Lulu Hypermarkets aims to bypass distributors and obtain between 50 and 70 per cent of its goods directly from producers by the end of this year to reduce costs.
The UAE-based grocery chain, which has more than 85 stores in the Middle East, now imports nearly 50 per cent of its food directly, said V Nandakumar, a spokesman for Emke Group, which runs Lulu Hypermarkets. Cutting out the distributors can reduce prices by as much as 15 per cent, he said.
"We're trying to step up our direct imports from other countries, to avoid the middleman and pass on the savings," Mr Nandakumar said.
The cost of staple foods including sugar and wheat have soared in recent months in part because of poor weather and increased demand. This has cut into the profits of food producers and retailers.
On Tuesday, the Ministry of Economy announced that prices of staples such as bread and sugar would be discounted by between 20 and 40 per cent for the next month. This is an annual agreement, signed with major retailers including Lulu and Union Co-operative Society. But the initiative puts additional pressure on retailers as food costs continue to rise.
Prices in January were at their highest in at least two decades, according to the UN Food and Agriculture Organisation (FAO).
The FAO food price index, which tracks average prices for meat, dairy, cereals, cooking oil, fats and sugar, reached 231 points in January, up 28.3 per cent from the same month last year. The figure was higher than the peak in 2008 and the highest since the FAO started compiling the index in 1990.
A compounding factor is the increase in oil prices in response to output disruptions in Libya caused by unrest there. Costlier fuel inflates transport costs, a key concern for the UAE, which imports as much as 85 per cent of its food.
Lulu has lost money on the sale of sugar and a number of other products since last year, said Abu Bak'r, the regional manager of retail operations at the chain.
The company started increasing its direct importation in 2008 when food prices were also hitting record levels, said Mr Nandakumar.
There was less urgency in 2009, when commodity costs began to slip, but Lulu put the initiative back in high gear late last year when prices began to surge again, he said. Lulu has since increased its direct imports including from sources in Thailand, Indonesia, the Philippines and the Indian subcontinent, he said.
The Ministry of Economy has been hosting regular meetings with retailers, suppliers and distributors to find ways to keep costs low, Mr Nandakumar said. And Dubai business leaders have urged the Government to obtain farmland overseas and grow key foods to buffer the high food prices.
The Food and Beverage Manufacturing group and other interests approached the Dubai Chamber of Commerce about producing staples such as rice, wheat and milk in foreign countries.
The Ministry of Economy has said it will act to ensure the UAE's food security. Last month, Sultan al Mansouri, the Minister of Economy, said the Emirates was looking to invest in farmland in Turkey. Also, the director general of the National Crisis and Emergency Management Authority, Mohammed Khalfan al Rumaithi, said the agency would have a food reserve strategy in place by April.