South Africa’s Largest Grocer Sees Tax Hike Hitting Shoppers

(Bloomberg) -- The South African government’s plans to raise value-added tax would scupper a nascent recovery in consumer spending, the chief executive officer of the continent’s largest supermarket chain said.

A disagreement within the coalition government over the National Treasury’s proposal to increase the VAT rate by 2 percentage points to 17% delayed Finance Minister Enoch Godongwana’s budget speech to next week. 

“I hope that it’s not going be the case that we will see that increase, because consumers just can’t afford it,” Shoprite Holdings Ltd. CEO Pieter Engelbrecht said in an interview from Cape Town.

Businesses have had to build their own power and water supplies after years of cuts as well as invest in new distribution centers to hold more stock because of poor local production capacity and delays at ports. They are equally unlikely to be able to absorb any further food-tax increases on behalf of customers, Engelbrecht said. 

“The two things that really worry me are the incredibly high cost of food and high unemployment,” with few local businesses reporting that they’re net creators of jobs, he said.

Consumer spending has only just started to recover, boosted by benign inflation, interest-rate cuts and the introduction of a so-called two-pot pension system that allows savers early access to part of their retirement funds without penalties. 

Retailers would likely pass any food-tax increase onto customers, “so that’s not good for consumption at the end of the day and is something we’d want to try and avoid,” Woolworths Holdings Ltd. Chief Executive Officer Roy Bagattini said in an interview Wednesday after the company announced first-half earnings.

Still, the government has recently engaged with South African companies about food prices and possible tax hikes, Engelbrecht said. Shoprite, along with other global retailers, is trying to figure out how to ease food inflation by using software, artificial intelligence, breakdowns of cost components and possible collective buying, he said.

While the local inflation rate has declined and is helping Shoprite boost volume growth, the risks remain.

“People are desperate,” Engelbrecht said. For most South Africans, “it’s not like I’m buying less because I have less money, it’s the fact that my money doesn’t go as far anymore.”

(Updates with comment from Woolworths CEO in seventh paragraph.)

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