Consumer prices are skyrocketing, and we are all feeling it. Driven by a perfect storm of COVID restrictions and impacts over the last two years followed by a major European war, and significantly for South Africa, a Chinese economic slowdown, the prices of fuel and the basic food basket are likely to continue to climb over the medium term.
According to the Pietermaritzburg Economic Justice and Dignity Group, in May 2022 the price of cooking oil increased +52% year-on-year, cake flour +13%, samp +12%, potatoes +22% and bread +10%. If we add in other items to make up the average household food basket, it is now costing +11.4% more than in May 2021, or in more concrete terms, an additional R473. This takes the cost of the basket to R4,609 per month, a cause for major concern when 70% of households earn under R10,000 per month and still need to cover other expenses.
We have seen high food and fuel prices before – Brent Crude reached a record high of US $133 a barrel in 2008, and the drought of 2016/2017 in many parts of South Africa pushed up food prices locally. However, in 2008 it cost us ‘only’ R7 to buy a US dollar while now it is more than twice that at R16. Even just looking back over the last 12 months, it costs R400-R500 more than last year to fill up our cars, and over R3,000 more to fill a truck with diesel. It is not difficult to see that such increases will be very difficult to absorb along the supply chain.
How did we get here?
Speaking at the recent ‘Rising Prices’ webinar hosted by FMCG research company, Trade Intelligence, renowned political economy analyst, Daniel Silke, explained that the world was on track for a “messy reboot” following COVID. Everything in the way of doing business had been affected, and inflation was going up across the globe due to the quantitative easing policies adopted by many central banks (i.e. the introduction of new money into the system to stimulate growth), causing an increase in demand and thus higher prices.
All our challenges have suddenly been brought into even starker focus over the last three months due to the geopolitical tumult of the Russia-Ukraine war and its impact on food and fuel supply. “I don’t think the Ukraine issue is going to be resolved any time soon, and even if there were a ceasefire in exchange for territory for what I would call a ‘frozen peace settlement’, the isolation of Russia and sanctions on Russia are going to continue, which will continue those supply side constraints on energy and on food as well,” Silke explained. “I think one has to settle in for a much more unstable medium term going forward.”
According to Carey Leighton, analyst and economist at Trade Intelligence, global food commodity price indices are significantly higher than last year, especially for vegetable oils and cereals. As a net importer of wheat and sunflower oil – meaning we consume more than we produce locally – South Africa is exposed to global prices and exchange rate volatility. “Supply of sunflower oil and wheat were hard hit following Russia’s invasion of Ukraine since the two countries account for around 70% of global exports of sunflower oil and over 25% of wheat exports,” she says.
This is showing in the year-on-year price increases per ton recorded by Grain SA with the sunflower seed price having increased by +23% and wheat +57%. Although South Africa is less exposed to international maize prices thanks to its substantial local production, prices in maize too have increased +30% per ton, impacting not only food costs, but feed costs, putting pressure on the prices of meat, dairy and egg production.
Times are tougher than ever – where to now?
“We all have to adapt, and the adaptation process is currently taking place in many businesses,” continued Silke, sentiments echoed by Roelien Havenga, Director of Business Intelligence at Daymon, a global private brands solutions provider. “In the current retail storm, we cannot trade in the same way that we did before,” she explains. “The stressors around us are driving worry in consumers. They are telling us that they are foreseeing extreme hardship, and they are worried about their buying power.”
To find out just how consumers plan to negotiate these tough times, Daymon conducted research among LSM 5 to 10 South Africans. The results of the research were particularly illuminating for FMCG retailers and suppliers:
- Shoppers are becoming increasingly retailer and brand agnostic, going to the retailer that offers the product they need at the cheapest price regardless of the brand
- Consumers are also more willing to ‘experiment’ in categories where they were once especially brand loyal, a recent (and surprising) example being laundry detergent
- Shoppers are saying that they will buy in bulk when a product is on “special”
Is there a silver lining?
It is in fact difficult to look on the bright side with all these pressures around us, but perhaps we can take solace in the fact that our current struggles are not uniquely South African. Shrinkage in take-home pay is happening across the developed world too, with inflation and interest rates rising everywhere, and set to continue as many European countries and the US look elsewhere for their food and fuel supplies.
Indeed, the Russia-Ukraine conflict has been hard on emerging markets so far this year, however South Africa fairs better than many due to its natural resources and exports. “There is always someone who will do well in a time of disruption,” says Silke. “Growth rates in sub-Saharan Africa are likely to remain relatively intact, with African markets seen by investors as ‘frontier markets’ and investment interest is quite good.”
“We are really moving out of an era of globalisation to something else. Global trade has started to drop off, the world has been trading less with one another. Because of COVID and supply chain issues there is a lot of pressure to begin to source closer to home… can we move from globalisation to localisation?”
The question needing urgent response here is do we have the tools to localise production. “We’ve certainly got the productive capacity here… the question is do we have the skill set and do we have the labour and regulatory environment to competitively make products here?” concludes Silke.
Creating an environment conducive to local manufacturing means having a labour and regulatory environment to support it – no mean feat, for sure. However, standing on our own two feet will not only mean that we become less exposed to the vicissitudes of geo-politics and supply chain constraints, but will also go a long way towards creating the employment that is so desperately needed in South Africa.
The call is to government and business to work together to create opportunity out of this adversity. “It’s not just the retailers’ responsibility but also manufacturers and all stakeholders in the FMCG industry. We all have something positive we can contribute towards easing this burden on the consumer,” said Natasha Smith, Managing Director of Trade Intelligence, summing up the sentiment that became evident during the webinar.
Sure, global circumstances are dire and deeply concerning to say the least. But if there is one thing that South Africans have proven to themselves and the world over and over again, it is that we are a resilient nation and we have a penchant for innovation. Now, more than ever, is the time to tap into these critical resources.
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