Corporate report

Update on the CMA’s work to help contain cost of living pressures in the groceries sector

Published 20 July 2023

Foreword

The rising price of food and other groceries has placed a growing strain on household finances, adding to the pressure caused by higher energy, housing and road fuel costs.

The CMA’s purpose is to promote competitive markets and tackle unfair practices, with a particular focus on areas where people spend the most time and money, and those who need help the most. We are determined to play our part in helping to contain cost of living pressures by making sure that people have the best opportunity to shop around for good deals, by maintaining a constant focus on effective competition in essential markets to keep prices as low as possible and by ensuring that companies don’t take advantage of general cost of living pressures for their own benefit.

Along with our market study on road fuel, we identified groceries as an early priority for our work to support consumers facing a rising cost of living. Today, we are providing an update on this area of our work.

At a time when food and other grocery prices are rising, it is crucial that people can be confident competition is working effectively. If competition – between retailers or in other parts of the supply chain – is weak or ineffective, the prices people pay for their groceries are likely to be higher than they otherwise would be. That is why, in May this year, we announced a stepping up of our ongoing work to assess the effectiveness of competition in the groceries sector.

It’s also essential that people can shop around and compare prices easily and with confidence, both to support effective competition, and to ensure they are paying no more than they have to. To underpin this, we’ve carried out a review of unit pricing in the groceries market which provides an important way for people to compare and find the best deal available.

The reports published today provide an update on these two pieces of work:

• On competition in groceries, the evidence we have seen indicates that recent high price inflation for groceries does not appear to date to have been driven at an aggregate level by weak or ineffective competition between retailers. In particular, recent profit margins for groceries retailing have been low, and those offering the lowest prices have gained market share. However, not everyone benefits from competition in the same way: in particular, those who cannot travel to large stores or shop online may not get the full benefits. Moreover, many consumers, particularly those on lower incomes, are already minimising their food spending by choosing cheaper retailers and products. They have fewer options to mitigate rising prices, even if competition is working well. At this stage, we also can’t rule out that competition may be stronger in some types of grocery products than others, and we will consider this further in the next phase of our work.

• On unit pricing, we found problems both with the rules themselves and, in some cases, with retailers’ compliance. We have made recommendations to government to address aspects of the rules that lead to inconsistency and uncertainty (for example, we recommend clarifying that retailers must display unit prices for products on promotion); we have published an open letter to all grocery retailers calling on them to ensure that they are complying with their obligations under the rules; and we have written directly to certain retailers to highlight specific non-compliance concerns (which we will monitor further in the next phase of our work).

Our work to ensure people benefit from competition and choice in groceries does not stop here:

• On groceries competition, we will continue to monitor indicators of retail competition to ensure that people are benefitting from competitive prices as input costs fall; continue collecting evidence from branded and own-label suppliers to consider competition at this level of the supply chain; and examine in more detail supply chains, inflation drivers and the role of competition for specific product categories we have identified.

• On unit pricing, we will be following up with the retailers we have written to, making sure they take action to improve compliance; publishing consumer research on the use of unit price information; assessing the savings available to consumers from using unit prices; and exploring joint work with Trading Standards in England and Wales to ensure compliance with rules on the accurate display of prices.

We will provide a further update on this work in the Autumn. In the remainder of this overview we provide more detail from our initial updates on these two areas of work. You can read the full reports on our website.

Sarah Cardell

Chief Executive of the Competition and Markets Authority

Our initial findings on competition and choice in groceries

Our work to look at competition in this sector over the last two months has been informed by input from over 50 stakeholders. This included written responses from 11 national retailers^{[footnote 1]} (including the supermarkets, and Aldi and Lidl) to our questions, including about their profits and pricing strategies.

Groceries price inflation has been driven primarily by changes in input prices: most notably, animal feed, fertiliser, key commodities (such as wheat and sugar), energy costs, and wages. Some of these changes take time to feed through to retail prices. These lags first delayed increases in consumer price inflation, and are now contributing to its persistence even as the price of some inputs is falling. Moreover, rising wages and additional regulatory requirements are, in the view of a range of stakeholders, likely to continue to put upward pressure on production costs, even as the price of other inputs falls.

The impact on households of the of the 23.7% rise in food price inflation since January 2022 has been significant. People have responded in a number of ways, including switching to cheaper alternatives, buying less and using food banks. Those on lower incomes have been disproportionately affected because they spend a higher share of their income on food; and they are already likely to be careful with their spending, leaving them with fewer options to mitigate rising prices by switching to cheaper retailers and alternative products.

Competition between groceries retailers is crucial to keeping prices as low as they can be. Our initial work looked at evidence of the strength of competition between retailers in aggregate. In the time available this initial evidence-gathering and analysis cannot provide a complete and determinative view on the state of competition in groceries retailing. Overall, the evidence we saw indicated that recent high price inflation for groceries to date does not appear to have been driven at an aggregate level by weak or ineffective competition between retailers. In particular, we observed that:

• Throughout the last ten years the discounters (Aldi and Lidl) gained market share from the major supermarkets, and this coincided with a decline in major supermarkets’ average operating margins (operating profits as a percentage of revenues).

• Having remained steady in 2020 to 2021 and 2021 to 2022, operating profits of the 11 national retailers fell significantly – in aggregate by 41.5% and as a percentage of revenues from 3.2% to 1.8% – to below historic levels, in the most recent financial year (2022 to 2023). This indicates that they have not ‘passed through’ to consumers all of the cost increases that they have incurred.

• The lowest-price retailers – Aldi and Lidl – have gained share from their competitors, particularly during the recent period of high price inflation, whilst retailers that have allowed their prices to become materially higher than their competitors have tended to lose market share, indicating retailers are constrained in their ability to raise prices without losing customers.

• Relatedly, consumers are in general able and willing to switch and shop around in response to price differences, which should exert pressure on retailers to keep prices low.

However, not everyone experiences competition in the same way. For example, people on low incomes, those who are digitally excluded, or who have no access to private transport, are likely to struggle to access better deals, and therefore benefit less from effective competition. Moreover, competition may be stronger in some types of grocery products – particularly those stocked by Aldi and Lidl – than others.

It is important, however, that competition remains effective. Retailers are looking to increase their groceries profit margins above the low levels seen in 2022 to 2023. The evidence we have received to date on whether they will be able to do so – in the form of monthly profitability data from April 2023 – is mixed. The existing competitive environment is likely to put limits on the extent to which retailers can achieve higher margins without losing market share. However, consumers will understandably be looking for reassurance that effective competition will ensure continued pressure on retailers to pass on cost savings to their customers. This is something we will continue to monitor in the months ahead, particularly as input costs fall.

The wider groceries supply chain is highly complex and comprises thousands of businesses and supply relationships. At this stage, we have not seen evidence of specific competition concerns in other parts of the supply chain or in relation to individual product categories. However, in order to examine whether the wider supply chain is working well for consumers, and gain a deeper understanding of price and competition dynamics, while ensuring our work is timely and impactful, we have initially identified a number of indicative product categories that may merit further consideration over the coming months. In selecting these, we have taken account of a number of factors, including the rate of consumer price inflation (including whether this has differed materially from similar product categories, and from input price inflation); the importance of the product to consumers; and the potential for further scrutiny to shed light on the groceries supply chain and/or consumer behaviour. This should not be taken as an indication of any provisional concerns that competition is not effective for those products.

In the coming months, we will therefore:

• continue to monitor indicators of retail competition to ensure that people are benefitting from competitive prices as input costs fall
• continue the work we have already begun gathering evidence from branded and own-label suppliers, to consider competition at this level of the supply chain and its impact on groceries prices
• examine in more detail supply chains, inflation drivers and the role of competition for the product categories we have initially identified. Some of these will be looked at in more depth than others, depending on what we find.

Our findings and recommendations on unit pricing

Unit pricing is a labelling system for displaying the cost of different products by reference to standard units of weight or volume. It is largely regulated by the Price Marking Order 2004 (PMO) in Great Britain, and a similar piece of legislation in Northern Ireland (the NI PMO).

During our review of grocery retailers’ unit pricing practices, we have seen problems with unit pricing which may affect consumers’ ability to compare products. These included:

• missing or incorrectly calculated unit pricing information
• different unit metrics being used for the same type of product
• issues with unit pricing for products on promotion – we found that retailers are taking different approaches to displaying unit prices for products on promotion both in-store and online, with some retailers not displaying unit prices for discounted products at all
• examples of unit prices in-store which we consider are difficult to read, particularly among the variety stores (that is stores selling a range of products, including some groceries, hardware and seasonal goods)

Many of these problems stem from the rules themselves, which permit unhelpful inconsistencies in retailers’ practices, and leave too much scope for interpretation. Building on proposals made by the CMA in 2015, we have recommended changes to both the PMO and NI PMO that will help people access better information when they shop, and help businesses comply with their obligations. In particular, our proposed changes are intended to improve the consistency of unit pricing information (for example, in terms of the weight or measure used); the legibility of information, so that unit prices are clear and easy to identify; and to provide clarity that the rules apply to products on promotion.

However, we have also found examples of non-compliance with the existing rules, particularly among some variety stores. We have written directly to certain supermarkets and variety store retailers to tell them to take action to address the concerns that we have identified. We will be monitoring compliance and we are ready to take enforcement action if we do not see improvements.

We are also calling on all grocery retailers to give consumers the unit pricing information that they need to make meaningful comparisons, particularly for products on promotion, before any reforms to the PMO. We have published an open letter to all grocery retailers calling on them to ensure that they are complying with their obligations under the PMO.

In the coming months, we will:

• assess whether the retailers we have written to have made improvements to comply with the PMO
• assess the potential savings that can be made when using unit pricing to choose between, for example, the same product in different pack sizes, or when sold loose versus pre-packaged
• publish findings from research with consumers on their use of unit pricing information;
• beyond unit pricing, explore working in partnership with Trading Standards to examine whether retailers, including convenience stores, are meeting their legal obligations when it comes to accurate pricing on groceries more generally

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1. Not all 11 retailers are present in Northern Ireland (for example Morrisons and Aldi do not operate there). ↩