Greedflation? There’s no evidence supermarkets are profiteering – and this is why
It is hardly surprising that, confronted with the highest levels of food and drink inflation since 1977, some people have concluded that supermarkets are “profiteering”.
Those people, apparently, include Liberal Democrat leader Sir Ed Davey, and the Unite union’s general secretary Sharon Graham.
Both have used that incendiary term over the past week, with Sir Ed going so far as to call for an investigation into the sector by the Competition and Markets Authority, the UK’s main competition watchdog.
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How much more do shoppers pay?
The CMA was quick to close down that option when, on Monday, it made clear that “global factors” had been “the main driver of grocery price increases” and said it “has not seen evidence pointing to specific competition concerns in the grocery sector”.
It did though, presumably following a degree of ministerial coaxing, announce it was stepping up its work in the grocery sector “to understand whether any failure in competition is contributing to grocery prices being higher than they would be in a well-functioning market”.
The CMA’s instincts not to pursue a full-blown investigation into the grocery market are well-founded.
For there is absolutely no evidence to point to profiteering by supermarkets.
Take Tesco, the UK’s largest grocery retailer. It has reported a 7% drop in its operating profits for its retail businesses in the UK and Republic of Ireland in the financial year just ended.
It expects its profits for the financial year just started to be “broadly flat”.
Or take Sainsbury’s, the number two player in the market. It has recently reported a 5% drop in its underlying pre-tax profits for the financial year just ended and, like Tesco, expects profits growth to be flat this year.
These are probably the best indicators of what is going on in the market because Asda and Morrisons, the remaining two members of what used to be called the “big four” in recent years, have both recently changed hands and so their numbers will be less “clean” in the jargon.
But they too, like Tesco and Sainsbury’s, have also seen declines in their pre-tax profits for the most recent reporting periods.
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The numbers don’t lie
Falling profits are hardly indicative of a sector that has been profiteering.
A look at some other financial metrics reported by the grocery multiples bear this out.
Tesco’s operating margin for the year just ended was just 3.8%, down from 4.37% the previous year and well down on the 5% or so that it and rivals – most notably Asda – has targeted historically.
Sainsbury’s has just reported a retail underlying operating margin of just 2.99%, down from 3.4% the previous year.
These are not, repeat not, the kind of figures one would expect to see from businesses that were profiteering. To put them into context, Apple has just reported an operating margin of 30.2%.
Another metric which gives the lie to any notion of profiteering among supermarkets is return on capital employed (ROCE) – a measure of how good a business is at generating a profit from the capital it puts to work.
Sainsbury’s has just reported a ROCE of 7.6% for the year just ended, down from 8.4% the year before, while Tesco’s ROCE has fallen from 7.5% to 6.6% during the last year.
Again, to put those figures into context, the Office for National Statistics reports that the typical rate of return achieved by a private sector company in the UK between July and September last year (the latest quarter for which figures are available) was 9.7%.
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‘Reaching the peak’ of food inflation
These numbers are just not what one would expect to see from a company that was profiteering.
The mistake made by people like Sir Ed and Ms Graham, who believe they have detected profiteering by supermarkets, is probably just to look at how big the headline profit is.
Tesco reported a headline retail operating profit of £2.3bn for the UK and Ireland for the year just ended.
A big number, yes, but – as has been shown above – not when set against sales of £53.3bn. These are huge businesses and with them come huge operating costs.
‘Shoppers are blessed’
As Clive Black, head of consumer research at the investment bank Shore Capital, put it to clients this week: “Tesco UK achieves circa 4% margins due to its scale (27% market share) but also a massive capital outlay in superstores that it would not expend today with current returns. Tesco is not opening any supermarkets, what does that indicate?
“Since the early 1990s, major UK superstore margins have fallen by 30% to 50% … Asda, Iceland, Morrison and Waitrose are largely loss-making to break-even at the profit before tax level.
“In the early 1990s, Sainsbury reported profits before tax of over £800m. We are forecasting less than £700m for the current full year after expending billions on capital expenditure.”
Mr Black, one of the City’s most experienced and highly regarded retail analysts, argues that “evidence of systemic profiteering is largely nonsense”.
He says that, on the contrary, the British public and government are “blessed to have one of the most advanced food systems in the world” which has brought down the proportion of household income spent on food from more than a third immediately after the Second World War to just one tenth now.
“That is a massive benefit of innovation, investment, technological change and entrepreneurship to society and an enhancement of living standards. More to the point, we have an amazing choice of safe product,” he added.
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Hunt: ‘Large rise in food inflation’
Not only is fierce competition in the grocery sector driving down supermarket profits. It may also be hurting other parts of the food and drink supply chain. Intense competition hurts suppliers of essential products such as milk.
Mr Black points out: “A decade or more ago, four pints of milk cost 155p to 160p. Prior to the pandemic, in 2019, that was 109p, despite rising costs in the interim. Presently, four pints of milk in UK supermarkets has fallen from 165p to 155p.
“The public kept quiet as milk was used, particularly by expanding German discount chains [Aldi and Lidl], as a loss leader, killing category profitability through those years.”
He suggests that government policies, such as regulations on packaging and clampdowns on migrant labour that have pushed up the operating costs of food producers, are – along with Russia’s invasion of Ukraine – among the main factors stoking food price inflation.
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‘Stupid statements’
The example he cites is tomatoes. When bad weather hit tomato production in Spain and North Africa recently, leading to shortages, there were gaps on the shelves of some supermarkets in the UK.
Mr Black explains: “The UK government decided not to support domestic glasshouse growers on energy or labour access and so, understandably, said folks emptied their facilities.
“Continental Europe, which tends now to have higher base food prices and elevated food inflation too, did not go short of such products while the UK did. Why? Well, because the intense competitiveness of the British market meant that African and Spanish product followed the money and, with little domestic produce, the availability matter was compounded.
“If anything shows the stupidity of Mr Davey’s supermarket profiteering statements, then tomatoes display all.”
Still unconvinced?
Well, take a look at the company share price charts.
Strip out the impact of share splits or consolidations and shares of Tesco, despite rallying by nearly 18% since the beginning of the year, have been changing hands this week at the same price they were back in November 2000.
Likewise, shares of Sainsbury’s, despite having risen by 27% so far this year, have been trading this week at the level they did back in September 1990. That is despite billions of pounds worth of investment by both in the intervening decades.
Supermarkets profiteering? Some of their long-suffering shareholders would probably be thrilled if they were.
The former BT Group chief Philip Jansen is being lined up as the next chairman of Heathrow Airport as Britain’s biggest aviation hub prepares to deliver an expansion costing close to £50bn.
Sky News has learnt that Mr Jansen, who chairs the FTSE-100 marketing services group WPP, is in advanced talks with Heathrow’s board and shareholders about taking on the role.
If the discussions reach a successful conclusion, sources said an announcement could come within weeks.
Mr Jansen is said to have emerged as the frontrunner from a shortlist of candidates compiled by headhunters at Russell Reynolds Associates.
His experience as the boss of BT, a regulated utility, is said to have been key to his selection as the preferred candidate.
Mr Jansen has also run companies including MyTravel and Worldpay.
The appointment of a successor to Lord Deighton, who has held the post for nine years, comes at a critical time for Heathrow.
In August, the airport submitted a revised expansion plan consisting of a third runway costing £21bn, £12bn for a new terminal and stand capacity, and £15bn to modernise the current airport through the expansion of Terminal 2.
The existing Terminal 3 would ultimately be closed.
Read more: Full details of Heathrow’s plans for a third runway revealed
Heathrow handled a record 83.9 million passengers in 2024 and is adamant that a third runway is essential to the growth of Britain’s economy, given the volume of exports which pass through the site.
“It has never been more important or urgent to expand Heathrow,” the airport’s chief executive, Thomas Woldbye, said in August.
“We are effectively operating at capacity to the detriment of trade and connectivity.
“With a green light from government and the correct policy support underpinned by a fit for purpose regulatory model, we are ready to mobilise and start investing this year in our supply chain across the country.
“We are uniquely placed to do this for the country; it is time to clear the way for take-off.”
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The expansion remains opposed by many airlines alarmed by the prospective increase in charges to use the airport, as well
It has, however, been backed by the government, with Rachel Reeves, the chancellor, saying that a third runway “would unlock further growth, boost investment, increase exports, and make the UK more open and more connected as part of our Plan for Change”.
Heathrow’s next chairman will lead a board dominated by representatives of the airport’s principal shareholders.
Mr Woldbye apologised in May for being asleep during the power outage in March which forced Heathrow’s temporary closure.
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The airport said it would implement the recommendations of a review conducted by former transport secretary Ruth Kelly.
Heathrow’s search for a new chairman comes months after the most significant changes to its ownership structure in years.
Ardian, a French investment group, now owns 32.6% of the company following a series of transactions over the last 12 months.
Saudi Arabia’s Public Investment Fund has also become an investor.
Heathrow has never formally announced Lord Deighton’s intention to step down, other than a disclosure in its annual report in which he wrote:
“In light of the recent changes to the HAHL [Heathrow Airport Holdings Limited] board…the nominations committee…has asked me to extend my appointment for a limited period to help ensure a smooth transition whilst new non-executive shareholder directors become familiar with the business and a new chair is appointed.
“I have therefore agreed to extend my role as chair for a limited period to ensure continuity and stability on the HAHL Board during this period of transition.”
A Heathrow spokesperson declined to comment, while Mr Jansen could not be reached for comment.
Business
Major milestone in Post Office scandal as first Capture conviction referred to Court of Appeal
The first Post Office Capture conviction has now been formally referred to the Court of Appeal, marking a major milestone in the IT scandal.
The Criminal Cases Review Commission (CCRC) made the decision to refer the case of sub-postmistress Patricia Owen back in July.
Mrs Owen was convicted of theft by a jury in 1998, based on evidence from the faulty IT software Capture.
She was given a suspended prison sentence and fought to clear her name afterwards – but died in 2003.
Capture software was used in 2,500 branches between 1992 and 1999.
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The first Capture conviction was sent for appeal in July
It is the first time a conviction based on Capture – the predecessor to the Horizon system at the centre of the wider Post Office scandal – has reached the Court of Appeal.
It comes after Sky News revealed that a damning report into Capture, which could help overturn convictions, had been unearthed after nearly 30 years.
An investigation found the Post Office knew about the report at the time and continued to prosecute sub-postmasters based on Capture evidence.
Mrs Owen’s family submitted an application to the CCRC in January 2024 – her case has now been referred on the grounds that her prosecution was an “abuse of process”.
A ‘touchstone case’ for victims
Lawyers have said that if Mrs Owen is exonerated posthumously in the Court of Appeal, it may “speed up” the handling of others.
The CCRC is also continuing to investigate more than 30 other “pre-Horizon” convictions.
CCRC chair, Dame Vera Baird, also told Sky News in the summer it could be a “touchstone case” for other victims.
Juliet Shardlow, Mrs Owen’s daughter, has been fighting to clear her mother’s name for years.
She told Sky News the family were “so pleased” her case had finally been referred.
“This has been a very long journey for us as a family and we can now see the light at the end of the tunnel,” she said.
“It’s just sad that mum isn’t here to see it.
“The good news is that once mum’s case is heard in the High Court, it will pave the way for all the other Capture victims.”
The Post Office has previously said it is “determined that past wrongs are put right and continue to support the government’s work in this area as well as fully co-operate with the Criminal Cases Review Commission”.
Business
UK suffers blow in bid to become minerals superpower – as it’s snubbed by its own leading firm
Britain’s hopes of becoming a critical minerals superpower have been dealt a severe blow after one of its leading companies abandoned its plans to build a rare earths refinery near Hull.
Pensana had pledged to build a £250m refinery on the banks of the Humber, to process rare earths that would have then been used to make magnets for electric cars and wind turbines.
The plant promised to create 126 jobs and was due to receive millions of pounds of government funding.
However, Sky News has learnt that Pensana has decided to scrap the Hull plant and will instead move its refining operations to the US.
Pensana’s chairman, Paul Atherley, said the company had taken the decision after the Trump administration committed to buying rare earths from an American mine, Mountain Pass, at a guaranteed price – something no government in Europe had done.
“That’s repriced the market – and Washington is looking to do more of these deals, moving at an absolute rate of knots,” he said.
“Europe and the UK have been talking about critical minerals for ages. But when the Americans do it, they go big and hard, and make it happen. We don’t; we mostly just talk about it.”
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The decision comes at a crucial juncture in critical minerals and geopolitics. China produces roughly 90% of all finished rare earth metals – exotic elements essential for the manufacture of many technology, energy and military products.
Last week, Beijing imposed restrictions on the exports of rare earths, prompting Donald Trump to threaten further 100% tariffs on China.
Pensana had been seen as Britain’s answer to the periodic panics about the availability of rare earths. The site at Saltend Chemicals Park was chosen by the government to launch its critical minerals strategy in 2022.
Visiting for the official groundbreaking, the then business and energy secretary Kwasi Kwarteng said: “This incredible facility will be the only one of its kind in Europe and will help secure the resilience of Britain’s supplies into the future.”
He pledged a government grant to support the scheme. That grant was never received because Pensana never built its plant.
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Paul Atherley and Kwasi Kwarteng at a groundbreaking ceremony for the plant in July 2022. Pic: Pensana
Mr Atherley said he is optimistic about another project he’s involved with, to bring lithium refining to Teesside through another company, Tees Valley Lithium.
But, he said, rare earth processing is far more complex, energy-intensive and expensive, making it unviable in the UK, for the time being.
The decision is a further blow for Britain’s chemicals industry, which has faced a series of closures in recent months, including that of Vivergo, a biofuels refiner based in the same chemicals park where Pensana planned to locate its refinery.
Producers warn that Britain’s record energy costs – higher than most other leading economies – are stifling its economy and triggering an outflow of businesses.
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