Words for the music.
22 July 2017 13:01 (South Africa)
Opinionista Ivo Vegter

Supermarkets aren’t ‘robbing us blind’

  • Ivo Vegter
    Ivo Vegter

    Ivo Vegter is a columnist and the author of Extreme Environment, a book on environmental exaggeration and how it harms emerging economies. He writes on this and many other matters, from the perspective of individual liberty and free markets. He is seldom wrong.

A recent article in these pages that blames the “rampant profiteering of big food retailers” for child malnutrition argues from false premises to a mistaken conclusion. Supermarkets aren’t the bogeymen that keep the poor mired in poverty and hunger.

In a recent article in Daily Maverick, Rebecca Davis writes about the “profiteering” of supermarkets, holding them responsible for poor nutrition, particularly among children. Her article is based almost entirely on An Empty Plate, a book by agricultural economist Tracy Ledger.

The article starts by observing a very real problem: far too few children in South Africa are fed a balanced diet, which results in malnutrition and stunting. This is especially true among the very poor, of course, but it also occurs in ordinary working-class and middle-class families, where price and convenience often trumps a balanced diet.

The fault, says Davis, lies with “rampant profiteering of big food retailers” and “a food system which has seen supermarkets retail food products at skyrocketing prices with little consumer resistance”.

Other than an anecdotal example of of kilo of potatoes which cost R2.50 at the farm and were sold for R9.60 on the shelf, which suggests a dramatic 384% markup, Davis does not specify what the net profits of supermarkets really are. Nor does she point out what food price inflation is, or whether it is uniform across all major retailers.

Since Woolworths is obviously an upmarket brand catering to the rich, let’s consider the large chains that are most likely to serve the poor, Shoprite, Spar and Pick n Pay.

According to Shoprite’s integrated annual report for 2016, its after-tax profit is 3.7%. However, this includes a liquor chain, a furniture chain and a fast-food chain, all of which enjoy higher margins than supermarkets. It doesn’t break out profit margins for its supermarkets alone, but it is reasonable to suppose its supermarket profit is below 2%. Spar’s after-tax profit, according to its integrated annual report for 2016, is 1.7%. Pick n Pay, in its integrated annual report for 2016, reports profits after tax to be 1.6%.

In the US, the average supermarket makes a profit of between 1% and 3%, so this is in line with expectations. Natural, organic or gourmet food stores can make up to 6%.

This is the scale of “the rampant profiteering of big food retailers”, in Davis’s words.

The latest consumer price index had yet to be announced at the time of writing. Hilton Tarrant, in an August 2016 article for Moneyweb, reported that year-on-year food price inflation at the time was 10.8%. This is based on a basket of about 100 food items, and is certainly cause for alarm. The article was prompted by Massmart reporting a massive 13% increase in the price of a basket of 23 food items in just six months, which suggested an eye-watering 26% annual food price inflation rate. However, Shoprite reported internal food price inflation over some 80,000 items to be only 3.5%. This shows that the claim of “skyrocketing prices” is at best a gross generalisation, which ignores the fact that consumers do have choices about where to do their shopping.

But the claim that food inflation is the fault of retailers is itself spurious. The major contributors to food price inflation in recent years, according to Agri SA, have been the nationwide drought and the exchange rate.

So the accusations against retailers, about both profiteering and inflation, are baseless. Yes, food prices have been rising and this has a disproportionate impact on the poor, but the blame does not lie with the big food retailers.

Davis’s argument does not consider what retailers actually do besides buy pockets of potatoes from farmers and sell them to consumers at a markup. They operate vast distribution networks that rapidly get fresh food from distant rural farms to shelves in population centres. This is expensive. They provide refrigeration along the supply chain, and maintain health standards that prevent customers from risking deadly food-borne diseases every time they buy fresh produce. This is expensive.

Supermarkets contract food processing services to offer easy-to-prepare or ready-made meals, saving customers precious time. They offer convenient one-stop shopping, complete with vast parking spaces. All of this is expensive.

Supermarkets serve as anchor tenants for shopping malls and districts, so customers don’t have to go far to find a pharmacy, clothing retailer or hardware store. They compete against charming mom-and-pop stores, certainly, but they do so by offering better quality, better prices, and more variety. None of these are bad for the consumer. If they were, supermarkets would simply fail to attract business. Instead, they set standards that competitors have to match and surpass in order to earn the right to make a profit. This is why niche retailers, specialising in luxury items such as organic food, survive perfectly well alongside supermarkets.

Pick n Pay and Shoprite together employ 190,000 workers who earn a total of R16.4-billion per year. The Spar Group has created business opportunities for 2,033 independently owned retailers in South Africa. Retailers are also active in their communities. Shoprite, for example, reports that it has donated over R100-million worth of food, subsidised prices to the value of R32-million and served 4.5-million meals of bread and soup to the poor. Other retailers have similar programmes.

But even discounting all the benefits that supermarkets bring to a society, the mere fact that they run on razor-thin profit margins of a couple of percentage points is enough to demolish an accusation of “rampant profiteering”.

The story claims: “A lack of public transport investment by government also plays its role in the dominance of supermarkets: small farmers have no means of transporting food from nearby farms to consumers without using private bakkies or the like.”

Small farmers have never had public transport as a means to transport produce, even in countries with highly developed public transport systems. There is bulk transport by rail, from centralised collection points such as grain silos, but even then, small farmers have to use private trucks, owned or rented, to get their produce to the railhead.

More generally, the idea of a public transport system that would reduce the “dominance of supermarkets” is nonsense. In rich countries with awesome public transport, supermarkets still reign supreme because they offer one-stop convenience, affordable prices, and quality that is adequate for the vast majority of people.

Some other points, which Davis attributes – like the bulk of her article – to Ledger, deserve applause. For example, it is indeed absurd to propose that food security can be addressed by encouraging people to grow their own food gardens. Not only are small gardens insufficient to provide a balanced meal, but subsistence farming and barter with neighbours is an awfully inefficient means of production and trade.

A core feature of the development of market capitalism is specialisation and the division of labour. This makes it possible for those best able to produce certain wants and needs of society to do so, leaving others free to pursue other specialities. This makes all of us richer, including those who are bested by competitors and forced to find alternative employment.

Before the advent of market capitalism, the vast majority of the population worked in agriculture. It is thanks to market capitalism that 97% of us have been relieved of back-breaking farm labour, leaving us free to do more productive or more fulfilling jobs. To dream of returning to an agrarian society, in which peasants farm enough for themselves with a little to spare, is to dream of slaving long days in grinding poverty and dying young, with regular famines to relieve the monotony.

Why is there no large-scale citizen resistance to the food system?” asks Davis. Ledger provides the answer: “South Africans see their low incomes as the problem rather than high food prices.”

Writes Davis: “This may be because many South Africans imagine that the alternative to the current system is ‘Soviet-style state control’, which Ledger dismisses as nonsense. The real alternative is an agri-food system built on human morality rather than economic morality.”

There is no such thing as “economic morality”. Economics is merely the study of how humans choose to act, given limited resources to satisfy unlimited wants and needs. It is inseparable from human morality.

But how would such a system be created, according to Davis and Ledger? By state intervention, of course: “A start, Ledger suggests, could be the establishment of an Agri-Food Policy Council to provide a coherence to work on food security which currently does not exist. Such a council would need to review the Marketing of Agricultural Products Act: the legislation which currently prevents government from intervening in agricultural markets.”

Then, once prices have been fixed, give subsidies to small-scale farmers, and something something competition legislation. (Davis writes: “Existing competition legislation should also be addressed with respect to food.” What this means is anybody’s guess, but in a market with 1% to 2% profit margins, there is clearly more than enough competition.)

As the article points out, most of this has been tried under the Apartheid government. State boards controlled the marketing and pricing of agricultural products, and (white) farmers were subsidised. In fact, Davis earlier in the article suggested the exact opposite: “Ledger notes that she is not suggesting that the old system of subsidies and marketing control be maintained, because it was unaffordable and prioritised farmers too heavily.”

So, having established a real problem, the piece falsely blamed the “rampant profiteering of big food retailers”. If you do not know the cause of a problem, it is unlikely that you’ll be able to propose a sensible solution. And indeed, Davis’s article concludes with contradictory, vague left-wing proposals, similar to those that were earlier dismissed as “unaffordable”. These, she argues (in Ledger’s words), would somehow restore care, dignity and kindness. How care, dignity and kindness would contribute to reducing malnutrition, they leave as an exercise for the reader.

The left’s stock-in-trade is to blame big companies for all the evils in the world, and promise that state intervention will solve them. Despite government’s record of corruption and sheer incompetence, and the fact that socialism has failed everywhere it has been tried, they keep placing their faith in some sort of idealised bureaucratic state. They refuse to recognise that where progress has been made in recent decades – against poverty, hunger, malnutrition, child mortality and the burden of disease – it is strongly correlated with decreased state intervention in markets and increased economic freedom for individuals and companies. Davis’s solution does the opposite.

If the left would stop blaming the bogeyman of capitalism, they might recognise that supermarkets are more likely to be part of the solution. By offering consumers a wide variety of high-quality products at the best possible prices, they have done more than most companies to improve our quality of life, and make decent nutrition accessible to the poor. History has proven that to continue the trend of raising prosperity and declining poverty, we need more economic freedom, less state intervention, and fewer false accusations by anti-capitalists. DM

  • Ivo Vegter
    Ivo Vegter

    Ivo Vegter is a columnist and the author of Extreme Environment, a book on environmental exaggeration and how it harms emerging economies. He writes on this and many other matters, from the perspective of individual liberty and free markets. He is seldom wrong.

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