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Gross challenge for grocers as reality bites

| Economic factors

The new year has brought a fresh challenge for SA’s grocers as they walk the tightrope of maintaining margins while trying to keep prices low for strained consumers amid a crippling drought.

Buying power has been eroded by poor employment prospects, tougher access to credit and rising utility costs.

The drought is likely to result in price hikes due to lower supply and increased imports, affecting basket items such as eggs, chicken, beef, dairy and fresh produce.

With year-on-year maize prices up almost 100%, managing "pricing versus volumes" would be a big issue for SA’s grocery players this year, Alec Abraham, Sasfin senior retail analyst, said on Tuesday.

"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," he added.

A spike in maize prices compounded by the rand’s plunge against the dollar has pushed up farmers’ production costs and the cost of imported maize.

"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," Mr Abraham said.

Given the tough environment, grocery retailers have for the past year become adept at absorbing cost increases and launching price-reductions to attract shoppers.

Festive season trading updates from SA’s listed retailers including clothing chains, pointed to a less dire picture than expected, but with no relief for the underlying macroeconomic drivers of spending, another tough operating year for SA’s retailers is on the cards.

Unlike their apparel counterparts, 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.

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