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Mon 21 Apr 2008 12:39 PM

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Cost catastrophe

Disputes over food price hikes have sent shockwaves through the industry and triggered prompt action coupled with scepticism.

Cost catastrophe

Disputes surrounding food price hikes have sent shockwaves through the industry and triggered prompt action coupled with scepticism.

"It's beyond our control. India has ceased the export of non-basmati rice, and wheat prices are shooting up," according to Manoj Thanwani, director, T. Choithram & Sons.

"Companies are saying they are going to keep prices down, the question is to what level can they do that? They would need to subsidise it out of their costs. Is the Ministry subsidising them? In which case, why are they not subsiding all of the retailers?" he asked.

Global crop shortages and reduced yields alongside soaring global demand have in some cases doubled the prices of many basic commodities, namely rice, flour, oils durum wheat, sugar, poultry, eggs and dairy in the Middle East. The situation has, undoubtedly, highlighted the strong dependence on outsourcing in the UAE market.

Thanwani's comments refer to the well-publicised action taken recently by some of the region's chains, which have rushed forward with possible solutions. In recent weeks, Carrefour signed an MoU with the UAE Ministry of Economy to fix the prices of several basic food commodities throughout 2008.

The move is part of a series of initiatives to implement the first phase of a program to retain the 2007 prices of 52 key commodities at the chain's UAE stores, and according to undersecretary Mohammed Bin Albdul Aziz Al Shihhi, is line with "the continuous efforts by the Ministry to stabilise prices, reduce inflation levels, maintain market balance and protect the consumer."

Fighting words indeed. Under the agreement, Carrefour will fix the prices of four types of rice, three types of egg, three types of milk, four types of frozen chicken, 10 types of fresh chicken and bread, two types of meat, two types of tomato paste, three types of sugar and salt, two types of vegetable oil, six types of macaroni, two types of beans, two types of tea, two types of water and four types of flour.

Last month Retail News reported that the UAE's Minister of Economy H.E. Eng. Sultan bin Saeed Al Mansouri had signed a Memorandum of Understanding with the chairman of Union Cooperative Society Majed Hamad Al Shamsi.

The move will witness the retailer implement the first phase of a program aimed at preserving the 2007 prices of more than 16 basic food items throughout 2008, to include oil, rice, flour, eggs, sugar, powdered milk, tea, meat, chicken, fish, and bread.

Khalid Humaid Al-Falasi, general manager of Union Coop said at the time that the initiative had been pushed by his ambition to maintain price stability for the city's retail sector, particularly for basic food goods representing up to 40% of consumer purchases.

Outcry over soaring food prices has resulted in political repercussions beyond the UAE and into other parts of the region in recent weeks, widely documented by the world's media.

In Egypt, the price of bread increased fivefold in private bakeries at the beginning of this month, creating panic in state-run bakeries that the staple may run out. Scuffles in bread queues became a daily occurrence, leading to violent clashes.

According to reports, rocketing global commodity prices and failing domestic supplies made the staple food unaffordable for 20% of the country's 76 million inhabitants. The doubling of prices over the past year and an acute shortage of government-subsidised bread acted as a major catalyst to the population's smouldering discontent.

Global food prices surged 57% last month from a year earlier, according to the United Nations, and the World Bank warned that civil disturbances could be triggered in 33 countries.

Regardless of their efforts with the Government or direct imports, Choithram's Thanwani points out that retailers must "constantly provide the service of availability. This means that we are forced to purchase products and sell with a nominal margin as is currently done. At no stage can a retailer sell at loss and the same has been re-enforced by the distributors."

"This means we are only left with two choices, which is either do not stock the product, or stock and work on a reasonable margin as all other retailers are currently doing, without any local government subsidies."

These approaches might well work for multiples, capable of securing stock and carrying forward inventory for the next few months, however the real concern is how will the Middle East's independent grocers survive?

This is a time when feedback to such questions from our readership could encourage cooperation between retail players to overcome serious hurdles.

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Thomas Titty 12 years ago

It is well appreciated that authorities are taking various steps to reduce the price increase. But there are few more steps required. Government should consider to waive the 5% customs duty on food products at lease during this critical time. Most of the leading retailers are charging 5 - 7% of the annual turnover as rebate from the suppliers which definitely they are adding into the product cost. Retailers should stop this to reduce the product cost.