/ 13 September 2023

‘Rocket and feather’ food prices signal inadequate competition – watchdog

Pick N Pay Stores Ltd. Launch New 'qualisave' Brand Cut Price Supermarket
South African consumers are struggling as spiralling food prices cut deeply into household budgets. File photo by Dwayne Senior/Bloomberg via Getty Images

Sticky prices in South Africa’s food value chains suggest there is inadequate competition among producers and retailers, according to the Competition Commission.

In its latest essential food pricing monitoring report, the competition watchdog notes that, while inflationary pressures have eased, consumers are still feeling the pinch of high food prices. This is amid so-called “rocket and feather” effects, which cause prices to shoot up quickly but come down very slowly.

Inflation recently fell to its lowest level in two years, as stubbornly high food prices have started to come unstuck.

Generally, it is assumed that in markets with few but large players, price-pass through — which indicates the responsiveness of producers and retailers to falling costs — will be lower than in more competitive markets, the report states.

“Evidence of the rocket and feather effect has been found across several food value chains locally and abroad,” the commission points out.

The Competition Commission has found evidence of these effects in South Africa’s bread, maize meal, sunflower oil and beef value chains.

There are several plausible explanations for this phenomenon, including adjustment costs and the nature of contracts in food chains, the report states. However, the one that is most salient for competition regulators is that rocket and feather effects signal that “competition may not be functioning optimally throughout food value chains”.

This is because, when markets are competitive, high mark-ups will be lowered through that competition.

Zeroing in on South Africa’s biggest grocery retailers, the report points out that Shoprite’s profit margin grew from 2019 to 2023, but has returned to where it was in 2019. Woolworths has fallen consistently since 2020. Pick n Pay’s profit margin has remained stable, though well below its two competitors.

However, though their weighted profit margin has fallen from 6% in 2022 to 5.3% in 2023, this is still higher than the profit margins among retailers in Ireland and the UK. This comparatively slower decline may be explained by load-shedding, which a number of economists have flagged as an ongoing upside risk to food price inflation.

The Competition Commission’s latest analysis shows that margins earned by bread and maize meal producers continue to grow in 2023, despite some easing cost pressures.  

“Listed producers of bread and maize meal have all reported that they increased prices to compensate for higher costs,” Wednesday’s report notes.

“However, in some cases margins have expanded which suggests price increases more than costs among other factors … Load-shedding costs have been reported by most food companies, but, with the exception of poultry, these do not appear to be major cost drivers.”

While retail spreads for bread and maize meal have remained constant — implying that retailers have not raised prices by more than their cost of sales — retailers may have earned more in absolute rand terms, the report adds.

On cooking oil prices, the report notes that these have been on the decline for a year. “However, while retailers cut their margins during the period of rising prices, they have been slower to reduce prices resulting in expanding margins.”

Beef carcass prices have been falling since September 2022, the report points out. 

“It is evident that the increase in retail prices at this time was not due to pressure from farmers, feedlots or abattoirs. Rather, this is due to retailers applying more margin to meat than they did before.”

Clearly, the report states, consumers are not benefiting from lower producer prices. However, this may be the result of the lag effects between when retailers pay for the meat and when it is sold, as well as attempts to hold onto profits in the face of load-shedding-related costs.