South African consumers are in for a rough rise with expectations of significant price increases in the food and beverage (F&B) sector, according to Grant Thornton’s latest International Business Report (IBR).
“Until now, local consumers have been relatively shielded from price increases and buyers have been in a strong position thanks to strong wage increases and relatively benign price core inflation. We are, however, seeing that producers are under more and more pressure to pass these increases on to consumers as inflation is no longer just contained to increases in fuel and administered prices,” says Ian Scott, Managing Partner of Grant Thornton Cape.
According to Grant Thornton’s latest International Business Report (IBR) on the F&B industry, privately held businesses in the sector have until fairly recently absorbed a large chunk of price rises themselves, but they are running out of capacity to do this.
The Grant Thornton IBR provides insight into the views and expectations of 12,000 businesses per year across 40 economies. In South Africa a total of 150 interviews are conducted per quarter and this equates to 600 perceptions from privately held businesses in SA per annum. This unique survey draws upon 20 years of trend data for most European participants and nine years for many non-European economies.
“F&B retailers in South Africa have not been as badly affected by the recession as some of their counterparts in developed economies where consumption spending was very weak and basic food prices high. Producers in South Africa benefited from low prices of basic food items thanks to strong agricultural supply and could afford to keep prices intact and the consumer relatively happy,” says Scott.
This situation is changing due to food prices increasing at producer level and simultaneously, consumption spending being eroded in an environment of stronger inflation. The report shows that 41% of F&B businesses expect to increase their prices over the next 12 months, compared to 12% in 2010.
Another factor that contributes to higher costs for producers is the higher duties charged on imported commodity items such as olive oil. “This is perhaps a sign of increased protectionism in the global economy, but producers are not in the position to absorb these costs and there are indications they will have to pass these increases on to consumers,” says Scott.
However, these increases prices will not necessarily result in bigger profits – while 62% of those surveyed expect revenue to increase over the next 12 months, only 43% also see a rise in profits.
Scott warns that South Africa is facing a very real threat to the nation’s food security with significant pressure currently being imposed on the poultry industry. Kevin Lovell, CEO of the SA Poultry Association stated in the media recently that urgent government intervention is required in South Africa to protect the industry from the “dumping” of cheap imports on the local market. In addition, subsidies are urgently required to support emerging farmers in the Poultry Sector, in order to stimulate local production and development of the rural economy.
However, Grant Thornton’s IBR survey highlighted one area for growth and this is consumers’ increased demand for healthier and organic food. Approximately 44% of those surveyed see the trend for more home-cooking as an opportunity for growth.
“This trend is also emerging in South Africa, but there is a large disparity between those opting for organic food at the higher end of the price scale and those with a need for cheaper food. Locally, about 35 million consumers would opt for more basic food at a cheaper price, while only about 5 million at the upper end of the salary bracket opts for healthier and organic food.”
Scott believes this ties in with the trend seen by several F&B retailers where their ‘housebrands’ has seen more appeal recently as consumers are feeling the bite from price increases.
“South African F&B producers have proved themselves to be fairly resilient through turbulent economic times and I believe their innovative solutions and strategies will position them well to cope with any coming headwinds,” he concludes.