There is a clear whiff of “something must be done” in the air. UK supermarkets discussed food prices with the Treasury last week. This week saw a Downing Street summit on the food industry and the launch of a ‘farm to fork’ parliamentary inquiry.
Sir Ed Davey, leader of the Liberal Democrats, had called on the competition authorities to investigate supermarket “gouging”. And behold, the Competition and Markets Authority said this week which would take a closer look at the fuel prices of supermarkets and the grocery market
This is not surprising in one sense. Food inflation reached 19% in March, with staples such as cheese and milk go up much higher. Consumer group Which one? found the highest inflation in discount stores Lidl and Aldi, and in the cheapest own-brand lines compared to name-brand products. The Resolution Foundation says that food is overtaking energy as the main pressure on living standards. The expert group found that 61 percent of the poorest households are cutting back on food and other essential items, compared with 35 percent in the richest quintile.
This is a crisis that deserves attention. But making supermarkets the focus of concerns about the so-called greed, where companies capitalize on inflation to boost their own profitability, it is futile.
The competition watchdog singled out fuel for attention, noting rising profit margins and “internal document evidence” that at least one supermarket had raised its profitability targets.
you don’t say It’s a fair bet the supermarket is Asda (which he refused to confirm). The CMA highlighted Asda’s “aggressive road fuel pricing strategy”, both in approving its takeover by private equity group TDR Capital and in blocking its merger with J Sainsbury in 2019. A change in strategy was a known risk of the deal.
However, Asda says it remains “the price leader” in fuel. And supermarket prices are still 3.5 pa liters cheaper than the UK average, according to the AA, compared to 4.5 pa liters in April 2019.
The truth is that fuel has lost importance for all supermarkets as a way to attract customers. In the age of “price matching,” fuel money may have been used to keep food competitive. And the gap between the prices of the four largest supermarkets on 30 key grocery items and discounters (which do not have gas stations) is about a third of its 2014 level, according to Exane.
There weren’t many signs of speculation in the recent results. Both Sainsbury’s and Tesco said profits fell in the past financial year as sales growth failed to keep pace with inflation. The sector operates on profit margins of around 3 percent, compared to consumer groups that supply branded products in their mid-teens. Over the past five years, notes Exane’s Andrew Gwynn, the average European grocery operating margin has fallen 60 basis points, while the U.S. average has risen 100.
The products that saw the highest price increases largely make sense (and the CMA acknowledged that “global factors” were the main culprits). Products like dairy and eggs have shorter supply chains, so they reflect higher input costs more quickly, says PwC’s Kien Tan. Ingredients account for a larger portion of the price of private label products than brand alternatives.
Meanwhile, the big picture is that the share of UK household budgets that goes to food has fallen from a third in 1950 to around 10 per cent, low by international standards. Four pints of milk cost between £1.55 and £1.60 a decade ago, says Shore Capital’s Clive Black, falling to £1.09 before the pandemic. Supermarkets have just cut prices to £1.55 after they shot up to £1.65. The shortage of tomatoes and salads earlier this year was partly due to producers who prefer other markets about the cutthroat UK sector.
This week’s summit in Downing Street focused on building a resilient and sustainable food supply chain and increasing domestic production, which means higher food prices to support it. The UK is managing to argue, in the same week, about whether supermarket prices are extremely high or problematically low, without really addressing the contradiction. Making supermarkets the ghost of food inflation will not help address that issue.