After months of coal shoveling by politicians, activists and the general public, supermarkets have been cleared of speculation.
Competition and amp; The Markets Authority (CMA) said on Thursday it found no evidence of so-called “greed” from national supermarkets as it disclosed the results of the first phase of its investigation into high food and drink prices.
Supermarkets have been accused of unfairly overpricing essentials during a cost-of-living crisis, using inflation as a cover to raise prices above what is necessary. As prices rose, so did the anger.
Retailers have consistently professed innocence and have begun cutting prices on a range of products since the beginning of the year, including bread, eggs and milk, as the cost of some ingredients and commodities fell.
But the image of greedy retailers accumulating profits is hard to shake.
Earlier this month, the CMA ruled that Asda, Morrisons, Tesco and Sainsbury's inflated drivers' fuel prices by £900m in 2022 alone as it completed a year-long separate investigation into fuel prices at gas stations.
However, while there are good reasons for consumers to be unhappy with fuel prices, the CMA found that concerns about food and beverage prices were misplaced. Companies have refrained from fully passing on the impact of price increases to consumers.
Margins fell from an average of 3.2% to 1.8%, while operating profits across the sector fell by 41.5%
. Supermarket profits fall despite price increases. Aggregate Industry Operating Income
The CMA said fierce competition among various retailers means that it would be difficult for any of them to achieve much higher margins without sending shoppers into the arms of competitors.
Tesco CEO Ken Murphy said in April: “The key point I would like to point out… is that our profits have fallen 7% this year, and this despite the fact that we have reached a record level of cost savings. For me, this is a very important proof that in the past financial year we have worked very hard for both clients and colleagues.”
Pressure to keep prices as low as possible came from rebellious discounters Aldi and Lidl, who stole customers with promises of lower prices. Last year, Aldi overtook Morrisons to become the UK's fourth largest retail chain by market share.
Kien Tan, director of retail strategy at PwC, said: “The UK is a particularly competitive market. The competition was there even before Aldi and Lidl came in because we had the Big Four. And we also had others biting on the edges – Co-op, convenience stores and all that.
“In addition, we have Aldi and Lidl. And then… B&M, Home Bargains and Poundland – you have retailers and half of their sales are in grocery categories. Buyers go to all these places. If you want to stay in business, you have to be competitive.”
In addition to outright price increases, supermarkets have also faced issues related to the time it takes for wholesale price drops to be passed on to customers through lower shelf prices.
Shoppers spend more but buy less – food retailers' sales compared to how much they sell 2019 = 100
Sir Ed Davey, leader of the Liberal Democrats, said in April that he was concerned about supermarkets' “rocket and pen” approach to prices: they raise prices when costs rise, but lower them much more slowly when costs fall. .
Much of this has to do with the structure of the market. Some ingredients and goods are bought on fixed-term contracts, which means that prices are set in advance. If a contract was entered into when prices were high, food suppliers may not see the effect of the price drop until they can renegotiate the contract.
The managing director of one supermarket food company says, “You can be stuck with a price this high or low on anything for up to a year.”
However, the CMA is concerned that supermarkets could still exploit this backlog to increase profits.
It cited “some signs” that grocers are regaining their margins as wholesale prices of ingredients, including dairy and wheat, decline, and warned that supermarkets should take advantage of lower wholesale costs by lowering on-shelf prices.
It states: “The cost of retail inputs is likely to fall, or at least rise more slowly, as lower energy and commodity prices proliferate and consumers do not always have a clear idea of what the 'right' price should be in the context of high but falling food price inflation.” prices are not displayed as clearly as possible and it can be difficult for shoppers to figure out how to get the best value for money.
Examples of missing or miscalculated unit prices in supermarkets have been found, such as some tea bags are priced per 100g and others are priced per package, making it difficult to identify and compare the best offers.
However, the focus of the watchdog in the future will be on food and beverage suppliers, which will likely include giants such as Unilever, Heinz and Mondelez, as well as companies that produce goods under their own brands .
While supermarket margins fall to around 1%, large food and beverage companies often achieve margins of over 15%.
This has caused friction with supermarkets as price tensions rise. Heinz suspended shipments to Tesco for several weeks last summer.
The CMA selected several product categories in which it wants to test whether the “broader supply chain is working well for consumers,” including baby food, bread, pet food, milk and mayonnaise.
Alan Jope, who stepped down as Unilever boss, previously insisted the company was not benefiting despite a 10% price increase earlier this year.
However, suppliers have not experienced the same level of scrutiny as Tesco and Sainsbury's. This is partly due to the fact that many of the largest companies do not provide a breakdown of their financials at the UK level, so getting an accurate picture is difficult.
One industry source says: “Retailers have been frustrated for some time by the scrutiny they are getting and overlooking other parts of the supply chain where profitability is higher.”
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