Food Inflation, so-called “Greedflation” and Food Retailer Profit Margins

Inflation in average prices of all categories of fresh produce expressed as percentage changes to the first week of this year 2023

A piece of news this week piqued my attention; the news media was full of reports about The Competition and Markets Authority investigating the recently named concept of “Greedflation”, which is the alleged practice employed by large national and multinational food retailers inflating their margins without sharing the extra profits with producers further down the supply chain.

This practice first rose to prominence last month when various news outlets reported that apple prices in major food retailers had risen by 5.8% while growers were receiving just 0.8% higher returns, even though cost of production had risen by up to 25%, according to the trade body, British Apples and Pears.

As many will already know, I have lots of experience of witnessing and navigating around the murky operational actions and decisions executed and employed by these companies. So I had a look at our own pricing records of all categories of fresh produce we sell and compared the inflation in our own prices to those reported by The Office for National Statistics.

Fig.1 ONS data set aligned with our own categories, but measuring the inflation for the twelve months between March 2022 & March 2023

Before I do so though, I want to make the valid point which was missing from all news reporting I saw, heard and read. All media outlets seemed to report only on retailer net profit margins. This to my mind at least, is very misleading. Net profit margins which were reported were those of Tesco (4.1%) and Sainsbury’s (3.1%).

The net margin of any retail business (in my opinion) is the responsibility of the management. Whereas the gross profit margin is governed to a large extent by market forces. For example, if an apple costs a retailer 10p and they charge 20p, their gross profit margin is 50%. However, if staffing costs, rent, rates, heat, light and all other overheads, as well as the cost of the apple are taken into account, it’s highly likely the net profit from that apple will be in the very low single figures. For information purposes, our average gross margin on fresh produce in isolation for this year is 33.84%.

My point being that there’s a limit to how much a person will pay for an homogenous apple if that same apple is more cheaply priced in another competing large retailer. It is therefore more closely linked to the market for that item than the management of that business. This is without the extra considerations regarding unstable production costs and supply and demand factors.

However, when it comes to net profit margins, the management has a far greater influence over how much the aforementioned overheads are costing beyond the input price of the stock, whether this be increasing staff productivity, negotiating lower rent, or investing in more energy efficient equipment.

It would be interesting to know who took the editorial decisions regarding the reporting of net profit margins as opposed to gross profit margins, and indeed whether this was influenced by any of the businesses reported on to make the news items look more sympathetic to those retailers.

It goes without saying that transparency in our business is a key principle for us, and while we don’t tend to publish our gross margins, the actual margin for each item of produce is on display for our team and for anyone who may enquire.

So, regarding ONS data (fig.1) and our own data (fig.2). It wasn’t possible to fairly or directly compare the two data sets as they were both from different periods of time (ours from the first 21 weeks of this year, and the ONS data from March this year and compared with March last year). However, I am very confident that our data for each category is comprehensive and accurately recorded. Conversely it’s likely that in March there is some pricing data in the ONS figures that was patchy or incomplete due to the produce shortages in supermarkets. By comparison, we had consistently excellent availability of all stock, if slightly more expensive than usual.

As can be seen from the graph at the top of this page plotting the average unit price at HFM for the last 21 weeks, prices have been very volatile, but have been on average 7.36% higher across the time period. However, when drilling down to the data in the table below (fig.2), there are even bigger fluctuations per category in both positive and negative directions.

Fig.2 Category price fluctuations expressed as a percentage change, both week on week and compared to the first week of this year 2023

Tomatoes taken in isolation between weeks 8 and 19 were consistently between 30% and 45% higher in price than week 01, before crashing to -0.24% of the price at the start of the year just this week (week 21) as the early UK tomato season begins. This is a similar story to all salad vegetables. In fact Cucumbers on the produce wholesale market are cheaper than I’ve known them to be in the last four years of trading.

Unfortunately the same cannot be said for potato prices, which are now on an upward trajectory. This isn’t just due to the start of the new potato season and the elevated prices commanded for these at the start of the season. The input cost for us of baking potatoes and chipping potatoes has inflated massively over the last few weeks, some by more than 50%. Our system for managing prices reduces gross margin as prices rise, so this won’t be fully passed on to any of our customers. But I do feel for those hospitality businesses who rely heavily on potatoes for their menu.

At the time of writing The Grocer have just published an article decrying the positive nature of the government food summit earlier this week. Hopefully some solutions will come from this summit. But having just read the item, I can’t claim to feel as positive. The grocery market in this country is extremely competitive. But this is the main problem; In order to remain competitive these big food businesses are literally screwing their suppliers by not paying them the true cost of production. We have an ideal climate to produce apples, yet more orchards are being grubbed up than ever before, with UK production in serious decline. This matters. Not only are these trees a valuable source of local food, but they also play a big part in the future health of our planet. According to American research from Cornell University, apple trees can absorb 10 to 20 tonnes of carbon dioxide per acre every year, and release 15 tonnes of oxygen.

If we really want to understand where the problems in our food system are, we need to create a better food culture in this country. There are some really positive signs of this, but we need more influence from our leaders if this is to happen. There are so many really valuable life skills that can be learned through food, not to mention the cost savings to the NHS if food culture was emphasised more comprehensively through government incentives and in the education system.

In the meantime though, we’ll continue doing our very best to serve the local community with the best quality produce from the finest producers we find, who we will of course treat with respect and pay fairly.

Thanks for reading.

Jason