Why supermarkets have been cleared of profiteering on food – for now
Daniel Woolfson
5 min read
retail
After months of being raked over the coals by politicians, campaigners, and the general public, supermarkets have been cleared of profiteering.
The Competition & Markets Authority (CMA) said on Thursday it had found no evidence of so-called “greedflation” by the nation’s supermarkets as it revealed the results of the first stage of a probe into high food and drink prices.
Supermarkets have been accused of unfairly hiking the price of everyday essentials during the cost-of-living crisis, using inflation as a cover to push through bigger-than-necessary price rises. As prices surged, anger spiralled.
Retailers have protested their innocence throughout and since the start of the year have begun lowering prices across a range of products including bread, eggs and milk as the cost of some ingredients and commodities dropped.
But the image of greedy retailers hoarding profits has been hard to shake.
The CMA ruled earlier this month that Asda, Morrisons, Tesco and Sainsbury’s had overcharged drivers by £900m in 2022 alone for fuel as it concluded a year-long, separate investigation into fuel prices at the pumps.
Yet while consumers have good reason to be angry about fuel prices, the CMA found that concerns about food and drink prices were misplaced.
The watchdog’s review found that profits have in fact fallen across the sector as retailers held back from passing the full impact of rising prices onto consumers.
Margins have dropped from an average of 3.2pc to 1.8pc, while operating profits across the sector declined by 41.5pc.
The CMA said fierce competition between different retailers means it would have been difficult for any of them to achieve much higher margins without sending shoppers into the arms of rivals.
Tesco chief executive Ken Murphy said in April: “The key point I’d make ... is that our profits fell by 7pc this year and that is despite the fact that we achieved a record level of cost savings. That for me is a very material proof point that we worked very hard for both customers and for colleagues this last financial year.”
Pressure to keep prices as low as possible came from insurgent discounters Aldi and Lidl, which have been stealing shoppers with the promise of lower prices. Aldi overtook Morrisons to become the UK’s fourth biggest retailer in market share last year.
Kien Tan, retail strategy director at PwC, said: “The UK is a particularly competitive market. It was competitive even before Aldi and Lidl came because we had a ‘Big Four’. And we also had others nipping around the edges – Co-op, convenience stores, all that stuff.
“We then have Aldi and Lidl on top of that. And then… B&M, Home Bargains and Poundland – you’ve got value retailers and half of their sales are in grocery categories. Shoppers go to all of those places. If you want to stay in business, you’ve got to be competitive.”
Besides outright price increases, supermarkets have also faced questions over the time it takes for falling wholesale prices to be passed on to shoppers through lower shelf prices.
Sir Ed Davey, the leader of the Liberal Democrats, said in April he was worried about supermarkets taking a “rocket and feather” approach to prices: boosting them when costs surge, but bringing them down much more slowly as costs fall.
Much of this is to do with how the market is structured. Some ingredients and commodities are bought on fixed term contracts, meaning prices are fixed ahead of time. If a contract was agreed when prices were high, food suppliers may not see the effect of falling prices until they are able to renegotiate.
The managing director of one food company that sells to supermarkets says: “You might be stuck with that high price or low price for anything up to a year.”
However, the CMA has concerns that supermarkets may still be exploiting this lag to boost profits.
It said there were “some signs” that grocers were rebuilding their profit margins as the wholesale costs for ingredients including dairy and wheat came down, and warned that supermarkets should pass on the benefits of falling wholesale costs by lowering prices on shelves.
It said: “Retailers’ input costs are likely to fall – or at least rise less quickly – as lower prices for energy and commodities feed through, and consumers do not necessarily have a clear idea of what the ‘right’ price should be in the context of high but falling food price inflation.”
And while supermarkets have been let off the hook for profiteering, the watchdog did warn that some retailers were not displaying prices as clearly as possible and could be making it hard for shoppers to work out how to get the best value.
It found examples of missing or incorrectly calculated unit prices on products in the supermarkets, such as some tea bags being priced per 100g while others were priced per bag, making it “hard to spot and compare the best deals”.
However, the watchdog’s main focus going forward will be suppliers of food and drink, likely to include giants such as Unilever, Heinz and Mondelez, as well as companies that make their own-label goods.
While supermarket margins have been falling to around 1pc, big food and drink companies frequently achieve margins of more than 15pc.
The CMA has chosen a handful of product categories in which it wants to examine whether “the wider supply chain is working well for consumers”, including baby formula, bread, pet food, milk and mayonnaise.
Alan Jope, who has since retired as the boss of Unilever, has previously insisted the company was not profiteering despite raising its prices by 10pc earlier this year.
However, suppliers have not faced the same level of scrutiny as the likes of Tesco and Sainsbury’s. Part of this is because many of the biggest do not provide a breakdown of their financial performance at a UK level so it is hard to get an accurate picture.
One industry source says: “Retailers have been for a while frustrated that the scrutiny has focused so heavily on them and missed other parts of the supply chain where profit margins are higher.”
