Dhersan Chetty, equity analyst at Foord Asset Management says rising food inflation and rising interest rates are headwinds for both consumers and food manufacturers in South Africa.
The net effect of rising food, transport and borrowing costs is the reduction of discretionary — or non-essential — spending by consumers, the analyst said.
Higher inflation disproportionately impacts lower-income consumers, given the contribution of food and transport costs to their total expenses. “This is compounded by this consumer cohort tending to have lower savings.”
Middle-income consumers with mortgages, car loans and credit card debt are also squeezed because of their exposure to rising interest rates. A higher interest burden eats into budgets, causing consumers to be more conscious of their spending, said Chetty.
Analysis by professional services firm PwC showed that middle to higher-income groups are re-evaluating their discretionary spending patterns and are either “buying down” or reducing insurance and savings products.
Households in the lower to lower-middle income categories, meanwhile, struggle to sustain their monthly basket of goods purchases.
A survey conducted by Debt Rescue earlier this month found that as many as 81% of South Africans are cutting down on daily meals due to rising food prices as they can no longer afford three square meals each day, while 41% said their monthly grocery budget could no longer feed their families.
Unlike other consumer products such as clothing, entertainment and cars, food is an essential expenditure item, said Chetty.
“But a consumption squeeze still affects food expenditures as consumers reduce their monthly basket sizes by eating less, reduce non-essential foods such as sweets and snacks, switch to cheaper proteins and trade down to cheaper products.”
GDP data for the second quarter of the year published by Stats SA this week also showed that consumer spending on alcohol, tobacco and nicotine products took a hit over the period.
Bloomberg reported that South African consumer confidence remained in the doldrums in the third quarter, weighed down by rising inflationary pressures and lending costs, citing a quarterly index from FNB, measuring sentiment.
“Consumer confidence, in general, remains very low and not conducive to healthy growth in real consumer spending,” FNB said. “Mounting inflationary and interest-rate pressures coupled with dismal consumer confidence point to a significant deterioration” in spending, especially on durable goods, it said.
According to Chetty, food companies with strong brands are better able to retain their customers and pass on these high price increases. However, those with weak brands or in highly competitive segments are more likely to be impacted by lower volumes, lower price increases and higher input costs.
“Food retailers tend to outperform food manufacturers in periods of high food inflation. The market dominance and bargaining power of the big retailers end up squeezing the margins of the more competitive food manufacturers.”
The analyst said that retailers also benefit from a switch to their better-priced private-label products and from eat-in trends – eating out is even more expensive in periods of high food inflation.
“Food retailers are not immune to the consequences of food inflation despite generally being able to pass it on to consumers. Higher till prices can result in lower volumes for retailers as consumers reduce their basket size. Food retail sales growth has been positive every year in SA since records began in 1980.
“Volume growth was negative in 10 of the last forty-two years. But the average volume declines in these years was just 1.6%, which is not material,” said Chetty.
This defensiveness has enabled food retailers to outperform cyclical sectors during periods of high food inflation. “However, stiff competition for market share in the food retail segment should stimulate more promotional activity to offset some of this inflation.
“Some retailers might reduce the number of SKUs in the store and try to get lower prices from manufacturers for bulk discounts – thus, a large portion of the food inflation is funded by food manufacturers,” said Chetty.
Read: Bad news for South Africa’s affluent and middle-class
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