Labour accused of ‘lazy scapegoating’ over supermarket price cap plan

The UK Treasury was hoping that chancellor Rachel Reeves would use a speech to the Commons on Thursday to trail a radical policy for supermarkets to agree a voluntary cap on the prices of essential groceries.

But a fierce backlash to Labour’s plan, revealed in an FT report on Tuesday, has led to a rethink. Now government officials are privately questioning whether it will ever see the light of day.

The proposal for UK supermarkets to introduce voluntary price caps on goods such as bread, milk and eggs in return for easing or delaying forthcoming regulation was seized on by retailers and political rivals, who claimed it was an admission that the government’s policies were fuelling inflation.

Marks and Spencer chief executive Stuart Machin told reporters on Wednesday morning that the idea was “completely preposterous”.

High-profile supermarkets have become an easy target for governments, with their multibillion-pound revenues and rising profits giving rise to the impression that they are flourishing at a time of economic hardship.

But those profits have been fuelled in part by stripping out billions of pounds in costs as recent increases in taxation, such as the rise in employers’ national insurance, and new levies on packaging take a significant toll on the industry.

Clive Black, head of research at Shore Capital, said the government’s proposals amounted to “lazy, populist scapegoating”.

“The biggest source of inflation is the British government. If you take just the extended producer responsibility legislation — that’s £80mn of costs for Tesco. It has to sell a huge amount more tins of beans to generate £80mn,” he said.

Former M&S boss Lord Stuart Rose joined the criticism, saying that price caps would be “idiotic, dangerous and will never work”.

The proposal, the brainchild of policy researchers within Number 10, comes as the blockade of the Strait of Hormuz threatens to lead to a new wave of food inflation. The initiative formed part of plans to help households with the cost of living, alongside scrapping a 5p fuel duty rise.

But even senior government aides were surprised the plans were being discussed, given that they had been briefing just hours earlier against the mandatory price cap plans outlined by the Scottish National Party last month.

Fearful that price controls appeared overly interventionist, the government played down the idea that it was considering imposing price caps on Wednesday. Treasury secretary Dan Tomlinson said on Radio 4’s Today programme that it was not “something we are considering”.

“Of course, the government is having conversations with supermarkets about what we can do to help households, but we are not implementing a mandatory price cap,” he said.

Officials did not deny, however, that they had held talks with supermarkets about voluntary freezes.

The conduct of supermarkets has come under scrutiny following a period in which grocery prices have risen by almost 50 per cent over the past six years.

Historically supermarkets have taken advantage of their size to boost profit margins. In 2007, Tesco, Sainsbury’s, Asda and Morrisons — the industry’s traditional “big four” chains — were fined more than £116mn after admitting to fixing the price of milk, cheese and butter.

The grocers said they were seeking to help farmers mitigate the financial damage of the foot-and-mouth crisis, but an investigation later found that the extra profit was largely absorbed by the retailers and largest dairies.

The emergence of Aldi and Lidl in the wake of the 2008 financial crisis forced supermarkets to compete more aggressively on price and dragged down margins across the industry. Market leader Tesco went from making operating margins of more than 6 per cent in the 2000s to 4.7 per cent last year.

Despite that, claims of profiteering have re-emerged during the cost of living crisis, prompting two investigations by the Competition and Markets Authority.

The watchdog found that, on the one hand, supermarkets had capitalised on weakening competition in the fuel retail market — which arose following private equity firm TDR Capital’s £6.8bn takeover of Asda in 2021 — to boost their profit margins at the expense of motorists.

But a separate CMA study, carried out two years ago, failed to “find evidence that groceries inflation is being driven at an aggregate level by weak competition”.

The regulator found that average operating margins across Tesco, Morrisons and Sainsbury's were 3 per cent in 2023-24. Discounters Aldi and Lidl were operating on margins of just 0.7 per cent.

This reality does not appear to be well understood by the British public. A recent poll of 3,000 individuals by the Institute of Economic Affairs found that people believed supermarkets were making profit margins of up to 50 per cent.

Callum Price of the IEA said the government’s price cap proposals were misguided and cynical. “There is no profiteering . . . and the government should know that,” he said.

Machin said the fact that food inflation was 3 per cent in April showed that the industry was “taking a big responsibility” in resisting inflationary pressure and that M&S actually lost money on some essentials.

“A pint of milk for us is 85p . . . we don’t make money on milk, it’s actually lossmaking, I think it’s about negative 7 per cent margin,” he said, adding that M&S had held the price of a loaf of bread at 75p.

An analysis by BNP Paribas called into question whether price caps on essentials would even save households a meaningful amount of money.

The analysts estimated that if the price of eggs, milk, bananas, bread, potatoes and butter were capped to protect consumers from a further 5 per cent rise in prices, the average household would save 80p a week.

Introducing price caps would require a level of cross-industry co-ordination that is illegal, according to industry insiders, who also expressed concern over how supermarkets would choose which groceries to include and what the prices should be.

Two people familiar with the situation said a relaxation of competition law was discussed at a recent meeting between supermarket bosses and the Treasury, although the idea has not progressed further.

The insiders also warned that the Treasury’s desire to protect British farmers from the fallout of price caps would result in supermarkets importing more food from international suppliers.

In the wake of the price cap revelations the Conservatives were quick to align themselves with supermarkets.

Andrew Griffith, shadow business secretary, said: “If the government wants a fast way to lower the cost of the weekly shop, looking at the trolleys’ worth of extra costs they themselves have imposed would be a more productive place to start.”

Additional reporting by Philip Stafford