The Times – 2nd July 2023

Our supermarkets seem short of friends — at least within the Palace of Westminster. Rishi Sunak has said that the cost of the weekly shop “has gone up too much in the past few months … we’re looking at the supermarkets, making sure that they’re behaving responsibly and fairly when it comes to pricing”.

Accordingly the chancellor, Jeremy Hunt, has urged the Competition and Markets Authority to look into the matter. The leader of the Liberal Democrats, Ed Davey, has already made his mind up, declaring the supermarket firms to be “raking in eye-watering profits” and “profiteering”. And last week leaders from the industry were subjected to a (rambling and ill-directed) interrogation by MPs from the Commons business and trade committee.

On Monday’s edition of Newsnight, the BBC2 programme’s invariably well-informed political editor, Nicholas Watt, revealed that his sources in government told him they were urging the CMA to consider using its “sweeping powers” to punish exploitative supermarket pricing and that it “may need to make a significant intervention”. And the reason for this? “There is a grim mood … Conservative MPs are getting the jitters.” So it’s about politics, not economics. Or, in the logic of Yes Minister: something must be done. This is something. Therefore we must do it.

My bet? Nothing will be done, because in reality the government and the CMA know that the food retail business in this country — almost entirely down to the supermarkets themselves — is intensely competitive; more so, for example, than in the rest of Europe. Even if we need to thank the arrival of the German discount chains Lidl and Aldi for keeping our established supermarkets honest, so to speak.

As the head of Assured Food Standards, Christine Tacon, observed last week in response to Watt’s Newsnight report: “Discounters are leading the charge on prices, and others are following them so as not to lose market share. That’s what you get in a truly competitive market. People may not want to hear this, but [in Britain] we have some of the cheapest food.”

In this context it’s instructive to see what happened to Tesco a decade ago. It had been seen as an invincible behemoth, even described as “Tescopoly”. But when Aldi and Lidl arrived, it resisted cutting prices. The result was that it lost over a million customers in a single year, its own profits foundered and its chief executive, the unfortunate Philip Clarke, was ignominiously dumped.

It was only after he left that it became the consumer champion again, for example by winning, last year, a very public battle against Heinz when it refused to stock the firm’s best-known products on the grounds that the American food giant was being too greedy on pricing. Heinz backed down, to the benefit of British purchasers of its tomato ketchup and baked beans. In any case, all the big UK supermarkets have developed their own much cheaper versions of such products for those who can’t easily afford the premium prices of the original.

Having returned to its core values (its founder, Jack Cohen, to whom my paternal grandfather supplied tea, had the slogan “Pile it high, sell it cheap”) Tesco remains the most profitable supermarket business. Yet its profit is about 4p for every £1 of sales — its latest annual figures show a margin of 3.8 per cent. The figure for all the other supermarkets is lower still. Aldi’s most recent declared returns show a profit of £35 million on sales of £13.5 billion, a profit margin, if it can be called that, of about 0.25 per cent.

As The Guardian’s business columnist Nils Pratley has observed, the industry’s profitability numbers are “miles below what the global food and drink manufacturers achieve. Unilever, the global Dove to Domestos titan, has just reported 16 per cent [profit margin]”. In fact there is no UK business sector that has such low profit margins as the food retail industry. Utilities tend to have margins of about 10 per cent, for example, and mobile phone operators 15 per cent.

Obviously, it would be possible for the supermarkets to absorb more of the increase in their costs (not just in the food chain from fertiliser upwards but also their vast energy bill in the freezing process). However, most of them are publicly quoted companies. Not only do they have dividends to pay, chiefly to pension funds; no one is obliged to buy their shares, and if they suffer a flight of capital, then how would they be able to pay their own hundreds of thousands of employees, let alone fund the technological improvements of which the biggest beneficiaries have been the consumers — us?

This is the process that has, in the postwar period, seen the average British family’s food bill fall from about 30 per cent of its disposable income to 10 per cent. It is true that food costs take a higher proportion of income among the poorest families, but by the same token they have been the biggest beneficiaries of the historic downward trend in food costs (and will at least be grateful for the government’s sensible decision earlier this month to postpone for a further two years its mooted ban on “Buy one, get one free” deals on products with high fat or salt content).

I am not claiming the supermarkets are in any way altruistic. Their ultimate purpose, as for all businesses, is to make profits. But they are rooted in communities; good citizens, if you like. And their endeavours during the height of the coronavirus crisis, in which they and their employees managed to maintain their quality of service and reliability in the most trying of circumstances, has been too easily forgotten.

And I am still reeling from the discovery that in February last year, even before the rocketing of food prices (principally because of the war in Ukraine), the pollster Opinium reported that 70 per cent of respondents — and 65 per cent of Conservative voters — would support “price controls on food”. Thousands of years of history, from the emperor Diocletian to modern-day Marxist-led Venezuela, has demonstrated that this leads to food shortages.

In the face of such invincible ignorance, it is perhaps not surprising that politicians say the things they do about “profiteering”, or that they will somehow act to make the supermarkets “more responsive” to the consumers’ needs — as if the firms themselves didn’t have the biggest interest of all in maintaining the goodwill of their customers.

It almost makes me want to make a most undemocratic counter-suggestion: how about the politicians and civil servants step aside and let the supermarkets run the country? Imagine if government departments were even half as efficient as Tesco or Sainsbury’s. I’d vote for that.

Dominic Lawson

Original Article