Bashing supermarkets is popular – and often the chains deserve a whack. Memories are fresh of how big food retailers had to be shamed during the pandemic into returning the business rates relief that was intended for shopkeepers whose doors, unlike theirs, were shut on government orders. But here comes an accusation of greed that looks wide of the mark: grubby profiteering during the food inflation shock.
Ed Davey, the Liberal Democrat leader, gave the profiteering thesis a whirl last week when he claimed wicked supermarkets were “raking in eye-watering profits” and called for the Competition and Markets Authority to investigate. Which accounts is Davey reading? Evidence of super-normal profits – which is what one assumes he means – is hard to spot in the audited numbers of Sainsbury’s and Tesco, the two biggest operators.
Rather than being eye-watering, profit levels are historically normal if one looks over several years. Ignoring distortions from property transactions, store writedowns, write-backs and suchlike, the tale is one of returns going roughly sideways.
Here’s the read-out of Sainsbury’s pre-interest underlying operating profits from retail, probably the most useful measure in this context, starting with the latest 2022-23 financial year and going backwards: £926m, £1bn, £713m, £938m and £981m. The dip in the middle was the pandemic-afflicted year of extra costs (just not enough extra to deserve relief from business rates) but otherwise the notable feature is the tightness of the range. In fact, Sainsbury’s was making more annual profit from groceries a decade ago.
At Tesco, the recent picture is similar. The market leader also reported a 7% fall in adjusted retail operating profits for the latest financial year – to £2.3bn in the UK and Ireland. And, like Sainsbury’s, its formal “outlook” statement to investors predicted a “broadly flat” year ahead.
Some will argue that the sums here are still enormous and that supermarkets should absorb more financial pain on behalf of customers when food inflation is running in high-teen percentages. Fair enough. But claims of out-of-the-ordinary profiteering normally hinge on metrics such as profit margins and return on capital employed (ROCE). On neither yardstick are Sainsbury’s and Tesco obviously coining it compared with the past.
Sainsbury’s retail profit margin was 3.4% pre-pandemic in 2019-20 and 2.99% last year. Tesco has just turned in 3.8%, compared with the 5% it used to aim at. These numbers are miles below what the global food and drink manufacturers achieve. Unilever, the global Dove-to-Domestos titan, has just reported 16%.
As for ROCE, Sainsbury’s achieved 7.6% last year, which conventional financial wisdom would deem pathetic when general inflation is 10%. The ratio helps to explain why shares in Sainsbury’s, even after a better run over the past six months, stand roughly where they were at the start of this century – yes, century.
Long-term investors will have enjoyed a steady stream of dividends over the past 23 years, which isn’t captured in the progress of the share price, but you get the picture. Supermarkets tend to be plodding income investments, at least since Aldi and Lidl arrived in the 1990s to perform the essential role of price policemen. Nothing in the latest financial reports suggests the market has suddenly become less competitive.
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Of course, there could be pockets where supermarkets are pushing things on price. Some economists point to milk as a market where something odd is happening between the farm gate and the shelf. On the other hand, a grumble from a different direction is that supermarkets have boosted margins from petrol and diesel (the CMA is investigating that charge) to limit price inflation in food. Granular details are hard to see from outside. In their absence, overall margin numbers are probably the best guide to the big picture.
None of which is to deny that the rate of food inflation is shocking and hits the poorest hardest because the effects of commodity-based hikes are most acute at the budget end. And there’s a legitimate debate to be had about whether big chains are making their lowest-priced essential products sufficiently available in their smaller stores – but that’s a different claim to the one of general profiteering.
And, to be clear, it seems entirely possible that “greedflation” may be happening elsewhere in the economy. That worry definitely deserves investigation by central bankers who should spend less time berating workers for asking for pay rises. It’s just that big branded companies and global agriculture titans look more likely culprits in the food arena than the UK’s big supermarkets on 3%-ish margins (and others on less).
Davey, to be fair, also cast his net of suspicion across “food multinationals”. But, unless he thinks he has uncovered a big accounting scandal of profit understatement, he should probably leave UK supermarkets out of it.
