Supermarkets in the spotlight: “ruthless” or trapped by margins?

The escalation of food prices, at historical highs, has put supermarkets in the eye of the hurricane. The harshest criticism from the political arena has been launched by Unidas Podemos: the general secretary of the government’s partner party and Minister of Social Rights, Ione Belarra, directly blames the large distribution companies for taking advantage of the increases to “make gold by cost of the economic crisis derived from the war in Ukraine”. In an act last Saturday in Zaragoza, Belarra charged directly against Mercadona and Carrefour, leaders in market share, and called Juan Roig, president of the Valencian group, a “ruthless capitalist.” His statements have caused discomfort among some members of the Executive, but above all they have outraged the sector, which does not want to become the scapegoat for price increases and which ensures that its margins are very tight (between 1% and 3% about the sales).

“Entrepreneurs generate wealth and well-being,” Roig said Tuesday at an economic forum in Valencia after Belarra’s words. The controversy surrounding food prices has been growing as they have been rising. Already in September 2022, the Minister of Labor, Yolanda Díaz, proposed to supermarkets to prepare a basic shopping basket with affordable prices. The companies responded that they were containing prices to the maximum and the National Commission for Markets and Competition (CNMC) warned Díaz that price fixing is illegal. After a meeting with the sector, the proposal came to nothing. Now, Belarra is targeting businessmen directly and raising the prices of a series of foods to the levels prior to the start of the war in Ukraine. What is true in his accusations?

skyrocketing prices

The rise in food prices started at the end of 2021, driven by the rise in fuel and raw materials, and intensified from January 24, 2022 with the Russian invasion of Ukraine. The war caused shortages of cereals and vegetable oils, in addition to triggering electricity and, consequently, production, transport and refrigeration costs for the food industry. The CPI for food closed December with a rise of 15.7% in Spain, a record in a country where prices had remained stable since 2002, even falling during the consumer crisis that broke out after the debt crisis. 2008. In the rest of the euro area the trend has been similar, with an average annual rise in December of 16%. In France prices grew by 12.10% annually, in Italy by 13.6% and in Germany by 20.7%.

It’s not just retail prices that have gone up. In the last year, prices in the field have been rising: 85% eggs, 63% milk and 61% virgin olive oil. The increase in the cost of fertilizers, feed and energy are behind the rises. The forecasts are not very optimistic: the World Bank has warned that, since energy will remain at high levels, price tensions may continue, to a greater or lesser extent, until 2025.

margins

How do increases affect business margins? Supermarket chains present their margins based on how much profit they represent on sales and these have been very limited after, in recent years, before the inflationary escalation, companies waged a price battle to attract customers. The accounts published by the main companies corresponding to 2021 (the latest annual available) indicate that that year, when prices began to rise as of September, the average profitability was 2.3%, according to data from the sector. In the case of Mercadona, the percentage stood at 2.7% and that of Carrefour at 4.6%. In total there were sales of 75,000 million euros and profits of 1,744 million. Lidl’s margin was 3.1%.

“In an inflationary context, the possibility of expanding this margin is reduced as a result of competition,” they say in distribution sources. Minister Belarra maintains that companies are earning more because prices rise. Meanwhile, the sector responds that the rising costs of electricity, transport and raw materials will have translated into less profit in 2022.

Manufacturers

Although Belarra targets supermarkets, big manufacturers such as Nestlé, Unilever and Mars tend to have higher margins in operating terms, which is how they publish their data. That of Unilever, for example, fell two points, to 15.2% in the first half of 2022. Meanwhile, own brands have been gaining weight in the shopping cart, being cheaper, although they leave less margin to the distributor than those of the manufacturer.

Sources from Anged, which represents about twenty companies such as El Corte Inglés, Carrefour, Ikea, Alcampo and Leroy Merlin, point out that distribution “has cushioned the historic rise in industrial prices by up to 6.8 points” thanks to promotions, discounts and promotion of own brands. In other words, the average price of the shopping basket has risen 6.8 points less than the price at which the distribution buys these products from the food industry, according to the employer, which ensures that imposing a ceiling on the sales prices that prevents distribution from transferring cost increases would mean taking the sector as a whole to red numbers in little more than nine weeks.

The employers’ association highlights that, between December 2021 and November 2022, the CPI for food and beverages has grown at an average annual rate of 10.7%, compared to an average annual rate in the industrial price index (IPRI) for food of 16.4%.

An OCU spokesman points out that cost structures vary between companies and some are more efficient than others. They can negotiate better with their suppliers, both energy and non-energy, and perhaps have more ability to cut overhead. However, the price increases are homogeneous in all the chains, according to the price studies of the consumer organization.

market shares

Distribution claims to be a competitive sector, at least compared to other neighboring countries. The data from the Kantar consultancy place a company as the leader by far, Mercadona, which has a market share of 25.4%, followed by Carrefour (9.8%), Lidl (5.9%), Dia (4 .6%), Eroski (4.1%), Consum (3.2%) and Alcampo (3.3%). That is, eight companies concentrate 56% of sales, the rest is distributed among small firms, many of them regional brands. The market setup is similar to the UK. In France, the five largest companies jointly control 78% and, in Portugal, more than 50% is in the hands of just two companies: Sonae (Continente) and Jerónimo Martins (branded as Pingo Doce). The Portuguese Government has just approved a tax on the extraordinary profits of food companies. United We Can also proposed this measure, which was rejected by the PSOE.

The Government has argued that there is competition in this market. When the controversy over the shopping basket proposed by Díaz arose, both the Minister of Industry, Tourism and Commerce, Reyes Maroto, and the Minister of Agriculture, Fisheries and Food, Luis Planas, ruled out capping the price of basic foods, because “in a market where there is competition it is not necessary to intervene”. Maroto considers that it is a free market and that it should be the citizens who choose the supermarkets that best meet their needs for variety, quality and price.

Both the sector and the OCU recall that the CNMC is responsible for controlling that the market is transparent and that there is no dominant position in the food chain. In addition, there is the Price Observatory of the Ministry of Agriculture, which imposes fines on those who violate the rules. In case of detecting problems, it would be necessary to report it and investigate it, as Facua did at the beginning of January with seven chains for not transferring the VAT reduction on some products.

Shopping baskets and VAT

Historical price increases have opened the debate on what measures can be taken to alleviate their impact on citizens. Food prices in Spain climbed 15.7% in December compared to the same month in 2021 (10 points more than the general CPI), after doing another 15.3% in November. To stop the rise, the Government approved the drop in VAT on bread, flour, milk, eggs, cheese, fruit, vegetables, legumes, tubers and cereals (from 4% to 0%) and olive oil and seeds and pasta (from 10% to 5%).

At the moment, this is the main specific measure approved by the Government to alleviate the rise in food prices. Agriculture sources indicate that we will have to wait for the CPI data for January, which is published in February, to analyze its impact, and that no new measures are contemplated for now.

United We Can’s proposal to intervene in the market to limit the price of a series of basic products in the shopping basket is an option similar to that taken by the conservative Executive of Greece and that France is studying to carry out after negotiating with the big companies. distributors and that focuses on twenty basic products.