The British public struggles to distinguish between large numbers and large margins. On Wednesday, amid swirling debates about the government’s nudging of supermarkets to implement price caps, I made the apparently controversial observation on X that supermarkets tend to operate on very small margins, and so should not be vilified. Tesco, for instance, makes somewhere in the region of about 4 per cent. In most sectors, this would not exactly qualify as gangster capitalism.
The response was telling.
Those that disagreed did not really dispute the margins themselves. Instead, the objections were to the fact that I had mentioned them at all rather than the actual numbers. ‘Tesco made £3 billion profit’, came the reply, delivered as though the figure were sufficiently obscene to end the discussion on its own.
Tesco turns over about £70bn annually. A business operating at that scale will naturally generate large nominal profits even on comparatively thin margins. These are not contradictory statements, but the same phenomenon expressed differently.
Yet increasingly, Britain seems unable or unwilling to think proportionally about commerce. A large number is assumed to be evidence of exploitation, no matter how small a return as a percentage.
The irony is that supermarkets are perhaps one of the worst targets for this argument. Food retail is an intensely competitive, low-margin industry with enormous operating costs. Distribution networks, refrigeration, staffing, logistics, rents, spoilage, energy costs and supply chains all have to be covered before a penny is made.
Oxford Economics recently found that on a basket of essentials costing a little over £20, the entire food supply chain made just 29p in profit. Not just a supermarket alone. The entire chain.
This is what makes the growing enthusiasm for supermarket price caps so economically illiterate. Even if supermarkets eliminated profit altogether, the difference to household shopping bills would be marginal. The British public appear to believe that there is a giant hidden surcharge on their grocery bills that is waiting to be expropriated. In reality however, the margins are already remarkably tight.
An IFS report shows that in 1977, food made up around a quarter of all household expenditure. Today, food makes up a little over 11 per cent.
Why then, does the suspicion continue to persist?
Part of this is because political discourse has become increasingly detached from scale. The phrase ‘£3bn profit’ appears scandalous because human beings are not particularly good at intuitively processing large figures.
If Tesco, or any other supermarket, had made £3bn from £5bn turnover, that would indeed be extraordinary. But that is not remotely what is happening.
More interestingly though, Britain’s reaction to corporate profit increasingly feels cultural rather than economic. Profit itself is widely treated as morally dubious. This can be traced back centuries to medieval and Renaissance Europe where practices like charging interest (usury) or making money purely from trade or finance rather than physical production were viewed as moral sins.
One sees this mentality almost everywhere, and no matter the sector. Housebuilders are condemned for making money during housing shortages. Energy firms are condemned during energy crisis. Banks are condemned for lending expensively and then condemned again if they haven’t lent insufficiently. Supermarkets are condemned for food inflation despite operating on slimmer margins than many independent cafes.
The assumption seems to increasingly be that if a company is large and profitable, and if the brand itself is visible, then somebody somewhere must be being cheated.
But prosperous societies require profitable enterprises. They require investment and risk-taking. A country or a people cannot endlessly demand higher wages and better services whilst simultaneously resenting the firms that generate the underlying wealth. If such entities continue to be demonised, Britain will likely not see rising living standards.
Britain increasingly speaks about profit as though it were extracted from the economy rather than generated within it
Even the criticism of executive salaries often collapses under inspection. Tesco’s CEO reportedly earns around £9m annually. To many people, this sounds outrageous, but mainly simply because it is a sum unobtainable to them (or so they imagine). Tesco employs hundreds of thousands of people, serves millions of customers and manages one of the largest retail operations in Europe. A single poor strategic decision in procurement or logistics could destroy far more value than £9m.
If his salary were to be spread across Tesco’s product range, it would have absolutely no effect on bringing prices down, given the scale of the business. What’s more, it would leave the business unable to attract the talent needed to run such a successful and vital business.
This is not to argue that every corporate decision is ‘virtuous’, nor that businesses should be immune from criticism. It is simply to point out that Britain increasingly speaks about profit as though it were extracted from the economy rather than generated within it. This matters, because countries ultimately get the economic culture they cultivate.
If a company feeding much of the country on margins of a few per cent is considered intolerably ‘greedy’ then Britain’s broader economic stagnation starts to become much less mysterious. Until we shake off this poverty of spirit toward those who are capable of turning a profit, we will continue in the poverty of growth that has held Britain back for nearly two decades.
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