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Middlemen sidelined to protect margins

Move has Ministry of Economy backing

Gulf News

Dubai Local retailers are finding new ways to earn revenue from basic food products with government price caps imposed on them to deal with narrow or disappearing profit margins, they told Gulf News during Gulfood 2012.

Facing zero profits on dairy products or hardly break-even on bakery items, retailers are now sourcing some products directly rather than buying them from local agents, but only for their retail stores — a move that slashes their costs significantly, said Manoj Thanwani, director of Choithrams.

The Ministry of Economy has allowed this move, he said, so there can be some flexibility for retailers to deal with dwindling profit margins. "For dairy, it's zero per cent [profits] and in bakery goods, what we buy is what we sell. It's shrunk absolutely."

This comes amid proposed changes to the Trade Agency laws. When retailers are allowed to source directly and bypass local agents, consumers are expected to benefit as direct sourcing is 30 to 40 per cent cheaper, he noted.

Another way to boost profits is to charge vendors more for their product displays in the store, he said.

Choithrams has increased display charges by five to seven per cent a year, he added. They are also expecting more revenue from rebates when they receive a percentage on sales growth from the suppliers, he added.

Future purchases

The retailer is also relying on future buying rather than spot buying of basic food supplies. "We do future buying to ensure price consistency for six to nine months, it's backward integration," said Thanwani.

"We are in 27 countries and this gives us the muscle power in terms of pricing and distribution. It allows us to buy massive volumes and secure better pricing for that period."

Local food manufacturers are in turn calling for more flexibility on pricing of basic food products and an open market approach.

Al Islami Foods has seen profits drop by 20 per cent last year as their chicken products were included in the government price freeze, said Aziz Iraqi, commercial director.

The price freeze is also capping fair competition with foreign food companies and further business investments, he said, adding that the government is making it harder to apply for price increases.

In a free market the decision must lie with the consumer to decide the right price and right product, he noted. "The best approach is to be an open market, but I understand this process [of price caps] especially as last year Arab countries went through a hard time so there is a need for political stability and government protection," he said.

Egypt: New store planned

Choithrams is currently considering opening a store in Egypt by next year given huge opportunities opening up in the country after the revolution, a senior company manager told Gulf News.

"Egypt is definitely an emerging market with huge volumes and a big population," said Manoj Thanwani, director of Choithrams. "We are evaluating the market now."

Countries like Egypt and Libya have purchased "huge" quanitites of groceries from Dubai for their retailers after the revolution, he said. "That's where the opportunity lies… cutting out the middleman."