I’ve recently read that UK food prices continue to rise despite a decline in wholesale costs.
In April 2023, according to the British Retail Consortium, UK food inflation rose to 15.7% compared with April 2022.
That makes our food inflation the highest in Europe. So, what’s happening?
There are, of course, plausible stories that explain the situation. For example, the claim that the cost of UK food shopping should start to come down in the next few months as the cut to wholesale prices and cost pressures filter through.
We’ll only know whether that’s the case when we get there but it does feel like the can is being kicked down the road. What if prices don’t reflect the easing of these pressures fully? Will we remember the BRC’s observations in many months’ time? Of course not, we’ll be fighting against other pressures by then, too busy dealing with the latest impacts on our beleaguered income.
If supermarkets are simply passing on to consumers additional cost increases further down the food supply chain, why have their profits generally increased?
I can posit several reasons but let’s start with a conversation I recently had with an egg farmer.
According to this worthy person, when I raised the egg shortage issue and the terrible impact of Bird Flu, they chuckled. Not the reaction I was expecting.
Their claim was that there never was a shortage. On their farm (usually a supplier to one of the major supermarket multiples) there were more than enough eggs to meet demand. The bigger issue was that the supermarket client, they claim, was unwilling to pay a reasonable price for eggs, taking into account increased farming costs. It was, they claim, simply loss-making to supply the required stock.
So, without wishing to diminish in any way the terrible effects of Bird Flu, could it be that supermarkets are so unwilling to take a margin hit that they would rather take lower stock levels and hang the consumer consequences? Or am I being too harsh? After all, supermarkets are a big target and therefore the easiest to hit.
At first, I didn’t quite believe this worthy, for reasons that will become clear later, but thinking it through more carefully, I did wonder if it might be a case of short-term pain for long-term gain.
After all, what else can farmers do? Changing a farm’s core operations takes time and money. I know a little about Bramley apples, for example. A new orchard will not generate income for around 3 years and only be really likely to hit its stride around year 7. Farm planning is long-term planning.
So, the logical conclusion is that, over a barrel, farmers can do little other than comply. Kicking against the traces is short-term thinking at best, business-destroying at worst.
Turning back to the supermarket profit situation I wonder if the increasing levels are due to a very simple mathematical metric?
In my experience, the driving principle in supermarket negotiations is their maintenance of a particular margin percentage, variable though that might be by product category.
The key word is, of course, percentage.
If supermarkets were to focus on an absolute margin as opposed to a percentage, would the situation be a very different one? As costs throughout the chain increase, a percentage added to those costs delivers exponential gain. If the margin were an absolute that wouldn’t be the case.
Of course, it’s not that straightforward – supermarkets are experiencing cost increases too, not least to the cost of all the energy required to power lighting and operate freezers and fridges. They rightly deserve to cover their increased costs and make a profit.
However, it’s the disparity between past profits and current profits that rings alarm bells.
Could it simply be that the escalation effect of the percentage margin means that achieving a fair profit is now misaligned with achieving fair pricing.
Now that’s food for thought.
