Supermarkets have been cleared of profiteering during the cost of living crisis, in a report by the competition watchdog released today.
The Competition & Markets Authority launched a probe in May, following accusations from across political parties that supermarkets were deliberately keeping prices high to bolster their margins. It said it had found no evidence of weak competition in the sector.
However, the body said there were “some signs” of supermarkets seeking to rebuild their profit margins. It said it was now launching a second phase of the probe, which would look at competition across the supermarket supply chain and focus on a raft of key product lines to ensure competition was working properly on behalf of consumers.
The next stage of the probe will also look at whether large branded suppliers hold too much sway in negotiations compared with supermarket own-label suppliers.
The report concluded that despite food price inflation standing at historically high levels, its evidence suggested this was not down to competition. It pointed to operating profits in the retail grocery sector falling by 41.5% in 2022/23, compared with the previous year, while average operating margins fell from 3.2% to 1.8%.
It also found consumers were continuing to switch to the discounters to find lower prices, suggesting supermarkets were unable to keep prices artificially high without losing business.
However, the report, based on interviews with over 50 retailers, suppliers and trade groups, found that supermarkets were now looking to increase operating profits as food inflation showed signs of slowing, despite the restrictions imposed by competition from Aldi and Lidl.
Some retailers made price comparisons difficult for consumers
It said it would be “carefully monitoring” the sector in the months ahead. It would also explore the power of larger suppliers of branded goods, which it said supermarkets had less ability to “bargain with” because of their size, it added.
The CMA announced it had chosen 10 “indicative products” – including baby formula, baked beans, bread, chilled desserts, lemonade, mayonnaise, milk, petfood, poultry and ready meals – to investigate more thoroughly to ensure adequate competition in the sectors.
These had been chosen because of inflation levels, and the importance of the products, rather than because of specific concerns, it added.
Meanwhile, a separate review into unit pricing by the CMA today set out recommendations to the government to reform legislation, to help shoppers spot the best deals.
It found retailers using inconsistent measurements to unit-price comparable products within their stores and online made it too difficult for consumers to compare prices.
Today’s report also suggested changes ahead in supermarket pricing policies when it came to loyalty.
Whereas a raft of major retailers have adopted Aldi price match schemes, the report quoted one unnamed supermarket that described them as “a method of generating publicity” for prices that would be adopted anyway.
The CMA said supermarkets, in their evidence, had also predicted that the series of ‘price lock’ campaigns that have been run by several supermarkets in recent years were likely to be “phased out” to allow price reductions as input costs began to fall.
CMA CEO Sarah Cardell said: “With so many people struggling to feed their families, it’s vital that we do everything we can to make sure people find the best prices easily.
The grocery market remains as competitive and efficient as ever
“We’ve also looked at how competition is working across the grocery retail market more widely. The overall evidence suggests a better picture than in the fuel market, with stronger price competition between all of the supermarkets and discounters. In the next phase of our work, we will examine competition and prices across the supply chain for the product categories we’ve identified. We’ll also continue to monitor the situation to ensure that competition remains effective as input costs start to fall.”
BRC CEO Helen Dickinson said: “It confirms that despite the challenges caused by rising costs throughout the supply chain, the grocery market remains as competitive and efficient as ever.
“Indeed, retailers have gone above and beyond to try and protect consumers from rising costs in the supply chain, with operating profits falling significantly to below historic levels.
“As noted in the report, supermarket margins have remained extremely tight as they try to support their customers and absorb the worst of the rising costs in the supply chain. In the last few months, some of these pressures have begun to ease, such as with global commodity prices and the weakness of the pound, and we are now seeing competition driving down the price of key staples.
Tom Smith, former CMA director and now a competition lawyer at Geradin Partners, said the report was a major victory for supermarkets.
“The CMA doesn’t say it explicitly, but essentially it is congratulating the grocery sector for their approach during the cost of living crisis.
“The CMA says that competition is working well, profit margins are down and the discounters’ market shares are up. This is as close to a hearty slap on the back as the CMA can give out.”
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