Pick n Pay reads riot act to suppliers
January 26, 2009
By Nicola Mawson
Food retailer Pick n Pay has summoned its suppliers to an urgent meeting to discuss high and rising food prices, which have continued upwards despite a recent fall in fuel prices.
In a strongly worded letter to 30 of the group's largest suppliers, CEO Nick Badminton says "in many cases, we are being asked by our suppliers for considerable cost price increases", which he describes as "untenable, and in the case of our customers and the media, indefensible".
Pick n Pay is asking it suppliers to exercise "serious restraint" with their price hikes.
The meeting, to be held next week, comes as food prices continue on an upward spiral despite a sharp reduction in fuel prices.
Badminton said there was an "expectation from consumers, government spokespeople and the media that grocery prices would therefore come down in line".
"However, in many cases, we are being asked by our suppliers for considerable cost price increases….The wrath of consumers and members of the general public is being directed at retail and, given Pick n Pay's profile, particularly, we believe, at us. We do not believe this to be fair, given that our gross margin has not only stayed the same, but actually dropped."
Chris Gilmour, an analyst with Absa Asset Management Private Clients, said manufacturers had claimed fuel was a huge component of increased costs, forcing them to put prices up dramatically last year.
However, the price of fuel had come down by more than 60% since September and now consumers, the government and the unions wanted to know why the savings were not being passed on, he said.
Pick n Pay is one of SA's largest food retailers, accounting for at least 33% of the market.
It was unclear yesterday how the suppliers would react to Badminton's letter, but as SA's largest retailer, the group has substantial clout.
Gilmour said its suppliers would be more likely to sit down and talk than they would be with other, smaller, food retailers.
However, they would be as likely to listen to Shoprite.
Pick n Pay, with its broad customer base and market positioning, vies with Shoprite on size and price.
Shoprite took out adverts recently saying it would pass on diesel savings of R27-million to its customers.
Pick n Pay's large suppliers, based on the group's shelf products, include Tiger, AVI, Unilever, Pioneer, Premier, Colgate, Kelloggs, J&J, Kraft, Master Foods, Nampak, National Brands and Nola, among others.
Gilmour said some suppliers had genuine reasons for price rises, such as specialised imported products affected by rand weakness. But they "can't have their cake and eat it".
Oil had fallen more than $100 a barrel in the past six months, which should result in lower food prices. If the oil price affected food prices on the way up, it should have an "equal but opposite effect on the way down", he said.
Barely a year ago, when unions were demanding state intervention to keep a lid on spiralling food prices, several items of food had double-digit price increases.
The maize price rose 25% in the year to last February while fresh milk climbed 21%, cooking oil 22% and cheese 35%. M margarine rose 18%, bread 11%, fruit and vegetables 18% and red meat 14%.
A manufacturer of tinned products which received a copy of the letter said it could understand Pick n Pay's point. However, it had also had increases of 50%-60% on tins, which could not be absorbed and made up half its input costs.
Pioneer Foods MD Andre Hanekom said, "We are concerned about the plight of the consumer, and as such won't hesitate to adjust prices lower when we're in a position to do so. It is a balancing act with upward and downward cost pressure at any given time and a minimum price required to ensure our sustainability."
Shoprite has also called on manufacturers to reduce costs.
The group said it believed "manufacturers should be presenting similar reductions in the prices of certain goods for retailers where possible to assist consumers".
Pick n Pay has acknowledged that there has been some good news with prices of some lines, such as margarine and cooking oil, dropping.
However, prices for other items, such as milk, would be increased soon.
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