In times of high inflation, everything goes in the grocery store business

In the middle of a long que to get to the cashier at D-Watson right at the beginning of Ramzan, the hushed conversations between strangers waiting their turn was heavy with discontentment. “Three bananas, a handful of grapes, some green chillies and lemons for Rs 500,” muttered one mother-of-four, disapprovingly addressing no one in particular. 

The murmurings spread fast through the lines. Inflation has hit everyone hard. And while the poorest segments of society have been hit the hardest, shoppers at up-scale grocery stores have not been spared either. Everyone is reeling from record food inflation which touched 45.1% by the end of February 2023, and hit an all-time high of 46.7% as measured by the Pakistan Bureau of Statistics. 

But in the same line at D-Watson, perhaps one of the most interesting comments made in passing was by another woman in the line: “Superstore walon ki to aj kal mouj hogi (the superstore businesses must be striving these days).” 

This poses an essential question. Since the demand for food is inelastic, meaning it never goes down since it is a basic necessity, does that mean businesses selling these items thrive in times of great inflation? That might be the answer one immediately arrives at but the reality is more complicated. And it goes to the heart of how the grocery store business works.

Normally, up-scale and upper middle class superstores and grocery stores enjoy a peak season in the month of Ramzan. People are consuming more despite prices rising which results in greater profits. And while the regular Ramzan price hikes are in place, the economy is not playing favourites. With inflation and import restrictions as well as rising costs of doing business such as more expensive electricity and rent hikes, things are far from easy. 

Banking on non-food items 

One starts a business to make profit out of it, not to bear losses. This is evident in increased prices of food items as inflation soars globally. “Retailers are not there to bear the brunt and provide subsidy,” says Omer Farooq, founder of retail consultancy, Extreemretail. Normally, price hikes are passed onto consumers. But it’s not that simple. 

Grocery stores are built on the idea of high volumes and low margins. This means that the food we buy from the grocery store is actually making little profit for the store. The margins are low so the customer is attracted to buy more. A lot of these costs are gone to overheads, staff payrolls and distribution. “Some costs are beyond us. We can’t pass on those to consumers like food price hikes,” confirms Farooq. 

A grocery store’s unique selling point is the diversity of products it offers under one roof.  That’s why they are built on a specific area of land. Convenience stores are built on at least 1,000-2,000 square feet, supermarkets on 5,000 square feet and hypermarkets on 25,000 square feet. With such expansion comes expense. “The industry is seeing exorbitant costs in electricity and utility bills. If the place is rented, then there’s an added cost too. Since last year, these costs have broken the backs of grocery stores across the country and some have even shut down,” said Farooq. 

Because margins on food prices are kept low, grocery stores rely on non-food items to cushion their profits. The non-food items, such as cosmetics, skin and hair care, crockery and fabric have higher margins. “It makes about 30-35% for the margins, the highest any item does,” indicated Farooq. That’s why convenience stores and small retail stores are more vulnerable to food inflation as they don’t have a diversified portfolio to curb the costs. But unfortunately, in the current times of inflation and import ban, non-food items are the first ones to get hit. 

“Food item sales have seen no major decline because it’s essential. But the non-food items demand has decreased significantly. Generally speaking, I would say there is a 40% dip in sales in terms of quantity, most of which is owed to the non-food items. The sections in the stores are closing down and there’s no hope of regaining the demand like before any time soon,” explained Munsub Abrar, founder of Naheed super store in Karachi. 

Grocery store visits, which in a country like Pakistan is one of the limited means of leisure for whole families, are reduced to just essential, and even panic buying. The idea behind big retail stores was to display things in front of the customer so they end up buying things which they don’t necessarily need. It’s about creating demand on the spot. But that’s not working anymore. Prices are downward sticky, which suggests that once they increase, it’s difficult for them to fall even when the market readjusts itself. Because inflation is irreversible, and wages only adjust in real terms with productivity, it results in the erosion of purchasing power. 

There’s a historic 31.5% inflation in Pakistan, as recorded by the state bank, dangerously close to the inflation of post-1971 war years. The figure indicates that not only the ones below the poverty line are suffering, but calls for an adverse lifestyle change for even the middle and upper-class, the primary target audience of a grocery store. 

“I avoid going to grocery stores now and just send a list to my husband. Looking at so many items with such high prices gives me a lot of stress. Even though I have stopped shopping for non-essential items like crockery, frozen food items and hair care products, the total bill is still higher than what it was before,” said an Islamabad-based housewife, who wishes to stay anonymous. Similarly, even those earning good pay have changed their buying habits. 

A general manager of one of the top retail stores in Lahore said even he and his own family have stopped splurging on grocery items. “We don’t shop from a single store like before now. We buy flour, wheat, sugar from one store and oil and pulses from another to keep the bill as low as possible,” he said. 

Crushing under import ban

Grocery stores, which stand out from local kiryana stores are their product diversity and availability of high-quality imported items. But since the problem of non-issuance of Letter of Credit (LC)  began in October of 2022, even the big stores began trembling. 

Non-issuance of LCs became a game changer not only for the retail industry but for other industries in the food business too. In a conversation with a supply strategist from Metro Cash & Carry (who wishes to stay anonymous), Profit learned that the store was unable to procure the brand’s imported frozen fries which created a flurry. “There was demand for the product but not supply. The items were stopped at the ports but we weren’t able to procure it,” he explained. “But we couldn’t lose the customers so Metro resorted to local frozen food companies, like Opa and Menu, to manufacture fries under Metro’s brand. The same happened with KFC and McDonald’s too. They faced a shortage until Opa handled their fries business. So the whole issue really benefited the local industry at that time,” he continued. 

However store owners did not always come by alternatives so easily. Pakistan is the second largest importer of pulses in Asia and its lack of supply became a detrimental factor for Metro Cash & Carry and others. Initially, the store benefitted from the import ban because it had a safety stock of pulses when there was a shortage in the market. “We sold them for higher prices and in the month the profits splurged. But it was a momentarily high. Eventually, our stock also ran out and we had to procure more before the peak season in Ramadan,” explained the source from Metro. That’s why the overall sales revenue of Metro did not see a major slump, the profit earned initially due to pulses was readjusted later when pulses and other items ran out. 

Other than just procuring items, retailers struggle with efficient planning and an unstable atmosphere makes planning extremely difficult. “We had to procure pulses in a market where prices were constantly going up because imports were banned and demand was high. We bought our targeted supply for Ramadan in five to six phases, and each time paid a price higher than the previous. The market trend (as shown in the graph) showed the potential for gaining profit. But it didn’t. As you can see after February the prices began decreasing because LCs were opened and there was no more a supply shortage. The prices settled, but we as a business are now selling the stock in prices less than what we bought for.” 

indexed price for pulses

Due to this Metro Cash & Carry is bearing the brunt of almost Rs 5 million. “But we had to do what we could. It’s extremely difficult to plan and strategize in such an unstable political and economic environment had we not stocked up pulses, we would have borne the brunt of more than Rs 5 million and also potentially lost customers,” he elaborated.

The stores take risks for essentials like pulses, wheat and rice. There are some items which they have resigned from. “We haven’t been able to achieve the forecasted supply of canned food and fruits. There are no local alternatives for it,” said the supply strategist from Metro. Similarly, Naheed superstore is facing similar problems. “Baby food, canned food, coffee and cereals are becoming a task to procure,” said Abrar. 

“For some products like cereals and coffee, we have invented a new alternative of grading the products of focal companies.  Basically, it’s a change in the manufacture of the local product just a bit. Both the quality and price of the graded product are mid-tier. It’s lesser than the imported items but a little better than the locally sourced ones. We have to do this because we don’t see when we will be able to import back in full swing like before,” he paused, “currency difference is too much for us to go back to our old ways.” 

The cost of doing business is high. A lot of the money, which would previously account for margins is reinvested back to buy the same food item but for a higher price. “The cost of tea has increased three times in just a month. And every time we have had to procure oil in the last six months, the price is higher than before. We are reinvesting everything and there is no growth,” said Farooq. More than price hikes, grocery stores also have to mend broken trust with the suppliers. “No one is ready to give us supplies on credit. We have to make on-spot payment,” mentioned Abrar. Providing ease to the customer is becoming more difficult with every passing day because suppliers and the grocery store are testing new ways to merely get the boat floating. 

Just like any other business in Pakistan, the profits of grocery stores are also trembling. Not because food prices are rising, but because buying habits are changing. There’s no room for splurging when bringing bread to the table is increasingly becoming a concern even for grocery store goers. For a consumption-driven economy, this might be some food for thought.