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Is Greedflation in Supermarkets Real?

Do you believe “Greedflation” is NOT occurring within the UK’s supermarkets? – I take a look under the bonnet of some UK listed food retailers accounts to see if it’s true.

Michael Saunders, an Ex-Bank of England rate setter said earlier in the week that there were no signs of “greedflation” in the UK.

Is Greedflation in Supermarkets Real?


But with the ever-increasing cost of the weekly food shop, can this be correct?

Let’s dig into the numbers of some UK favourites such as Tesco, Sainsburys, Marks & Spencer and Greggs, and see for ourselves if Greedflation is a thing or not.


For the purposes of this investigation, the simplest and most accurate way of analysing a company's profitability over a period of time, is via the Operating Margin (Operating Profits/ Revenue). This takes into account the increased operating costs likely incurred, including salaries and rent etc.


Tesco

Starting with the UK's largest supermarket with an estimated 2023 revenue of £65.7b, Tesco has a current trailing operating margin (TTM) of 2.32% which is well within the historical normal range of supermarket margins (circa 2%-3%).


The full year 2022 margin of 4.17% is on the high side, but no more so than the pre covid, pre inflation 2019 figure of 4.16%.


This does suggest that despite the huge increase in food costs at the checkout, Tesco doesn't appear to be making excessive profits.


Sainsbury

Sainsbury generates half the revenue of Tesco, with the 2023 estimate of £31.5b.

The TTM 2023 margin is 3.30%, down from 3.88% in 2022.


Both these figures are substantially higher than the 2017 to 2020 range of 1.73% to 2.39%, which could indicate a hike in Sainsbury's profit margins, or alternatively they are trying to make up for the 2021 year where they got caught out with increasing costs and only made a 0.57% margin.


Marks and Spencer

Marks and Spencer have a 2023 estimated revenue of £11.3b, but of course is not a food retailer in isolation, so we are looking at the whole group here.


The 2023 TTM margin is 5.13%, down slightly from the 5.31% margin of 2022.


However, in comparison with the 2017 to 2020 range of 1.46% to 2.50%, the current margins are at least 100% higher, potentially suggesting that some sort of greedflation may be taking place by M&S.


Unfortunately, Asda, Morrisons, ALDI and Lidl are not listed companies, so accurate data is not freely available.


Therefore, to conclude this mini-investigation, I thought I would review a UK staple hot food distributor, who has been vocal about having to increase the prices of its snacks such as sausage rolls.


Greggs

Greggs is only a fraction of the size of the other businesses reviewed and has a 2023 revenue estimate of £1.5b.


They operate a different model to supermarkets and so the margin numbers will be different and not directly compatible with them.


The 2023 TTM margin is 10.2% down from 12.5% the previous year.


The historic range of the 2017 to 2020 period was 7.53% to 9.83%, so the most recent two years noted above do suggest that Greggs are seeking higher profit margins of late, although the difference between the current 10.2% and 2020 margin of 9.83% is modest.


Results

Even our small group of companies reviewed has shown that there are varying levels of increased profit margins within the industry.


Whilst it is fair to say that Tesco’s margins are similar to their long-term average, this is not the case with Sainsburys or Greggs who both appear to have higher margins and therefore profits now, than their own long term averages.


M&S has clearly doubled its margin. I’m not sure at what level a margin increase turns into greedflation, or if Michael Saunders missed M&S from his research, but it looks to me (IMHO) like the phrase “there were no signs of “greedflation” in the UK” may be a little naïve.


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