The Tribune

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

Food retailers have warned that price control margins must “at least double” to help the industry thrive again, with an almost-10 percentage point increase from current levels “ the bare minimum that it takes to secure our survival”.

The stark warning about the impact 40 year-old price controls are having on the sector’s viability was contained in a March 17, 2014, letter sent by the Retail Grocers Association to Shane Gibson, minister of labour and national insurance.

Philip Beneby, the Association’s president, told Mr Gibson that food retailers needed the current 18.67 per cent gross margin allowed on most price-controlled items to increase to at least 28 per cent.

Apart from covering the industry’s 25 per cent operating expense level, Mr Beneby said this would also help to cover an inventory shrinkage (stealing and product spoilage) level that ran as high as 3 per cent.

Permitting their minimum suggested increase, the Association president said, would mean that the allowed mark-up on price controlled items increases from the current 23 per cent to 39 per cent.

“In order to maintain the level of quality service and products for the public which is expected in the Bahamas, the bare minimum margin that it takes to secure our survival is 28 per cent gross margin (39 per cent mark-up),” Mr Beneby said.

“This would mean that an item now selling for 0.69 cents with a 23 per cent mark-up would increase to 0.78 cents with the 39 per cent mark-up.”

While the requested increase seems high in percentage terms, given the prices levied on most food store products, the actual increase in dollars and cents terms will be relatively minimal and likely measured only in cents.

The food retail industry’s main concern is that with price-controlled items accounting for up to 70-80 per cent of a store’s inventory, it is effectively selling the bulk of its products as a ‘loss leader’.

This forces it to sell non-price controlled items at ever-increasing prices, thus establishing a vicious circle where rising costs drive consumers to purchase ever-more price controlled items.

The 18.67 per cent gross margin was established in 1971, some 43 years ago, and has remained fixed ever since. It has thus failed to take into account the dramatic increase in labour, utility and other costs that have been imposed on the food retail sector in recent years.

The Association has held several meetings with Mr Gibson and his officials to discuss the issue, and the Minister has asked it to justify its request by producing data showing the extent to which the food retail/wholesale industry has been squeezed by soaring operating costs.

Describing current gross margin levels as “inadequate”, Mr Beneby warned in his letter that the industry’s current low to non-existent profit levels threatened to result in more store closures and job losses.

“All the supermarket operators, especially the small and medium size stores, manage to accomplish is perhaps to provide ‘employment’ for themselves and members of their families,” Mr Beneby said.

“They do not make a profit for their risk, extreme sacrifice of labour, long hours and stress. Many of them have to spend up to 18 hours every day in their stores to just survive. Certainly that is not a fair reward for entrepreneurship……the primary engine of the Bahamian economy.”

Price controls were originally introduced to ensure food staples remained affordable for low income Bahamians, and to prevent ‘price gouging’ by merchants.

While acknowledging that price controls are here to stay, many in the Bahamian food industry believe there is enough competition in the sector to act as a natural safeguard against price gouging.

There have also been calls in the past for the Price Control Unit to be converted into a competition/antitrust type regulator, preventing price fixing and other types of cartels that work against consumer interests.

Pointing out that food retailers had “done an outstanding job making great sacrifices” to serve Bahamian consumers, Mr Beneby said the Government’s current policy subsidised living costs for the rich as well as the poor.

“We would also like to point out that after expensive freight rates we sell rice, flour, sugar, grits, corn beef and most price-controlled commodities at almost half of the retail prices in Florida,” the Association president added.

Setting out the historical background, Mr Beneby said: “ When Price Control was introduced in 1971 it gave retailers 18.67 per cent gross margin (23 per cent mark up) on all price-controlled items except eggs, which is only 10 per cent. This low margin results in losses after breakage and refrigeration costs on this product.

“Today, with the advent of the new port charges and additional customs charges, that 18.67 per cent has been eroded. Also, because it takes six weeks to have new price increases approved, we are selling these items in many cases considerably below 18.67 per cent, and in some cases almost at cost.”

Coming to the consequences, Mr Beneby added: “We do not know the criteria or formula used for arriving at the 18.67 per cent gross margin (23 per cent mark up) 43 years ago, but with the new monumental Business License fee, the enormously high cost of electricity, the labour costs from 48 to 40-hour work week, National Insurance 1974, spiraling health insurance and other risk insurance, greater security costs and numerous other increased costs, if you were to use the same yard stick/formula today, that margin would have to at least double to relate to today’s costs.

“Some of our inner-city store sales are up to approximately 70 per cent of price controlled items at 18.67 per cent gross margin to cover our 25 per cent expense level of operation.

“The nature of our business also lends itself to high inventory shrink (stealing, damage, out of date products) which can climb as high as 3 per cent,” Mr Beneby added.

“We do not sell enough non controlled items to bring our total gross up to 25 per cent. Therefore, we cannot make a profit to sustain our existence, remodel, grow or keep up our employment level.”