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Politicians like to show that they are taking action — even when little can be done. Witness the chatter about profiteering now dogging Europe’s grocers. For the most part, this does not stack up.
With food inflation in the double digits across Europe, it is easy to see why governments would like retailers to cut prices.
This week, supermarket executives from Tesco, Sainsbury’s, Asda and Morrison’s defended themselves from accusations of profiteering in a UK parliamentary hearing. Sweden’s competition authority has expressed concerns about profitability within the food value chain. Earlier this month, France struck a deal to cut the price of staples.
Governments are right to be wary. Inflationary environments can hide a multitude of sins, especially in sectors where competition is lax.
Swedish egg-packing may be one of these. Operators have been feathering their nests with margin increases, driving the price up a whopping 32 per cent in the year to February. More broadly, a first-quarter gross operating surplus for UK plc as a whole rose by 23 per cent, an analysis by Saltmarsh Economics suggests. That implies fattening margins, at least in some areas.
Yet food retail does not seem to be one of them. Tesco and Sainsbury’s are on track for full-year operating margins of 4 and 3 per cent respectively, says William Woods at Bernstein, in line with last year. Returns in the sector are barely above the cost of capital. Traditional retailers are inflating prices less than discounters Aldi and Lidl, according to Barclays analysis.
European peers are similar. Margins at Ahold hover around 4 per cent. Even Sweden’s private ICA Gruppen, with a chunky 50 per cent market share, made a 4 per cent operating margin in the first quarter.
Rather than benefiting from rampant cost increases, grocers get squeezed more. While headline food inflation is cooling, labour costs still play catch-up. The sector may find that it needs to pay higher wages, just as it runs out of room to increase prices.
