Are supermarkets profiteering from high food prices?

Supermarkets are under fire from a top MP for ‘profiting’ from record high food prices – but are the retail giants really filling their pockets at the expense of customers?

Food prices are rising at about 19.1 percent a year, according to the Office for National Statistics, a record in 45 years.

While new analysis suggests these rising prices are about to plummet, consumers are still aching at supermarket checkouts.

Now, Liberal Democrat leader Ed Davey has called for a review of the way supermarkets set their prices.

Speaking to The Guardian, Davey called on the Competition and Markets Authority’s watchdog to investigate supermarkets, adding: ‘We need to bring rising food prices back under control and provide relief to families.

‘That means cracking down on the exorbitant profits of food multinationals and the large supermarkets, so that customers get a fair deal.’

Last month, Tesco’s profits were condemned by the Unite union as ‘excessive profiteering’.

But are supermarkets really responsible for the high food prices? And if not, then who?

Supermarket profits are huge, but declined year on year

The major supermarkets are making hundreds of millions of pounds a year in profits according to their latest results.

For example, Tesco, where about a third of Britons do their shopping, made a profit of £1 billion in the 12 months to 25 February 2023.

It’s a similar story with Sainsbury’s, the second largest supermarket, which made a profit of £327m in the year to March 4, while Asda reported a profit of £886m in 2022.

But all four major supermarkets have seen their profits fall significantly compared to last year, with Sainsbury’s seeing the biggest drop at 61 percent.

This goes against the argument that they are trying to make money by unfairly inflating prices and keeping them there.

Stiff competition

Competition in supermarkets means profit margins are “paper thin” compared to other retail sectors, said Richard Lim, chief executive of analysts Retail Economics.

This mainly means that prices are kept as low as possible.

“The norm is 2-3 percent profit before tax per year,” explains Lim.

Taking the Tesco example above, the supermarket’s £1 billion profit was made on a turnover worth £56.7 billion.

According to Richard Hyman of Thought Provoking Consulting, supermarkets are also much more competitive than they were, which encourages retailers not to charge too much.

“I don’t think there is any evidence that supermarkets are making a profit,” he said. “The balance of evidence is in the opposite direction.”

Hyman added that the last time major supermarkets made massive price hikes to protect themselves was in 2008.

They then got a bloody nose from discounters such as Aldi, Lidl, B&M Bargains and Home Bargains, all of which entered with discounted products.

Now that Aldi is a bigger retailer than Morrisons, that’s a mistake traditional supermarkets don’t want to make again.

“When the big players raised their prices, they created a huge gap between the big four and the discounters, losing billions of pounds of market share,” Hyman said. “Most of them remember that.”

So why are prices going up?

Although supermarkets do not implement unfair price increases, those price increases must come from somewhere.

The answer is that the costs for a supermarket to do business are rising, and that is being passed on.

Lim points out that the price consumers pay at the checkout should cover all the costs of a supermarket, many of which have skyrocketed.

Supermarkets charge higher prices from their own suppliers and also face higher bills for wages, utility bills and rent from their stores.

The Russian war against Ukraine also has an impact on supermarket prices.

The conflict has increased fuel prices, energy prices and the cost of fertilizers, making it more expensive to grow and transport food.

Do suppliers make a profit instead?

Some supermarket bosses have suggested that their own suppliers make a profit, not them.

In January, Tesco chairman John Allan said it was ‘quite possible’ that suppliers were acting this way.

Last year, Tesco temporarily stopped stocking Heinz and Mars Petcare products in a row over prices, which has since been resolved.

The price of milk has risen to about 45 pence a pint, reflecting the rise in supplier prices, according to UBS Wealth Management.

Suppliers are fiercely defending their own price increases, with the Food & Drink Federation and National Farmers’ Union both saying their members are facing their own higher bills.

Lim said suppliers typically have bigger profit margins than supermarkets, but they don’t make outright profits, while Hyman believes it is possible, but he hasn’t seen any concrete evidence.

This is Money understands that the CMA has no immediate plans to probe supermarkets for profit, but is currently questioning retailers whether their prices are easy to understand.

What the supermarkets say

A spokesman for Sainsbury’s said: ‘We are well aware of the pressures millions of households are currently facing and our number one priority remains to do everything we can to keep prices low for our customers.

“Supporting our customers, colleagues and suppliers is the right thing to do and our profit and margin are declining year on year as a result of the significant investments we have made to cope with inflation.”

The British Retail Consortium has responded on behalf of all other supermarkets.

Andrew Opie, director of nutrition and sustainability at the BRC, said: ‘Many supermarkets have seen their profits fall over the past year due to the high costs of energy, transport and labour, as well as higher prices paid to food producers and farmers.

‘Despite tight margins, retailers are investing heavily in lower prices for the future. To further help those affected by the high cost of living, supermarkets have expanded their affordable food range, locked down the price of many essentials and continue to provide support to vulnerable groups.

“Once the cost pressures faced by retailers eventually ease, retail prices will soon follow as they compete fiercely for market share.”