Question

Wholesale and Retail of Food in South Africa 2020: Impact of COVID-19 on Consumer Shopping Patterns Competition has increased dramatically as the grocery market has matured. The lines between traditional retail and wholesale channels is blurred, and the larger players have substantial procurement, central warehousing and distribution divisions. The traditional wholesale and fresh produce markets are being eclipsed by the retail trade as larger farmers supply directly to supermarkets, and smaller and informal traders make more use of the leading grocery companies for their supply. Supermarkets have expanded into less central areas, local convenience stores and garage forecourt retailing. The coronavirus outbreak has had a significant effect on consumer shopping patterns, and analysts expect the rising demand for food and essential grocery products to provide a short-term boost to supermarket sales and revenues. While panic buying has subsided, overall demand for food remains elevated. There has also been a massive increase in demand for online shopping services.

1.Based on the information in the case study, identify any five factors affecting the demand in South Africa’s food sector

2.Suppose individual X opened a supermarket just before lockdown commenced and does not offer online shopping. With the aid of a graph, illustrate and explain the effect on the change in demand for groceries on equilibrium price and quantity of groceries post-lockdown, ceteris paribus.

3.Identify and explain the market structure to which the grocery market explained in the case study belongs.

Answer 1

Ans 1.

Determinants of Demand in South Africa's Food Sector

1. Availability of substitute goods: Due to high competition in the grocery market segment, consumers have many options to choose from. As a result, consumer demand is elastic for grocery goods.

2. Tastes and preferences: There is a trend towards online shopping as consumers are finding ways to avoid venturing outside due to fear of the disease. Online retail stores (E-tailers) are helping consumers make better buying decisions by enabling them browse through pricing catalogues at just the click of a button. Amazon, for instance, was successful in indulging consumers even in the current pandemic, all because of the ease of online shopping; Amazon’s profit doubled during the pandemic.

3. Changes in expectations about future price: Due to the current pandemic, consumers might have expected a shortage of food products in the future and hence, resorted to stocking up early to avoid the impact of increasing price levels. Shortage of goods often increases prices as demand falls short of supply.

4. Income levels: Consumer’s purchasing power is determined by the income level. Since the pandemic has disrupted lives of people across the world and many are without a job, purchasing power has reduced drastically. Consumers have to make buying decisions very wisely due to less disposable income. Online grocery shopping has helped consumers manage their expenses wisely in these trying times. The discount schemes offered by online stores make buying groceries online both cost-effective and time-saving.

5. Nature of commodity: As grocery items are essential requirements for consumers, their demand is inelastic. Any change in the price of groceries won’t have any drastic effect on demand; some amount will always be bought by the consumers.

Ans 2.

  

Let individual X be in equilibrium at point E prior to the lockdown, where the equilibrium price is P and equilibrium quantity is Q.

Now let the lockdown begin. Due to the current pandemic, consumer’s demand for online shopping will increase and as a result, retail stores offering online services will benefit more due to consumer strong consumer preference for online shopping.

Now, let the lockdown end. Individual X, whose supermarket doesn’t offer online services, will witness a decrease in demand for goods as more consumers stick to online shopping. The decrease in demand for individual X’s goods will shift the demand curve D to the left, bringing the market to a new equilibrium point E₁, where the equilibrium price has decreased to P₁ and equilibrium quantity has decreased to Q_1.

Note: Due to the lack of demand for individual X’s goods, a lot of stock is left unsold with individual X. This results in a surplus which causes individual X to lower prices for selling the unsold stock in the market. This is the reason for the decrease in price.

Ans 3.

Oligopoly market structure is characterised by the presence of a small number of firms with high competition among them. Among these firms, few may be very large and hence, lead the other firms in the industry. The case study states competition is high in the grocery market. It also mentions the presence of larger players having substantial procurement, central warehousing and distribution divisions. These two traits of the grocery sector are sufficient to conclude that the market structure prevailing in the grocery sector is indeed oligopolistic.