food – there are better ways to fight hunger
As appealing as it is to want to put pressure on retail giants into forgoing a small fraction of their gargantuan profits by scrapping their profit margins on essential food items, this strategy is flawed.
There is an old joke, in somewhat bad taste, which claims that it is Shoprite billionaire Christo Wiese, not the poor, who has been the biggest beneficiary of the South African social grant system. I was reminded of this when reading about a recent campaign calling on retailers to scrap their profits on a basket of 10 essential food items. A call that was picked up by Daily Maverick and other publications over the past few months. To match private-sector commitment to addressing our national hunger crisis, the call proposed that the government agree to provide a rebate or subsidy to retailers in order to further enhance the discount to consumers.
There is no doubt that South Africa is in the middle of a nutritional crisis, but is this the right approach?
As appealing as it is to want to pressure retail giants into forgoing a small fraction of their gargantuan profits by scrapping their profit margins on essential food items, this strategy is flawed. Not only would it disincentivise store owners from continuing to stock the types of food on which the poor rely, but more importantly what the argument for scrapping profits on essential foods misses is that the biggest spenders on food are not the very poor: it’s middle- and upper-income citizens. This means that if retailers drop their margins on a basket of items, the rich and middle class benefit too.
Interestingly, the South African Revenue Service already does what campaigners are asking retailers to do. It exempts 19 essential food items from VAT. The idea that the poor should not be taxed on essential food items seems fair in principle. However, BDO ran the numbers on the VAT exemption and the results are worth considering in light of the recent call for retailers to follow suit by scrapping their profits on 10 essential food items.
In 2016, SARS’s zero VAT rating on the basket of essential food items resulted in a R23.3-billion per year saving for consumers (and a corresponding loss to the national fiscus). This is a lot of money, about 10% of the total allocation for all social grants.
On face value, this sounds like a simple and effective way to bring down food costs. However, BDO’s analysis showed that R15.3-billion of the R23.3-billion saving was made by middle- and upper-income consumers, while just R7-billion was experienced by the poor and very poor. This meant that it cost the South African fiscus R23.3-billion in lost revenue to deliver only R7-billion in food relief to the poor and very poor. In other words the zero-VAT programme costs R3 to deliver R1 of food aid to the poor.
Other retail-side initiatives, such as profit exemptions on essential food items, that don’t target relief directly to the most in need, are likely to mirror this problem.
Effect on the informal economy
The second major concern with forcing retailers to forgo profits and further cut retail prices through state-funded rebates to retailers who comply, is the impact on the informal economy.
Small shops, spazas and informal traders are an essential component of the South African food system. “Small retail” is vital in extending access to food into many of the poorest parts of this country. It is also a very important source of livelihood, employing far more people than the formal food retail sector. Forcing price cuts on big retail will have serious negative implications for small retail.
We need to ensure that the annual injection of R235.5-billion into low-income communities through the social grant system goes to local entrepreneurs and traders who recirculate it in their communities.
Unlike Pick n Pay or Shoprite, the spaza on the corner cannot afford to stock shelves with products that aren’t profitable, nor are they going to be able to navigate the bureaucracy required to access state rebates. The result is likely to be that small retailers will stop stocking these essential items, and big retail’s monopoly on the food system is further entrenched as consumers shift spending to large retailers. This is the opposite of what we should be trying to do.
So what are the solutions/alternatives?
Phase out subsidies to those who don’t need them. Scrap the zero-VAT rating, recoup the R23-billion and immediately redistribute this fiscal windfall into the current gaps in grant coverage which most directly target the poor. Funding the rapid extension of ECD feeding and increasing the value of the Child Grant and the Social Relief of Distress grant could be three ways to go about this.
Don’t ask retailers to forgo the profit on essential food items and instead start pushing them to declare profits on essential food items in their annual reports (get them to do the same on sugary beverages while you’re at it). Then work out exactly how much profit retailers are making on the food they sell to the poorest of the poor. Use this information to drive for a pledge from retailers to plough these profits back into more targeted relief to the very poor. These could use local community kitchens, school feeding programmes, ECD centres and other direct channels which put food directly on the tables of those most in need. This would prevent the unintended subsidisation of the rich and the eradication of smaller retailers from the food system.
Turn off the economic vacuum cleaner. The biggest lever South Africa currently has to uplift low-income areas and drive an economic revolution capable of turning the tide on unemployment (read hunger) is to build wealth within low-income communities by changing the way that social grant recipients buy food.
Every month, R235.5 billion of our tax money is paid out to 29 million social grant recipients, of which National Treasury estimates 70% gets spent on food. Most of this food spending takes place at budget retailers like Shoprite. Shoprite, bless them, even facilitates the collection of social grants in-store. This money then vanishes almost instantaneously from the low-income communities into which these grants were paid.
Read more in Daily Maverick: What goes up, must go down: Compcom’s latest Food Pricing Report shows prices are sticky
This needs to change. We need to ensure that the annual injection of R235.5-billion into low-income communities through the social grant system goes to local entrepreneurs and traders who recirculate it in their communities. This social grant spending represents an untapped opportunity to drive wealth accumulation in low-income areas and lay the foundations for a sustainable and dignified solution to South Africa’s hunger crisis. This means diverting grant spending away from big retailers and back into small and micro-scale enterprises. This can be done, but calls on us to radically reimagine the kinds of support we offer to the informal economy as a pathway out of poverty. DM
Luke Metelerkamp is a senior professional officer working on food system transformation at ICLEI Africa.