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

Germany: Europe’s largest economy is facing a third consecutive year of recession

Published

8 hours ago

January 16, 2025

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Germany: Europe's largest economy is facing a third consecutive year of recession

Forget this week’s minor decrease in the UK inflation number.

The most important European data release was the confirmation from Germany that, during 2024, its economy contracted for the second consecutive year.

Europe’s largest economy shrank by 0.2% during 2024 – on top of a 0.3% contraction in 2023.

Now it must be stressed that this was a very early estimate from Germany’s Federal Statistics Office and that the numbers may be revised higher in due course. That health warning is especially appropriate this time around because, very unexpectedly, the figures suggest the economy contracted during the final three months of the year and most economists had expected a modest expansion.

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If unrevised, though, it would confirm that Germany is suffering its worst bout of economic stagnation since the Second World War.

The timing is lousy for Olaf Scholz, Germany’s chancellor, who faces the electorate just six weeks from now.

Worse still, things seem unlikely to get better this year, regardless of who wins the election.

Germany, along with the rest of the world, is watching anxiously to see what tariffs Donald Trump will slap on imports when he returns to the White House next week.

Germany, whose trade surplus with the United States is estimated by the Reuters news agency to have hit a record €65bbn (£54.7bn) during the first 11 months of 2024, is likely to be a prime target for such tariffs.

Aside from that, Germany remains beset by some of the problems with which it has been grappling for some time.

Because of its large manufacturing sector, Germany has been hit disproportionately by the surge in energy prices since Russia invaded Ukraine nearly three years ago, while those manufacturers are also suffering from intense competition from China. The big three carmakers – Volkswagen, Mercedes-Benz and BMW – were already staring at a huge increase in costs because of having to switch to producing electric vehicles instead of cars powered by traditional internal combustion engines. That task has got harder as Chinese EV makers, such as BYD, undercut them on price.

Other German manufacturers – many of which have not fully recovered from the COVID lockdowns five years ago – have also been beset by higher costs as shown by the fact that, remarkably, German industrial production in November last year was fully 15% lower than the record high achieved in 2017.

German consumer spending, meanwhile, remains becalmed. Consumers have kept their purse strings closed amid the economic uncertainty while a fall in house prices has further depressed sentiment. While home ownership is lower in Germany than many other OECD countries, those Germans who do own their own homes have a bigger proportion of their household wealth tied up in bricks and mortar than most of their OECD counterparts, including the property-crazy British.

Consumer sentiment has also been hit by waves of lay-offs. German companies in the Fortune 500, including big names such as Siemens, Bosch, Thyssenkrupp and Deutsche Bahn, are reckoned to have laid off more than 60,000 staff during the first 10 months of 2024. Bosch, one of the country’s most admired manufacturing companies, announced in November alone plans to let go of some 7,000 workers.

More of the same is expected in 2025.

Volkswagen shocked the German public in September last year when it said it was considering its first German factory closure in its 87-year history. Analysts suggest as many as 15,000 jobs could go at the company.

Accordingly, hopes for much of a recovery are severely depressed.

As Jens-Oliver Niklasch, of LBBW Bank, put it today: “Everything suggests that 2025 will be the third consecutive year of recession.”

That is not the view of the Bundesbank, Germany’s central bank, whose official forecast – set last month – is that the economy will expand by 0.2% this year. But that was down from its previous forecast of 1.1% – and growth of 0.2%, for a weary German electorate, will not feel that different from a contraction of 0.2%.

And all is not yet lost. The European Central Bank is widely expected to cut interest rates more aggressively this year than any of its peers. Meanwhile, one option for whoever wins the German election would be to remove the ‘debt brake’ imposed in 2009 in response to the global financial crisis, which restricts the government from running a structural budget deficit of more than 0.35% of German GDP each year.

The incoming chancellor, expected to be Friedrich Merz of the centre-right CDU/CSU, could easily justify such a move by ramping up defence spending in response to Mr Trump’s demands for NATO members to do so. Mr Merz has also indicated that policies aimed at supporting decarbonisation will take less of a priority than defending Germany’s beleaguered manufacturers.

But these are all, for now, only things that may happen rather than things that will happen.

And the current economic doldrums, in the meantime, will only push German voters to the extreme left-wing Alliance Sahra Wagenknecht or the extreme right-wing Alternative fur Deutschland.

Business

UK economy just about returns to growth after two months of contraction

Published

11 hours ago

January 16, 2025

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UK economy just about returns to growth after two months of contraction

The UK economy just about returned to growth in November after two months of contraction, the latest official figures show.

Gross domestic product (GDP), the standard measure of an economy’s value and everything it produces, grew by 0.1%, according to data from the Office for National Statistics.

It was expected to grow by 0.2%.

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It is mixed news for the government, which has made economic growth its top priority.

Despite this political focus, the economy shrank by 0.1% in both October and September. Latest quarterly data showed there was no economic growth in the three months from July to September.

The ONS described the economy as “broadly flat” and the rise as the economy growing “slightly”.

What parts of the economy are growing and which aren’t?

Doing well are pubs, restaurants and IT companies, said the ONS’s director of economic statistics Liz McKeown.

New commercial developments meant there was growth in the construction industry, Ms McKeown added.

The services sector grew “a little” but all this was partially offset by the accountancy sector and business rental and leasing.

Also pushing down the growth rate were manufacturing businesses and oil and gas extractors.

Why does it matter?

The government has pegged many of its spending and investment plans on economic growth. It needs growth to meet its political pledges and spending commitments.

But the economy is no bigger now than when the government assumed office in July.

Prices are expected to rise in April when water and electricity bills are increased again and employer taxes go up meaning there’s an expectation of inflation increases.

With more cost pressures on consumers, there are fears growth could be even more illusive than at present. A period of stagflation is feared at that point.

Chancellor Rachel Reeves admitted to Sky News the economy was growing “albeit modestly”.

When pointed to the idea growth has been snuffed out since Labour came to power Ms Reeves said the truth is the British economy had “barely grown” for the last 14 years.

Growth “takes time” and with investment and reform, she’s “confident we can build our economy and make people better off”.

Business

Spending calculator: Which prices are rising and falling fastest?

Published

1 day ago

January 15, 2025

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Spending calculator: Which prices are rising and falling fastest?

Inflation unexpectedly fell to 2.5% in December, following two consecutive months of increases.

Today’s inflation rate is above the Bank of England’s 2% target but lower than the forecast of 2.6% by economists.

This means that prices are still rising but at a slower pace than before.

But how does all of this affect the cost of groceries, clothing and leisure activities? Use our calculator to find out.

Which prices are increasing fastest?

Hair gel was the item with the largest price increase, with prices for 150-200ml rising by more than a third from £3.04 to £4.08.

The cost of olive oil also continues to rise. Prices for 500ml to one litre have risen from £7.40 to £9.11, an increase of 23%.

Olive oil has consistently had high price increases and experts have put that price rise down primarily to poor olive yields due to last year’s heatwaves in southern Europe.

However, they expect a significantly better harvest in the 2024-25 season, thanks to significant rainfall in Spain. The harvest could be double the size of last year’s, which may lead to lower prices in the coming months.

Food and drink products are responsible for seven of the 10 biggest increases since last year.

Top five price rises:

• Hair gel (150-200ml): up 34%, £3.04 to £4.08
• Olive oil (500ml-1litre): up 23%, £7.40 to £9.11
• Large chocolate bar: up 23%, £1.73 to £2.12
• White potatoes (per kg): up 20%, 74p to 89p
• Iceberg lettuce (each): up 20%, 82p to 98p

Overall, 45 of the 156 types of food and drink tracked by the ONS have actually become cheaper since last year.

Crumpet lovers have reason to celebrate. Prices for a pack of 6-9 crumpets have dropped by 9%, while another breakfast favourite, peanut butter, has seen an 8% drop.

Overall, 139 out of the 444 products in our database are cheaper than they were 12 months ago.

Top food price decreases:

• Pulses (390-420g): down 12%, 76p to 67p
• Crumpets (pack of 6-9): down 9%, £1.01 to 92p
• Peanut butter (225-350g): down 8%, £2.18 to £2.00
• Mayonnaise (390-500g / 420-540ml): down 7%, £2.20 to £2.04
• Canned tomatoes (390-400g): down 7%, 70p to 65p

Among non-supermarket items, kerosene has seen the largest price drop, falling by 17%.

What is the effect of long-term inflation?

The price changes described above compare the cost of items to where they were a year ago.

However, inflation has now been at high levels for an extended period of time.

The war in Ukraine, COVID, Brexit, and other supply chain pressures have all contributed to spiralling costs in recent years.

Inflation reached a 40-year high of 11.1% in October 2022.

While the headline inflation figure has come down markedly, any amount of inflation means that prices are still rising, and building on already inflated costs.

We’ve compared the costs of shopping items with what they were three years ago to see what the cumulative impact of inflation has been.

The biggest price rise for groceries over that time has been for olive oil (500ml to one litre), which has increased nearly two-and-a-half times (150%), from £3.64 to £9.11 in the past three years.

Iceberg lettuce is up by four-fifths, with one costing 98p now compared with 54p in December 2021.

Use our calculator to see how much prices in your shopping basket have risen in total since three years ago.

Who is worst affected?

Richard Lim, chief executive of Retail Economics, says: “It’s the least affluent households that are going to see much higher rates of inflation as they spend more of their income on food and energy.”

We’ll continue to update our spending calculator over the coming months so you can see how you’ll be affected.

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Methodology

The ONS collects these prices by visiting thousands of shops across the country and noting down the prices of specific items. There are upwards of 100,000 prices published every month, from more than 600 products.

The items that form the “official shopping basket” change each year to reflect how the purchasing habits of the population have changed. For example in March 2021, after a year of the pandemic, hand gel, loungewear bottoms and dumbbells were added, while canteen-bought sandwiches were among the items removed.

Where there aren’t the exact equivalent items available at a survey shop, ONS officials pick the best alternative and note that they’ve done this so it’s weighted correctly when the averages are worked out.

Shops are weighted as well, so the price in a major chain supermarket will have a greater impact on the average than an independent corner shop.

We will be updating these figures each month while the cost of living crisis continues.

During the pandemic, more of the survey was carried out over the phone and work is ongoing to digitise the system to be able to take in more price points by getting data from supermarket receipts, rather than making personal visits.

Data journalists: Daniel Dunford, Amy Borrett, Ben van der Merwe, Joely Santa Cruz and Saywah Mahmood
Interactive: Ganesh Rao
Design: Phoebe Rowe, Brian Gillingham

The Data and Forensics team is a multi-skilled unit dedicated to providing transparent journalism from Sky News. We gather, analyse and visualise data to tell data-driven stories. We combine traditional reporting skills with advanced analysis of satellite images, social media and other open-source information. Through multimedia storytelling, we aim to better explain the world while also showing how our journalism is done.