Greedflation? There’s no evidence supermarkets are profiteering – and this is why

Published

2 years ago

May 18, 2023

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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.

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.

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%.

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.

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.

‘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.

Business

EY partner in talks to become boss of new football regulator

Published

17 hours ago

July 19, 2025

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EY partner in talks to become boss of new football regulator

An expert in financial regulation at one of the big four accountancy firms is in talks to become the inaugural boss of English football’s powerful new watchdog.

Sky News has learnt that Richard Monks, a partner at EY, is the leading contender to become chief executive of the Independent Football Regulator (IFR).

The new body will be formally established once the Football Governance Bill receives Royal Assent, which is expected this month.

Mr Monks spent 18 years at the Financial Conduct Authority and its predecessor regulator, the Financial Services Authority, before becoming chair of the G20/OECD Taskforce for Consumer Financial Protection, according to his LinkedIn profile.

He became a partner at EY, where he focuses on financial regulation, in the autumn of 2022.

The prospective choice of a chief executive of the IFR with no professional experience of the football industry may spark alarm among club executives who will face an onerous new regulatory regime overseen by the IFR.

In recent weeks, football industry executives have circulated rumours that the IFR boss was likely to emerge from the professional services sector.

It was unclear this weekend whether other candidates were vying with Mr Monks for the post.

The IFR has already been set up on a ‘shadow’ basis, with Martyn Henderson, former chief executive of the Sports Grounds Safety Authority, appointed in December 2023 as interim chief operating officer of the football watchdog.

The EY partner is understood to have held talks with David Kogan, the government’s preferred choice for the watchdog’s chairmanship but whose formal appointment has been delayed by an investigation sparked by his previous donations to Labour politicians.

William Shawcross, the commissioner for public appointments, is investigating the process through which Mr Kogan was recruited to the role, and is thought likely to produce his report in the coming weeks.

Lisa Nandy, the culture secretary, told MPs last month that she was delegating the final decision on Mr Kogan’s appointment to the sports minister.

Stuart Andrew, the shadow culture minister, said at the time: “The public has a right to know whether this was a fair and impartial process, or yet another case of political patronage disguised as due diligence.

“The decision to launch an inquiry is welcome [and] must include scrutiny of [Sir] Keir Starmer, his advisers, and whether any conflicts of interest were properly declared.”

If Mr Kogan’s appointment is ratified, the appointment of a chief executive would be a crucial step in paving the way for the most radical reforms to the supervision of English football in decades.

The legislation includes a new licensing regime for clubs, measures to ensure greater fan engagement and a backstop power allowing the IFR to impose a financial settlement on the Premier League in relation to distributions to English Football League clubs.

Revisions to the Bill have seen a requirement for the IFR to take decisions about club takeovers in the context of the government’s foreign and trade policy removed.

If Mr Monks does land the IFR chief executive’s post, ministers are likely to argue that his expertise as a regulator will balance Mr Kogan’s decades of experience as a negotiator of sports media rights deals.

Last year, Mr Kogan acted as the lead negotiator for the Women’s Super League and Championship on their latest five-year broadcasting deals with Sky – the immediate parent company of Sky News – and the BBC.

His current roles include advising the chief executives of CNN, the American broadcast news network, and The New York Times Company on talks with digital platforms about the growing influence of artificial intelligence on their industries.

The creation of the IFR was pledged by the last Conservative government in the wake of the furore over the failed European Super League project in 2021.

Its establishment comes with the top tier of the professional game gripped by civil war, with Abu Dhabi-owned Manchester City at the centre of a number of legal cases with the Premier League over the club’s financial affairs.

The Premier League has also been keen to agree a long-delayed financial redistribution deal with the EFL before the regulator is formally launched.

Tentative talks between representatives of both factions failed to produce meaningful progress, however.

This weekend, EY declined to comment on Mr Monks’s behalf, while the Department for Culture, Media and Sport has been approached for comment.

Business

Ofwat could be scrapped in water reforms

Published

1 day ago

July 18, 2025

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Ofwat could be scrapped in water reforms

An independent review of the water industry is to recommend sweeping changes to the way the sector is managed, including the potential replacement of Ofwat with a strengthened body combining economic and environmental regulation.

Former Bank of England governor Sir Jon Cunliffe will publish the findings of the Independent Water Commission on Monday, with stakeholders across the industry expecting significant changes to regulation to be at its heart.

The existing regulator Ofwat has been under fire from all sides in recent years amid rising public anger at levels of pollution and the financial management of water companies.

Campaigners and politicians have accused Ofwat of failing to hold water operators to account, while the companies complain that its focus on keeping bills down has prevented appropriate investment in infrastructure.

In an interim report, published in June, Sir Jon identified the presence of multiple regulators with overlapping responsibilities as a key issue facing the industry.

While Ofwat is the economic regulator, the Environment Agency has responsibility for setting pollution standards, alongside the Drinking Water Inspectorate.

Sir Jon’s final report is expected to include a recommendation that the government consider a new regulator that combines Ofwat’s economic regulatory powers with the water-facing responsibilities currently managed by the EA.

In his interim report, Sir Jon said options for reform ranged from “rationalising” existing regulation to “fundamental, structural options for integrating regulatory remits and functions”.

He is understood to have discussed the implications of fundamental reform with senior figures in industry and government in the last week as he finalised his report.

Environment Secretary Steve Reed is expected to launch a consultation on the proposals following publication of the commission report.

The commission is also expected to recommend a “major shift” in the model of economic regulation, which currently relies on econometric modelling, to a supervisory approach that takes more account of individual company circumstances.

How water can teach Labour a much-needed lesson

Liz Bates

Political correspondent

@wizbates

On Monday, the government’s long-awaited review into the UK’s water industry will finally report.

The expectation is that it will recommend sweeping changes – including the abolition of the regulator, Ofwat.

But frustrated customers of the water companies could rightly complain that the process of taking on this failing sector and its regulator has been slow and ineffective.

They may be forgiven for going further and suggesting that how Labour has dealt with water is symbolic of their inability to make an impact across many areas of public life, leaving many of their voters disappointed.

This is an industry that has been visibly and rapidly declining for decades, with the illegal sewage dumping and rotting pipes in stark contrast with the vast salaries and bonuses paid out to their executives.

It doesn’t take a review to see what’s gone wrong. Most informed members of the public could explain what has happened in a matter of minutes.

And yet, despite 14 years in opposition with plenty of time to put together a radical plan, a review is exactly what the government decided on before taking on Ofwat.

Month after month, they were asked if they believed the water industry regulator was fit for purpose despite the obvious disintegration on their watch. Every time the answer was ‘yes’.

As in so many areas of government, Labour, instead of acting, needed someone else to make the decision for them, meaning that it has taken over a year to come to the simple conclusion that the regulator is in fact, not fit for purpose.

As they enter their second year in office, maybe this can provide a lesson they desperately need to learn if they want to turn around their fortunes.

That bold decisions do not require months of review, endless consultations, or outside experts to endlessly analyse the problem.

They just need to get on with it. Voters will thank them.

Sir Jon has said the water industry requires long-term strategic planning and stability in order to make it attractive to “low-risk, low-return investors”.

The water industry has long complained that the current model, in which companies are benchmarked against a notional model operator, and penalised for failing to hit financial and environmental standards, risks a “doom loop”.

Thames Water, currently battling to complete an equity process to avoid falling into special administration, has said the imposition of huge fines for failing to meet pollution standards is one of the reasons it is in financial distress.

Publication of the Independent Commission report comes after the Environment Agency published figures showing that serious pollution incidents increased by 60% in 2024, and as Thames Water imposes a hosepipe ban on 15m customers.

Ofwat, Water UK and the Department for the Environment all declined to comment.

Business

Post Office Capture IT system conviction referred to Court of Appeal for first time

Published

2 days ago

July 18, 2025

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Post Office Capture IT system conviction referred to Court of Appeal for first time

The first Post Office Capture conviction is to be sent to the Court of Appeal, Sky News understands, in a “breakthrough” moment in the IT scandal.

The Criminal Cases Review Commission (CCRC) has decided to refer the case of sub-postmistress Patricia Owen, who was convicted in 1998 of theft.

Mrs Owen was found guilty by a jury based on evidence from the faulty IT software Capture, which was used in 2,500 branches between 1992 and 1999, before the Horizon Post Office scandal.

It comes after Sky News revealed that a damning report into Capture, which could help overturn criminal convictions, had been unearthed after nearly 30 years.

The decision to refer the first-ever Capture case to the Court of Appeal has been made on the grounds that Mrs Owen’s prosecution was an “abuse of process”.

The development has been described by victims’ lawyer Neil Hudgell as “hugely pivotal”.

“The Court of Appeal don’t receive that many referrals that start at the CCRC, and most get turned away, so it’s a very high bar to even get cases from the CCRC to the Court of Appeal…”

“I think it will be a real shot in the arm to all the other Capture victims who are waiting for their cases to be determined by the CCRC.”

Mr Hudgell described the report found earlier this year – written by computer experts in 1998 and highly critical of Capture – as “significantly tipping the balance”.

Sky News found that the Post Office knew about the report at the time and continued to prosecute sub-postmasters based on Capture evidence.

Pat Owen always maintained her innocence but died in 2003 with a criminal record before the wider Post Office scandal came to light.

Her daughter Juliet Shardlow said she cried when she heard the news that her mother’s case would be referred to the Court of Appeal.

“I feel angry that she is not here because she died before her time… we will be there – we will be sitting there in that front row.

“I can’t put it into words because it’s still all a shock that we are where we are and that later this year, or next year, we might have what we set out to get… justice for her.”

The CCRC is currently investigating 30 cases potentially related to the Capture software system.

Twenty-seven of those cases are now assigned to case review managers and under “active review”, with a further three cases in the preparatory stages.

The CCRC has described a “challenge” over determining “whether cases involved the use of Capture at the time of the alleged offences”.

In a letter written to Liam Byrne, chair of the Business and Trade Committee, and seen by Sky News, it said that information the Post Office has provided “does not, in most cases, show whether it was installed and in operation at the time of the alleged offending”.

It also mentioned that the Post Office is reviewing “a significant amount of data which may contain further information”.

A Post Office spokesperson said: “While it is not appropriate for us to comment on specific cases, we have been very concerned about the reported problems relating to the use of the Capture software, and we are sincerely sorry for past failings that have caused suffering to postmasters.

“We are 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.”