Why price controls imposed on essential groceries will not shield British shoppers from inflation

There is no doubt that Britain’s two biggest grocers, Tesco and rival Sainsbury, have benefited from Asda and Morrisons becoming less competitive since they were acquired by private-equity groups around five years ago. I have repeatedly argued that Tesco, in particular, has missed opportunities to undercut its competition on price.

Even so, the margin grocers earn from selling food is generally about 3% to 4%. It’s much higher for big food manufacturers such as Nestlé and Unilever, typically in the mid to high teens.

So Reeves had been heaping more pressures on a retail business where profits are as thin as a slice of ham.

If the Labour government wants to ease the burden on consumers, it should start by doing the same for grocers. The most damaging burden it has laid on these companies is a hike in the tax employers pay in the form of National Insurance.

Also inflating their expenses is an increase in the so-called National Living Wage. Together these have added about £6.5 billion to retailers’ costs, according to the British Retail Consortium, a trade group.

Then there are the extra levies on packaging, ostensibly to fund recycling, and charges to cover apprenticeship training costs. Add in higher property tax rates, green levies and some elements of the Employment Rights Act, such as requiring retailers to offer all workers guaranteed hours, and the cost of keeping shop has spiralled. The expense has in turn been passed on to consumers.

Food price inflation has been climbing since Labour announced the increase in National Insurance contributions in fall 2024, although it has subsided recently.

Supermarket profits on the everyday essentials the government is targeting tend be even lower than their overall margins. Milk, eggs and bread are items that grocers compete on most intensely, as customers tend to know the price of these items and track them keenly.

Stuart Machin, chief executive officer of Marks & Spencer—who on Wednesday described the proposed cap as “completely preposterous”— said M&S loses 7% on each pint of milk it sells, 6% on bananas and 20% on a tin of beans costing 45 pence. It also loses money on its cheapest loaf of bread, and makes low single-digit margins on eggs, sugar and flour.

Meanwhile, the rise of no-frills supermarkets Aldi and Lidl, which together control almost 20% of the UK grocery market, has helped keep the big grocery players on their toes.

In aggregate, Britons spent about 11% of their incomes on food and non-alcoholic drinks in 2024, according to the UK Office for National Statistics. Americans spent 12.9% of their budgets on food in the same year, according to the US Department of Agriculture, although this includes eating out, which they do much more often than the British.

Any caps could bring unintended consequences, such as increasing the prices of other items. And if grocers are forced to charge less for essentials, they will cut what they pay suppliers too, possibly driving manufacturers to pivot to other, higher-margin products—and potentially causing shortages. Buying more from outside of the UK, rather than supporting British farmers, is another possibility.

And what about those weaker, private equity-owned supermarkets Asda and Morrisons, which are grappling with billions of pounds of debt? If one of them were to get into severe financial difficulties, forcing it to sell swathes of stores, or even the whole business, to a rival—most likely Sainsbury or M&S—that could mean less competition for shoppers, not more.

If the Iran war drags on, particularly into winter months, talk of the expense borne by consumers is only going to intensify. But asking retailers to cap prices is the wrong way to ease that load. ©Bloomberg

The author is a Bloomberg Opinion columnist covering consumer goods and the retail industry.