- Food giants to blame for some food price hikes
- Supermarkets margins remain low
The battle over who to blame for soaring food prices is heating up after the Competition and Markets Authority (CMA) accused suppliers of branded products of fanning the inflationary flames. The large grocery chains came under pressure from Downing St earlier in the year as food prices soared, but the CMA now says supermarket margins have shrunk, and suppliers further up the supply chain such as Kraft Heinz and Unilever (ULVR) are profiting.
Food inflation reached an eye-watering 19.2 per cent in March according to the Office for National Statistics (ONS), and was still at 10.1 per cent in October. Month-on-month prices were flat in the most recent numbers, however.
The CMA said in a report that branded suppliers had raised prices at a higher rate than costs, noting that "over the last two years, around three-quarters of branded suppliers in products such as infant formula, baked beans, mayonnaise, and pet food have increased their unit profitability and, in doing so, have contributed to higher food price inflation".
Consumers have reacted swiftly, downtrading to own-label products, which make up half the items on regular supermarket shelves. Further, they have shifted to budget supermarkets, evident from the top-line performances at German discounters Aldi and Lidl, which have been posting significantly more rapid sales growth than the listed supermarkets.
A loss of volume caused average net branded manufacturer margins to fall from around 15 per cent in 2020 to under 12 per cent in 2022, the CMA said, based on its analysis of 31 suppliers. Own-label margins fell from around 4 per cent to under 2 per cent over the same time period.
One area where there is not a lot of competition is infant formula, with a lack of own-brand alternatives meaning that UK consumers rely on products from Danone (FR:BN) and Nestlé (CH:NESN). The CMA said it would examine barriers to entry and expansion in the market.
The CMA's latest report comes after its July statement on grocery retail competition found that supermarket margins had fallen despite widespread debates about profiteering and "greedflation". That report said that average operating margins at the 11 retailers the CMA looked at had fallen from 3.2 per cent to 1.8 per cent year on year.
The regulator is now turning its attention to supermarket loyalty schemes, and is considering the impact on grocery competition of lower prices being available for those signed up to schemes. Tesco (TSCO) and J Sainsbury (SBRY) have gained market share this year as consumers have used the Clubcard and Nectar card schemes to help with cost of living pressures.
Shore Capital head of consumer research Clive Black argued that the CMA's review had largely reported obvious trends and "unsurprisingly found that aggregate UK supermarket margins were falling and generally low, that is sub-5 per cent". He added that Aldi and Lidl's 1-per-cent-or-less margins were unsustainable without outside backing.
Meanwhile, continuing cost pressures mean a challenging pricing environment for food sector players.
Director of food and sustainability at the British Retail Consortium, Andrew Opie, said that food retailers are being "challenged by rising costs, from hundreds of millions in additional business rates, to higher labour costs from the rising national living wage".
