On social media, complaints regarding the rising costs of groceries are trending. It’s no surprise after all, the price of groceries has gone up around 13% compared to last year. According to the data from the Labor Department, the price of fruits and vegetables increased by 10.4 percent annually, while milk rose 15.2 percent and eggs soared 30.5 percent. Like other sectors of the economy, food prices are susceptible to supply chain complications and geopolitical unrest including the war in Ukraine. But some people have expressed their disdain for grocery store companies, accusing them of “price gouging” to increase their profits, which have been reaching exorbitant heights (corporate profits are at their highest levels in nearly 50 years, according to CBS MoneyWatch).
For example, this tweet shared by thousands blames the rising prices of groceries on retailers engaged in price gouging: “Grocery stores need to be brought to heel over food prices. This isn’t ‘inflation’ because it isn’t caused by monetary oversupply. It’s just price gouging and we know that because we can literally see that they’re all reporting surplus profits.”
Is putting the blame on grocery store managers for your rising costs of orange juice accurate? It’s not quite that simple. The claim of “price gouging” at the grocery store is misleading because of the complex nature of the grocery business. Professor Lisa Jack, School of Accounting, Economics and Finance and lead of the Food Cultures in Transition (FoodCiTi) research group at the University of Portsmouth explains…
Supermarket profits are complex and care should be taken with attributing them to any one cause. There are three main factors:
- Commercial income, also known as suppliers payments or back margin, contributes heavily to supermarket profits. These payments and support from suppliers to the supermarket include volume discounts and marketing fees. These can represent as much as 7% of a supermarket’s income: bottom line profits can average around 1-2% of income. Primary producers are seeing rapidly increasing costs for all inputs and having been squeezed to breaking point over the last 20 years, have no choice but to increase the prices of their output. Similarly for processors, packagers, distributors and every other business supplying supermarkets. The supermarkets themselves claim to be fighting on behalf of consumers to be keeping prices down and there is evidence that they are refusing price increase requests, which implies that commercial income is still being maintained.
- In the last few years, supermarkets have been increasing profits by cutting overhead costs at head offices and in support services. Counterintuitively, the only economy of scale they have is bargaining power – see above. All their activities, including large stores, increase the overhead costs which can be as much as 75% of their spend. A significant amount of recent ‘soaring profits’ come from job losses, which are not sustainable in the long run.
- Since their emergence in the 1920s, the business model for supermarkets has been to sell basics at little or no profit relying on high volumes to break even. Profits come from enticing customers to buy at least one impulse, premium item of food and non-grocery items. 8 of the 10 best sellers in supermarkets are the cheaper (but still higher profit margin) alcohol, confectionery and snacks. Since the pandemic and the cost of living crisis hit, more of us are exchanging going out for buying in ready-meals, alcohol and other treats, and buying more of our non-grocery items from supermarkets. These are where the profits come from, and they are being taken away from other sectors. Unsurprisingly, the food businesses that have the highest margins are those that produce brands of alcohol, confectionery etc – ‘Big Food’.
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