Supermarket Promotions

Some interesting stories of mild skullduggery in the way that supermarkets manage and advertise their price promotions here. However, there\’s something not quite right about this assumption:

Hundreds of articles have been written about supermarkets slashing prices, but Tesco\’s operating margin actually increased from 6pc to 6.4pc between 2000 and 2007, while Asda\’s operating margin remained flat over the same period. Only Sainsbury\’s saw a significant fall (a result of Justin King\’s "sales led" turnaround rather than any price war).

It is a similar picture for suppliers. While own-label supermarket suppliers have seen a slight dip in operating margins between 2000 and 2007, margins are still running at more than 5pc. As for branded suppliers their margins may have been flat throughout that period, but they still enjoy margins of more than 10pc.

So what is going on? Okay, supermarkets and suppliers could have offset the cost of some of the price cuts with savings, but if they really have slashed the hundreds of millions of pounds off prices that they claim to, surely we would have seen some hit on margins?

Certainly, it\’s possible that a series of price wars could cut margins. But the absence of declining margins doesn\’t mean that prices have not fallen. There\’s two (at least) further possibilities. The first is that people further up the supply chain have seen their margins weaken or their basic prices change in some other manner. If, say, the price of beef falls (whether it is by shafting the farmer\’s margins or not) then it\’s entirely possible to maintain the processor\’s and the supermarket\’s margins while still delivery a price cut to the final consumer.

The second is that the supply chain could simply be becoming more efficient. As, in fact, we would strongly hope (and can observe that it did) would happen.

The absence of collaapsing margins doesn\’t, in and of itself, mean that consumers are not enjoying lower prices.

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