The UK Big 4 supermarkets have been in the news this week for allegedly profiteering from the cost of living crisis as they are said to have an influence on the higher prices customers are facing at the tills.

However, although government select committees were called with the bosses of these supermarkets to discuss the supposed underhand tactics I think a lot of this criticism may be unfounded (or weak at least).

Supermarkets operate in an incredibly competitive, price sensitive (price elastic for the business people among you) market meaning that needlessly increasing the price likely wouldn’t benefit their businesses as it would actually lead to a decrease in revenue.

Some have suggested that the supermarkets have been colluding to artificially increase prices beyond what is needed to cover costs and make a profit to try and capitalise on the inflationary economic conditions.

In reality, the evidence seems to be to the contrary. I suspected that this supermarket pricing situation was being exaggerated so I calculated the gross and operating profit margins for big 4 supermarkets (Asda, Sainsbury’s, Tesco and Morrisons) in the last 10 years. Here are the graphs:

As you can see, both Tesco and Sainsbury’s (those with the most recent financial statements) took a hit to their profits in the last year where the cost of living crisis was at its peak.

The increase in prices is partially to cover the additional costs associated with supplying and running a supermarket due to the impact of inflation on prices (as shown by the fall in both profit margins) and also what is mandated by large suppliers.

Suppliers who are established brands (such as Heinz, Nestle and Procter & Gamble) often dictate prices to supermarkets to some extent. These businesses are reporting higher profits even though the supermarkets are not suggesting that they are the real driver behind some of the high prices seen at the tills.

In conclusion, although the supermarkets are still generating sizeable profits (Tesco made over £1.5bn in 2023) they are crucial to the functioning of the UK economy and society and are, in my view, not excessively capitalising on the current situation.

Do comment your thoughts below.