By Stephen Rushton, CFO of Empact Group

Economics is boring. Or at least it can be a lot of the time. The global and local macro-economic landscape is always the context for the world that businesses operate in and so, as businesspeople, we use it to paint a picture of the background, headwinds and tailwinds that we face in day-to-day operations. As interesting as this sounds, the reality is that for the most part, the macro economy oscillates within a very tight band. Our discussions become centred around relatively inconsequential details like whether inflation will be 4.3% or 4.5% and whether the rand dollar exchange rate will average 14.50 or 14.70 for the year.

But then, every 10 to 15 years, we find ourselves in a storm. Sometimes economic factors cause the storm (like the global financial crisis) and sometimes other factors are the cause. But regardless of what causes the storm, it always becomes (at least in part) an economic one. And when this happens, the world of economics becomes very significant, very quickly. That narrow band within which economic metrics usually move are replaced by volatile swings, with predictions by economists making the weathermen look good.

Our current storm is a confluence of the pandemic’s aftereffects, coupled with the complex unwinding of government’s stimulus attempts during the pandemic, ignited with Russia’s invasion of Ukraine then intertwined with “load-shedding”, “water-shedding” and the recent Transnet strike. Part of the side effect of all these factors combined is the high inflation currently being experienced globally and in South Africa.

One of the features of this storm has been the dislocation between producer price inflation (PPI) and consumer price inflation (CPI). Historically, there has been a general correlation between PPI and CPI. Logic tells us this should be the case: when business input costs increase, those cost increases are inevitably passed on to consumers at some point. However, over the past six months, year-on-year PPI in South Africa has exceeded CPI by around 8% on average. When it comes to food inflation over the same period, food PPI has exceeded food CPI by around 4% on average. Whilst an oversimplification, this in theory could mean that the profit margin of food producers has reduced by between 4% and 8% as a result.

As consumers, we may think this is a good thing. The socialist hidden in some of us assumes that food producers have been making too much money for too long, and that this inflation dislocation presents a chance for that situation to normalise. Whilst there are no doubt instances where this is the case, realistically it isn’t the case in most instances. This is borne out by the fact that the operating profit margin of food producers listed on the JSE averaged 8.4% in the past financial year. The current dislocation between food PPI and food CPI of 4% implies that these food producers don’t have much more room to absorb this inflation dislocation.

There are a few ways that this situation could play out. The first is that food PPI reduces sharply in the months ahead, allowing food producers to return to a level of equilibrium between input costs (PPI) and selling prices (CPI). This is certainly the best possible outcome, for both producers and consumers.

The second possibility is that there is worse to come for consumers, with more significant food CPI in the year ahead as producers recover their higher input costs through prices. If food PPI doesn’t reduce sharply, this will almost certainly happen. The only uncertainty in this scenario is the extent to which producers will be able to fully recover their higher input costs through price increases to consumers. In South Africa, it appears that consumers are feeling the impact of inflation with retail sales falling for four straight months to August; and the Bankserv Economic Transactions Index showing four consecutive months of decline to September. With further interest rate increases expected ahead, consumers are very limited in their capacity to handle further price increases.

The third possibility is that producers will absorb the inflation dislocation. This has happened in the past, with producers becoming more efficient and thereby maintaining a sustainable profit margin. Only time will tell the extent to which food producers can generate efficiencies, but these are not likely to be at the level required to offset the inflation dislocation. To the extent that they can’t, their profit margins will be eroded. And this is the gathering storm.

An industry of food producers operating at losses or low margins is bad for everyone. Inevitably, some of these producers will go out of business which in turn, reduces supply. For those who manage to stay in business, low margins will translate to lower investment into building new capacity, which will further limit supply. This reduction in supply will not be quickly reversed, as establishing new capacity or revitalising old capacity, takes time (in many cases, a number of years). Collectively this will drive food inflation even higher and for longer. But beyond inflation, reduced food supply will mean just that, less food being available. We often measure food security based on the availability of food raw materials. In practice, the majority of food consumed in South Africa is processed in some way. The processing of food is critical to get it into the form and to the location in which it is consumed.

Whilst this outlook may be bleak, we as South Africans tend to make the mistake of thinking that we have it worse than everyone else. In some respects, we do. But when it comes to the economic storms that the world is facing, we as South Africa are better off than the rest of the world in two respects. The first, is that our economic storm, whilst severe, is far more moderate than that being faced in the rest of the world (to a large extent, we have the prudent approach of our Reserve Bank to thank for this). The UK has had three prime ministers in seven weeks and is navigating its way out of a disastrous economic experiment. Most of Europe is facing double digit inflation and the prospect of insufficient gas for their winter. And emerging market peers like Turkey and Nigeria have far less stable economic trajectories than ours. The second respect is that we as South Africans have become resilient to storms – that is, resilient in dealing with crises that are outside our direct control. Our experiences with loadshedding, volatile exchange rates, social unrest and struggling infrastructure have built within us a resilience to crisis which is beyond what most of us realise. We have succeeded in spite of these storms in the past and we will no doubt continue to succeed in spite of the storm in the present.

We’re in the middle of the storm: consumers are hurting, interest rates are rising, and the risk of recession is ever present. But beyond this storm, there is another storm gathering on the horizon. It’s the storm of inflation dislocation and the knock-on effect for food producers. The gathering storm may dissipate as they sometimes do. If it doesn’t, we’ll need to brace ourselves for tougher times ahead as we’ll move into a world that is ‘higher for longer’, even more than the one we’ve come to know. But we’re South Africans. And perhaps our ability to weather this storm, like we have so many before, will allow us to emerge in better shape than the rest of the world.

Author Bio:

As Chief Financial Officer of Empact Group, qualified Chartered Accountant Stephen Rushton is committed to growing Empact Group in a way that ensures the business is leading the way for decades to come. Stephen’s past experience includes seven years at Thebe Investment Corporation in Corporate Finance, Strategy and Investment Management where he had extensive acquisition and capital raising experience, as well as three years as the CFO of Jones Lang LaSalle South Africa, after various roles at KPMG.

By shaping the strategy and stewarding the many parts of the business he helps move Empact towards its goal of being a people-driven business that cares for their people, cares for the communities of South Africa and cares for this beautiful planet we live on.

Stephen Rushton’s business philosophy is this: Since life is about more than money; business needs to be about more than just profit. Profit matters - it gives us the right to open our doors again tomorrow. But it’s not all that matters. People matter and the planet matters. Therefore, success is not only about the business thriving; but about our people and planet thriving together with the business.

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ABOUT EMPACT GROUP

At Empact we are on a journey – a journey to do our best and be the best for our people, our clients, our partners, our community and our planet.

This is the passion that drives us to be the preferred, purpose led partner for catering, cleaning and integrated facilities management solutions in Southern Africa; known for our skilled and caring people, our consistent excellence in service delivery and the value we create for our clients.

As a client centric values-based solutions business we aim to consistently create value for our stakeholders all while prioritising our people, protecting and nurturing our planet and positively impacting our communities.

Each of our bespoke, multi-service solutions are uniquely designed to solve our clients’ problems – allowing you to concentrate on your core business; knowing that all your non-core activities are being managed in the safest, most effective and most cost-efficient manner possible.

This is how we care, create value, deliver impact and do right by you.

Food Solutions

Food by Empact Group delivers an extensive range of catering and support solutions for the corporate, industrial, healthcare, education, remote, offshore, mining, retirement and lifestyle sectors. From fine dining to corporate canteens, from grab-and-go to harvest tables and delicious canapés, from a nutritious smoothie to delicious coffee, food is our passion. We understand that food is an essential part of your employees’ wellbeing – so we bring you award-winning chefs, varied menus, world-class service and the freshest, most nutritional ingredients.

Cleaning Solutions

Supercare by Empact Group offers contract and specialised cleaning for a wide range of commercial, industrial, healthcare, education, transport and retail environments.

Our professionally trained and caring staff and management team are dedicated to legal compliance, service excellence with health and safety being our number one priority.

Our safety standards are extremely stringent, putting our people and the environment first. To uplift and empower our people, and allow them to better service your company, we run training centres nationally that develop skills at all levels.

Hygiene and Pest Management Solutions

Supercare by Empact Group delivers outstanding hygiene and pest management solutions to the highest standards of excellence to all industries and environments.

In a post COVID-19 world, hygiene in the workplace has never been more important.

Our products are environmentally friendly, our safety standards are of the highest quality, our staff are professionally trained and our commitment to service excellence is unmatched – all so that we can offer you and your people total peace of mind.

Integrated Facilities Management Solutions

Facilities by Empact Group provides support services and integrated facilities management solutions for diverse industries, including mining, commercial/corporate, offshore and remote sites.

Our management model offers total integrated facilities management services, which are predominantly self-performed by our staff. From corporate offices to large industrial power plants and campuses, our expertise in Facilities Management is consistently growing and evolving.

Our approach and expertise provide cost certainty and all the reassurance you need to get on with your core responsibilities, confidently knowing that we will do right by your facility.

Level 1 BBBEE Certified

Empact Group (formerly Compass Group Southern Africa) is 100% owned by Thebe Investment Corporation (Pty) Ltd (TIC); a pioneering black owned company that uses its business success to transform lives and make a difference in our communities.

We are rated as a Level 1 BBBEE Contributor with a 135% BBBEE supplier recognition, 89.53% black economic interest and 36.34% black women economic interest.

Our level 1 rating forms part of our strategic Transformation Pledge, as we see transformation as a principal and dynamic business process contributing to our competitive edge