Tim Worstall

Big Bad Tesco

Ooooh! Oooooh! squeals of horror!

Tesco will this week post record annual profits of around £2.5bn,
providing further ammunition to critics who argue it has become too
dominant in Britain.

2.5 squiddely billions! Loadsa Dosh!

The supermarket is expected to have generated sales of more than £42bn, a rise of about 7% on the previous year.

Oh, err, 6% on sales.

Total equity is some 9.4 billion, so a return on equity of 26%? Good, certainly, but hardly a monopolist exploiting the rest of us now is it?

Back to sleep everyone, just the usual big business is bad.

In

5 responses

  1. Luis Enrique Avatar
    Luis Enrique

    I’d like to know what their operating margin is on food as opposed to clothes, electronics etc. I asked a retail equities analyst once, who told me that they stopped disclosing margins along those lines (presumably the calculation would involve a fairly arbitary allocation of overhead) but that he thought it was 2-3% (which is what margins used to be before they started selling so much non-food).
    The distinction between operating and gross margin is conspicuously absent from popular (i.e. Radio 4) discussions of this topic. They always talk about the difference between farm gate and retail pricing (gross). I’d love to know what gross margins ‘Fresh and Wild’ makes.
    This subject always raises my blood pressure. I don’t want to argue that supermarkets are all-good, but the argument that they are screwing farmers because their margins are too high is particularly bone headed (well, a simple version of it is – actually margins in for example France are lower, so perhaps UK supermarkets do have more monopoly power, alhtough product mix may explain it). The bone-headed bit is thinking that lower margins would indicate ‘fairer’ treatment of farmers.
    Why oh why can’t the BBC ever employ an economically literate reporter to cover supermarkets?
    For as long as I can remember, I’ve have been told that the situation is farming is “not sustainable”. I think it’s time we redefined the words.
    it may well be that profits are so low that certain farmers are going out of business (actually you can see data on average incomes by category on I think defra’s website and yes profits in some categories are tiny). This may be because of a) domestic over supply b) competition from cheaper imports c) a vindicative campaign by supermarkets to drive their suppliers out of business, to name but three possibilities.
    i wish a BBC reporter would consider the possiblity, for example, that there’s too much capacity in dairy farming, driven by productivity gains, and that dairy farmers are putting each other out of business by out bidding each other and the supermarkets are just sat their buying at the lowest price they can, as happens in all businesses.
    if there is something about the dairy industry that means normal market mechanisms are not operating, I would really like a proper explanation of what that is, and not ‘supermarkets are powerful and greedy’ because they are just as powerful and greedy when they deal with pate manufacturers, spinach growers and greetings card suppliers and we don’t hear a peep out of them.

    Reply
  2. Ian Bennett Avatar
    Ian Bennett

    Quite so, Luis. I often wonder, when hearing of farmers complaining that supermarkets pay less than the cost of production for milk, why those farmers don’t simply refuse to sell at a loss. I’m pretty sure I would.
    As for the subject; well done, Tesco, I say.

    Reply
  3. Bob B Avatar
    Bob B

    Some put the ultimate blame on Ted Heath who, among many other failings, pushed legislation through Parliament in 1964 banning retail price maintenance. Possibly rather more Conservatives blame him for what they claim was the consequential loss of the 1964 election by the Conservatives.
    http://en.wikipedia.org/wiki/Resale_price_maintenance

    Reply
  4. Bob B Avatar
    Bob B

    Btw this recent academic paper (PDF format) certainly looks challenging, controversial and timely:
    Paul Grout: “Predatory pricing, the adoption of price cuts that are ultimately beneficial because they induce exit of a competitor, has received considerable attention from economists in recent years. The main focus has been to elucidate why predation can be a successful and sensible strategy in the presence of imperfect information.”
    http://www.bris.ac.uk/cmpo/workingpapers/wp23.pdf
    The contrast is with the received “traditional Chicago view, which was popular amongst economists for many years . . that it is unlikely to be rational to engage in predatory pricing because of the high cost involved. If a company can be removed from the market either by a price war or by take-over, economists . . have argued that the victorious firm will be far worse off engaging in a price war than purchase.”

    Reply
  5. John Avatar
    John

    I agree with Luis I’d never sell at a loss. If it’s really not profitable selling milk perhaps the farmers should be looking for another way to generate income from their farm.

    Reply

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