Gulf Arab states take up food subsidy outsourcing

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Retailers in the UAE have agreed to slash costs of hundreds of items

Retailers in the UAE have agreed to slash costs of hundreds of items

Gulf countries are taking up food subsidy outsourcing. US food giant Kraft Foods, consumer goods producer Unilever and French retailer Carrefour are just some of the international brands forced to share the financial burden of the kings' club through price caps. But in a region that imports nearly everything it eats, such meddling is a poor answer to rising global commodity prices.

The UAE, Qatar and Saudi Arabia are living up to their frontier market status by ordering commercial retailers and manufacturers to cap prices in an effort to offset inflation and minimise political risks. Even Saudi's Almarai, the region's dairy supplier with a near $6 billion market capitalisation, was recently ordered by the kingdom to undo a recent rise in milk prices following a consumer backlash.

Consumption typically rises around the Muslim holy month of Ramadan. But price controls are becoming an increasingly common feature in the Gulf since inflation soared into the high double-digits in 2008, the last time oil prices spiked. Headline inflation has come down and average consumer food price inflation for the region has more than halved to around 6 percent year-on-year in May, according to Barclays Capital. But the Arab unrest has increased political sensitivity to the issue.

Unilever and Kraft don't break down their margins for the region but Saudi's Alamari has an EBIT margin of around 20 percent, according to Reuters estimates. With prices for some basic goods in the UAE set at around 2004 levels, entities are seeking greater supply chain efficiencies to offset losses. Smaller retailers are also compensating by eating into funds normally set aside for charitable projects.

The pain isn't bad enough yet to scare international brands away from these small but high-spending, low-tax markets, where plenty of goods can still be sold without price caps. But the International Monetary Fund forecasts that high agricultural commodity prices are here to stay. For publicly-listed companies like Almarai, this will be a market distortion until governments decide they should bear the full cost of keeping the peace.

(Una Galani is a Reuters Breakingviews columnist. The opinions expressed are her own.)

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