The question of grocery retail profits
The Fine Gael spokesman for agriculture Denis Naughten launched an attack on supermarket chains for running high margins on agriculture products, diary and meat products in particular, and thus giving their customers and the farmers an unfair deal.
Mr Naughten’s entrepreneurial spirit deserves praise for identifying a genuine business opportunity. In the following weeks Mr Naughten could reveal his plans to set up a grocery retail business and explore this market opportunity to the benefit of both farmers and consumers.
’The consumer is footing the bill for the margins the retailer is making, and the consumer needs to become more conscious of this so that we can try and address it and ensure everyone gets a fair deal,’ he said.’
Fine Gael’s ongoing efforts to raise consumer awareness are commendable but regretfully there are indications this campaign may be just another election gimmick. Statements like ‘the highest mark-up was on milk, which had an average retail price of 85c a litre from which the producer only got 27c.’ seemingly suggesting that the retailer is making 70% on milk, will certainly win votes but as an argument it has little or no value. In fact its potential to mislead the punters is damaging. Efforts should be made to go beyond this populist modus operandi.
There is a lot to be said about the consumer prices in Ireland. According to The National Competitiveness Council, Ireland and Finland are now the most expensive European countries. ‘A basket of five goods in Tesco in Ireland was 43% dearer on average than in the UK’ said Fine Gail on their website dedicated to rip-off Ireland (http://www.ripoff.ie/).
Faced with such accusations retailers point out to comparatively higher costs of running a business in Ireland. They may be onto something here because they too are facing the same ridiculous insurance bills as the rest of us are. They are also facing the spiralling labour costs. The National Competitiveness Council estimates the average annual compensation stands at €38,140 in Ireland, topping the EU-15 average of €34,630 and the UK average of €35,750. The fact the population has more disposable income to spend is certainly driving the prices of goods and services up more than anything else.
None of this does prove or disprove the retailers are indeed pocketing extraordinary profits. The large groceries provide little information about their business in Ireland. It is hard to tell whether the underlying reason for secrecy can be found in the absence of legal requirement to disclose financial information or is it that they have something to hide.
Superquinn and Dunnes Stores are privately owned and are not obliged to disclose financial results. Their principal competitor Tesco reported an operating margin of 5.9% in the UK for the year 2004 but the profit they made in Ireland was lumped with the ‘Rest of Europe’ where 4.7% was reported. The Irish sales constituted a significant 38% of their total European sales of £3,834m. If their operating margin in Ireland was 10% that would effectively mean that the businesses they did in the rest of Europe (excluding Ireland) would have operated at a meagre 1.25%. That is hard to believe. It is more likely that the figure is a good deal below 10% and closer to the UK result.
The Sunday Tribune was of similar opinion in April this year. They estimated Tesco made €137m profit from its grocery retail in Ireland in 2004 putting the margin at 7% - better than Tesco performed in any other market. But this is merely 1.1% and 2.3% above the UK and the rest of Europe figures, hardly a spectacular result. It certainly does not account for a 43% price difference between baskets of five goods in Tesco in Ireland and the UK.
In 2002 the largest American retailers Wal-Mart and Target had achieved profit margins of 7.6% and 8.4% respectively. We appreciate the differences in size but this is still a good indication of margins which can be achieved on the global level (While Wal-Mart with $430b sales is beyond any comparison the volume of sales of Target is only 6 times of what Tesco sold globally. Target is the second grocery retailer in the USA while Tesco is number two in Europe).
There is further evidence the margins in the Irish grocery retail are nothing out of the ordinary. For example Musgrave, the parent company of Centra, SuperValu and Londis, reported a small operating margin of 2.7% with roughly 60% of its turnover coming from Ireland. It is possible although unlikely that Musgrave’s businesses outside Ireland are being heavily subsidised by the Irish consumers. Furthermore the June 2005 report by the Central Statistics Office reported a 1.2% fall of CPI for food and non-alcoholic beverages, probably a result of the cutthroat competition in the sector.
But even if the case against the ‘greedy’ retailers was more compelling, discussion about the profit margins while ignoring other factors contributing to high prices is beside the point. And what is the benefit of this information going public anyway? It is doubtful the potential customers would engage in checking the profit margin of each retailer before hitting the supermarkets. They would remain to be driven by factors like the price, the quality and the convenience. And if the government needs to know retailers’ profit margins to shape their policies they don’t need to twist the retailers’ arms to get it. They already have this information submitted to them for tax purposes.
Back in February last year the Oireachtas called the retailers to disclose their profits. It must be that the politicians realised the futility of this effort because not much has happened since to resolve this ‘mystery’. It could also be that the politicians found the margins to be relatively reasonable, in which case there is more benefit in keeping them undisclosed.
Focusing on how much other people made while doing business has been a vote-winning business bashing strategy popular since the times Jesus Christ walked the Earth. This particular ‘red herring’ eclipses more important issues which could be addressed ‘to ensure everyone gets a fair deal’.
While minor in the context of Irish grocery retail prices the issue of transparency of data available to investors is an important one. The local and international professional accounting bodies should be asked to investigate the companies in question and amend the standards if necessary to stop them from misleading the investors. For example Tesco could be reported to the ASB’s Financial Reporting Review Panel for failing to disclose proper segmental results. Investors are certainly interested to learn whether Tesco underperforms on the European markets so there is a good chance the FRRP would investigate the case.
It is important for businesses to become less complacent and more active in the public debate. Continuous efforts of politicians and pressure groups to wind the population up will eventually result in an increased regulation. Although it is easy to understand why they are reluctant to provide sensitive commercial information such as operating margins to their competition (not only to the public) unless forced by law or accounting standards, they have to make an intellectual case to defend from these ridiculous attacks and regain the lost moral ground.
Finally, the most important is the issue of ensuring an unimpeded competition takes place. The anti-competition laws, preventing the players from fixing prices and forming cartels, should be rigorously enforced. Fortunately competition is alive and kicking in Ireland so this issue rarely gets attention which is not to suggest it should be completely forgotten.
Competition remains the most powerful tool to compensate for market distortions. The suggestion that Mr Naughten could venture into the grocery retail business was not a cynical joke.
Mr Naughten’s entrepreneurial spirit deserves praise for identifying a genuine business opportunity. In the following weeks Mr Naughten could reveal his plans to set up a grocery retail business and explore this market opportunity to the benefit of both farmers and consumers.
’The consumer is footing the bill for the margins the retailer is making, and the consumer needs to become more conscious of this so that we can try and address it and ensure everyone gets a fair deal,’ he said.’
Fine Gael’s ongoing efforts to raise consumer awareness are commendable but regretfully there are indications this campaign may be just another election gimmick. Statements like ‘the highest mark-up was on milk, which had an average retail price of 85c a litre from which the producer only got 27c.’ seemingly suggesting that the retailer is making 70% on milk, will certainly win votes but as an argument it has little or no value. In fact its potential to mislead the punters is damaging. Efforts should be made to go beyond this populist modus operandi.
There is a lot to be said about the consumer prices in Ireland. According to The National Competitiveness Council, Ireland and Finland are now the most expensive European countries. ‘A basket of five goods in Tesco in Ireland was 43% dearer on average than in the UK’ said Fine Gail on their website dedicated to rip-off Ireland (http://www.ripoff.ie/).
Faced with such accusations retailers point out to comparatively higher costs of running a business in Ireland. They may be onto something here because they too are facing the same ridiculous insurance bills as the rest of us are. They are also facing the spiralling labour costs. The National Competitiveness Council estimates the average annual compensation stands at €38,140 in Ireland, topping the EU-15 average of €34,630 and the UK average of €35,750. The fact the population has more disposable income to spend is certainly driving the prices of goods and services up more than anything else.
None of this does prove or disprove the retailers are indeed pocketing extraordinary profits. The large groceries provide little information about their business in Ireland. It is hard to tell whether the underlying reason for secrecy can be found in the absence of legal requirement to disclose financial information or is it that they have something to hide.
Superquinn and Dunnes Stores are privately owned and are not obliged to disclose financial results. Their principal competitor Tesco reported an operating margin of 5.9% in the UK for the year 2004 but the profit they made in Ireland was lumped with the ‘Rest of Europe’ where 4.7% was reported. The Irish sales constituted a significant 38% of their total European sales of £3,834m. If their operating margin in Ireland was 10% that would effectively mean that the businesses they did in the rest of Europe (excluding Ireland) would have operated at a meagre 1.25%. That is hard to believe. It is more likely that the figure is a good deal below 10% and closer to the UK result.
The Sunday Tribune was of similar opinion in April this year. They estimated Tesco made €137m profit from its grocery retail in Ireland in 2004 putting the margin at 7% - better than Tesco performed in any other market. But this is merely 1.1% and 2.3% above the UK and the rest of Europe figures, hardly a spectacular result. It certainly does not account for a 43% price difference between baskets of five goods in Tesco in Ireland and the UK.
In 2002 the largest American retailers Wal-Mart and Target had achieved profit margins of 7.6% and 8.4% respectively. We appreciate the differences in size but this is still a good indication of margins which can be achieved on the global level (While Wal-Mart with $430b sales is beyond any comparison the volume of sales of Target is only 6 times of what Tesco sold globally. Target is the second grocery retailer in the USA while Tesco is number two in Europe).
There is further evidence the margins in the Irish grocery retail are nothing out of the ordinary. For example Musgrave, the parent company of Centra, SuperValu and Londis, reported a small operating margin of 2.7% with roughly 60% of its turnover coming from Ireland. It is possible although unlikely that Musgrave’s businesses outside Ireland are being heavily subsidised by the Irish consumers. Furthermore the June 2005 report by the Central Statistics Office reported a 1.2% fall of CPI for food and non-alcoholic beverages, probably a result of the cutthroat competition in the sector.
But even if the case against the ‘greedy’ retailers was more compelling, discussion about the profit margins while ignoring other factors contributing to high prices is beside the point. And what is the benefit of this information going public anyway? It is doubtful the potential customers would engage in checking the profit margin of each retailer before hitting the supermarkets. They would remain to be driven by factors like the price, the quality and the convenience. And if the government needs to know retailers’ profit margins to shape their policies they don’t need to twist the retailers’ arms to get it. They already have this information submitted to them for tax purposes.
Back in February last year the Oireachtas called the retailers to disclose their profits. It must be that the politicians realised the futility of this effort because not much has happened since to resolve this ‘mystery’. It could also be that the politicians found the margins to be relatively reasonable, in which case there is more benefit in keeping them undisclosed.
Focusing on how much other people made while doing business has been a vote-winning business bashing strategy popular since the times Jesus Christ walked the Earth. This particular ‘red herring’ eclipses more important issues which could be addressed ‘to ensure everyone gets a fair deal’.
While minor in the context of Irish grocery retail prices the issue of transparency of data available to investors is an important one. The local and international professional accounting bodies should be asked to investigate the companies in question and amend the standards if necessary to stop them from misleading the investors. For example Tesco could be reported to the ASB’s Financial Reporting Review Panel for failing to disclose proper segmental results. Investors are certainly interested to learn whether Tesco underperforms on the European markets so there is a good chance the FRRP would investigate the case.
It is important for businesses to become less complacent and more active in the public debate. Continuous efforts of politicians and pressure groups to wind the population up will eventually result in an increased regulation. Although it is easy to understand why they are reluctant to provide sensitive commercial information such as operating margins to their competition (not only to the public) unless forced by law or accounting standards, they have to make an intellectual case to defend from these ridiculous attacks and regain the lost moral ground.
Finally, the most important is the issue of ensuring an unimpeded competition takes place. The anti-competition laws, preventing the players from fixing prices and forming cartels, should be rigorously enforced. Fortunately competition is alive and kicking in Ireland so this issue rarely gets attention which is not to suggest it should be completely forgotten.
Competition remains the most powerful tool to compensate for market distortions. The suggestion that Mr Naughten could venture into the grocery retail business was not a cynical joke.
posted by Domenico at 12:50 PM
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