In my article entitled Statistics damned statistics (TMID, 6 October), I had called for a clarification by the National Statistics Office to explain how profits by the wholesale and retail sector skyrocketed by 22 per cent during the second quarter of 2008, when several other indicators pointed to a very different picture. To this end, the NSO (TMID, 9 October) suggested that this increase in profits was underpinned by “new and larger establishments setting up shop in specific areas of wholesale and retail, in particular food and beverages”. The NSO explains that this argument is corroborated by the fact that imports of food and beverages increased by almost 25 per cent in the second quarter.

The conclusion reached by NSO that such a huge increase in importation of food and beverages must have led to a corresponding significant rise in profits in the wholesale and retail business is somewhat flawed. Indeed, from the information that has been kindly supplied by NSO from its letter to the editor, it even raises more doubts about the reliability of the reported 22 per cent record rise in profits to the wholesale and retail sector.

From NSO’s letter it is amply clear that the rise in importation of food and beverages during the second quarter was attributable to the commencement of operations by the Lidl discount store, although understandably it does not give any names. While it is likely that this operation registered profits since it started business, as turnover by these outlets was evidently strong, however, it is highly unlikely that the overall sector registered such strong growth in profits.

This is because overall consumption volumes of food and beverages are not likely to change much, unless population growth intensifies, since demand for food is relatively price inelastic. This means that when food becomes cheaper, it is highly unlikely that people embark on an eating and drinking binge. Therefore, the impact of the arrival of Lidl is not likely to have increased overall consumption of food and beverages that much, but simply displaced customers from other outlets.

For example, Farsons, a producer of beverages which also directly competes with Lidl in the non-alcoholic beverages business and beer, as well as with other new importers after the effective opening of the market to other players at the start of this year, has just reported a halving of its profits during the six months of February-July 2008.

Furthermore, if other retail outlets that were selling food and beverages at higher prices than those supplied by Lidl had also a relatively higher profit margin, which is highly likely given the success of this new chain, then because of the inelastic demand for food and beverages, profits for the overall sector would decline.

In my view, NSO’s mistake was that it equated higher imports with higher activity and profits, when it is likely that in this case imports surged because of this new enterprise, while other firms may have continued to import at the same rate for a while, also because of advance order books, which partly ended up unsold (stock piling), until they realise that their turnover has decreased. Given the increased competition in the sector, if existing importers are unable to reduce their profit margins, then they would simply have to scale back their operations and reduce importation. Indeed, imports of food and beverages in July 2008 were unchanged even in value terms compared to July 2007, notwithstanding the particularly high inflation for food and Lidl, implying a decline in volume terms. However, this would not suggest that in the third quarter Maltese citizens went on a diet and drank less.

Besides, the example given by NSO that a 21 per cent increase in imports of fuels and lubricants implies higher activity and profit is also hard to comprehend. Everybody knows that the strong rise in “value terms” of such imports, as incidentally the case of food during 2008, mostly reflected the sharp increases in international food and energy commodity prices and not higher volumes or profits. They are simply higher input costs, which are passed on to the final price.

To conclude, NSO’s response to my queries have been truly enlightening in that they have confirmed my suspicions that the surge in profits of the wholesale and retail sector is grossly overstated, which also implies that economic growth in the second quarter was significantly lower than that indicated in NSO’s news release. NSO’s logic that higher imports necessarily results in as much higher profits does not always necessarily hold and can be at times flawed, especially in the specific cases that have been put forth by NSO.

Dr Gavin Gulia

Opposition Main Spokesman on the Economy and the Self-Employed

Valletta