Pioneer has paid its dues and consumers now face the impact of higher input costs, writes Lloyd Gedye.
Did you notice the drop in the bread price? Did consumers benefit from Pioneer Foods’ price cuts on bread and flour, enforced by the Competition Commission (which recently came to an end)? And how did the cuts affect its competitors, who were involved with it in a bread cartel a few years ago?
In November last year Pioneer Foods agreed to a R1-billion settlement with the commission for its involvement in bread and wheat cartels, as well as providing evidence about fellow colluders in alleged egg and poultry cartels.
As part of the settlement Pioneer Foods agreed to reduce the sale price of its bread and flour products by a total of R160-million in its gross profit, when benchmarked against a similar period in the previous year.
In December last year the commission announced that Pioneer Foods had begun implementing its price cuts, reducing the price of standard white and brown loaves of bread by an average of 30c each. The price of flour was reduced by an average of R350 a tonne.
This week Pioneer Foods reported its financial results for the six months to March 2011 and it was reported that it had increased its bread prices following the conclusion of the period of enforced cuts.
Johannes van Niekerk, the spokesperson for Pioneer Foods, said this week that the price cuts had amounted to a R171-million reduction in gross profit and that this had been signed off by the external auditors according to the agreement with the commission.
Pioneer’s bread division, Sasko, posted a 5% gain in revenue, up to R4.3-billion, but the division faced a 24% reduction in operating profit, down to R395-million. How did these price cuts affect the market? An economic analyst who tracked bread prices during this period said that when Sasko dropped its bread prices Blue Ribbon (Premier Foods) followed suit, although Albany (Tiger Brands) did not.
A bread price survey published in the National Consumer Forum’s Consumer Fair publication of April 2011 seems to support this. At Pick n Pay, Sasko’s white loaf was selling for R6.99 and its brown loaf for R5.99. Blue Ribbon’s white and brown loaves were selling for R6.99 each, while Albany’s white and brown loaves were selling for R7.99 each.
Saving much more
The analyst, who spoke on condition of anonymity, pointed out that wheat and fuel prices increased significantly during the period that the price cuts were being implemented, so the true saving to the consumer was more than just the reduction in price—under normal circumstances the price would have gone up significantly.
The analyst said that Albany, probably because it was losing market share, eventually responded in May and reduced its bread price—just as Sasko and Blue Ribbon were increasing theirs.
Tiger Brands is reporting its financial results next week and only then will it be possible to analyse how its bread business has been affected. Because of the imminent announcement of its results, the company is in a closed period and could not respond to questions this week.
Ian Visser, Premier Foods chief executive, said it had not reduced the price of its bread products in response to Pioneer’s cuts, although retailers might have done so. “We did not drop prices,” Visser said. “It was part of Pioneer’s fine. It was not normal trading conditions.”
However, he said, Premier’s ability to increase bread prices due to rising input costs had been constrained because of Pioneer’s forced cuts. “These input cost increases haven’t been passed down fully to the consumer yet,” he said. “I don’t know how long it will take to normalise.”
Cliff Sampson, Foodcorp’s managing director of consumer brands, said this week that Foodcorp was a regional player with a focus on Mpumalanga and Limpopo and was not one of Pioneer’s main competitors. For that reason, Sampson said, it did not feel it needed to reduce its bread prices, although it did decrease the price of flour.
Sampson said that looking at the prices of all brands of bread during the period it was clear that consumers “definitely” benefited from the cuts.
The commission, responding to questions from the Mail & Guardian, said this week: “The settlement with Pioneer was crafted not just to give some relief to consumers at a time when input costs such as wheat prices have been on the rise but also to stimulate active competition in this market and more competitive outcomes.
“The producers had dampened competition between them through the information they shared through their industry associations. This information exchange has been ended by the commission and we expect more vigorous competition as a result.
“Bread prices, of course, may still increase, as costs such as fuel, electricity and wheat are at historically high levels,” the commission said.