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Retailers can profit from better farm relationships

A wage increase from R69 to R150 a day is quite a jump. Still, it is unlikely that anybody reading this article would feel content, no matter their job, trying to support themselves on less than R150 a day. The figure becomes more frightening when you try raising a family

But bumping everyone up to a fair living wage is not without its consequences.

The recent proposed wage settlement in the farming strikes will place severe pressure on farmers even when the harvest is good and many will be forced to adapt or close down when times turn bad.

Looking forward, if the situation remains one of farmers versus labourers the long-term damage is going to be far worse than the rush of heated violence we have seen over the past few months.

The government could step in to subsidise the farmers but this would distort the market and simply rest the cost on the taxpayer. Consumers, already balking under the pressures of food inflation, are in no position to absorb the wage hikes through increased shelf prices. The only players with space to manoeuvre are the food retailers.

For the 2012 financial year, Shoprite Holdings (including Checkers) posted trading profits of R4.66 billion. The Spar Group followed with R1.51bn, Pick n Pay Stores with R1.26bn and Woolworths’ food division made R874 million.

It is not, necessarily, their responsibility to take care of the farmers but the current turmoil at the source of supply is a serious threat to the sustainability of their business model. Supporting the farmers and farmworkers that keep the shelves full, to ensure that they continue to do so, is a business imperative.

The competitive advantage in the food retail industry will be held by the brand that can commit to its consumers with secure supply and stable prices.

In labour management there is a widely used concept of efficiency wage. The idea is that if workers are paid above the mandatory minimum wage then costs will be saved due to lower turnover of staff, better labour relations, and higher productivity.

The same logic needs to be applied to the relationship between retailers and their suppliers. Retailers are in their full legal and business right to put pressure on farmers downstream and squeeze consumers at the till, but they are likely to make more money by working with their supply chain rather than against it.

Simply paying farmers more to help them survive the higher wage bills would be a good start, although this does not guarantee that the money gets spent in the retailer’s favour.

Skills development of farmworkers, on the other hand, is a fitting place for large retailers to leverage their resources. Their size and experience in human resources gives them an edge and allows a medium for them to improve the productivity and bottom line of the farmers.

Retailers must also look to build a higher supply component from small-scale farmers. By encouraging entrepreneurship, assisting in infrastructure, and designing accommodative supply chain structures, the traditional challenges of sourcing from smaller entities can be overcome. Small-scale farming will create more jobs and be less vulnerable to labour action.

The ongoing strikes have highlighted a structural breakdown in the South African farming industry. The solution lies not in repeating old practices with more ferocity but in reinventing the relationships that underpin the chain of responsibility.

Pierre Heistein is the convener of UCT’s Applied Economics for Smart Decision-Making course.

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