Operating profits in the grocery retail industry dropped by over 41%

In the midst of rising food and grocery prices, the Competition and Markets Authority (CMA) has reassured the public that competition is operating effectively to keep price increases as low as possible and that people can simply and confidently shop about and compare prices.

The CMA's recent two-month assessment gave insight into the dynamics of retail competition, focusing on major supermarkets like Asda, Morrisons, Sainsbury's, Tesco, and discounters Aldi and Lidl.

Although food price increases are at historically high levels, evidence gathered by the CMA so far indicates that competition difficulties are not to blame. Operating profits in the grocery retail industry dropped 41.5 per cent year-over-year in 2022/23, while average operating margins fell from 3.2 per cent to 1.8 per cent. This is because retailers' costs are rising faster than their revenues, indicating that increased costs are not being passed on to customers in full.

Consumers themselves are actively seeking the best offers and turning to low-cost shops like Aldi and Lidl, leading to these retailers gaining market share, and thus, constraining the ability of other supermarkets to raise prices without losing business.

As some inputs begin to decline, there are some indications that supermarket retailers intend to begin recovering their profit margins. The CMA will closely monitor this in the coming months to ensure that people benefit from competitive prices as input costs decline.

Furthermore, the CMA's investigation is set to prioritise specific product categories and the entire supermarket supply chain in the next phase of its work, aiming for a comprehensive understanding of competition and pricing dynamics.

This will be a major priority for the business's next phase of work. The current update lists ten product categories (including milk, bread and baby formula) that need further investigation in order to acquire a better understanding of competition and pricing dynamics.

Unit pricing gives vital information to enable individuals to easily evaluate prices at a time when shoppers are looking for the most competitive deals.

The study looked at 11 supermarkets and seven variety retailers (stores that sell homeware and household products with a limited selection of groceries) in the UK.

The CMA has also scrutinised unit pricing laws to help customers easily compare prices. In its study of 11 supermarkets and seven variety retailers in the UK, compliance issues were found in all the retailers examined. Some variety shops were particularly less compliant, partly due to variations in sellers' procedures and interpretations allowed by unit pricing laws. This inconsistency and lack of transparency make it challenging for shoppers to identify the best deals.

To address these concerns, the CMA has recommended reforms to unit pricing laws and urged retailers to provide unit pricing information more clearly, especially for products on sale. The CMA will conduct consumer research on the usage of unit pricing in autumn 2023 and will take enforcement action against non-compliant retailers.

Sarah Cardell, Chief Executive of the CMA stressed the importance of helping people easily find the best prices, especially during times of financial struggle for many families. The CMA has already written to several retailers to enforce improvements in price displays.

Cardell noted a discovery they made that not all retailers display prices as clearly as they should, which may impair people's ability to compare product prices. She said they have written to several retailers, advising them that they must make the necessary modifications or face enforcement action.

The CMA also urged the government to implement reforms because the law itself needs to be tightened here. The CMA further investigated how competition works in the broader grocery retail business. Overall, the evidence points to a healthier picture than in the fuel industry, with greater pricing competition among all supermarkets and discounters.

"In the next phase of our research, we will look at competition and prices throughout the supply chain for the product categories we've identified. We'll also keep an eye on the situation to guarantee that competition stays effective when input costs decline," the CMA said in a statement.

Gareth Mills, partner at City law firm Charles Russell Speechlys, stated that the current cost of living crisis has led to competition regulation and politics becoming increasingly intertwined, with the CMA's investigatory findings and subsequent ministerial announcements to the press threatening greater regulation or oversight becoming almost weekly occurrences.

Mills stressed that supermarkets should expect increased scrutiny and regulatory oversight as political parties of all stripes seek to position themselves as consumer protectors.

As rising prices continue to be felt by citizens across the country, Mills emphasised the role of regulators in ensuring that competition acts in the best interests of consumers is likely to become more prominent in the coming months.

Helen Dickinson, Chief Executive of the BRC, responded to the CMA report by acknowledging the competitive and efficient nature of the grocery market. She noted that retailers have been working hard to support customers while absorbing rising supply-chain costs, resulting in significantly reduced operating profits. Dickinson expressed that supermarkets will consider the CMA's unit pricing proposals to maintain their commitment to helping customers cope with the cost of living problem.