Profit is not a dirty word but greedflation most certainly is

A supermarket close to my home recently engaged in a spot of what I considered to be dubious marketing about affordability in midst of the cost-of-living crisis.

The store parked a shopping trolley in its entrance foyer. At first glance, it appeared to be almost overflowing with core household grocery items such as bread, sugar, milk, teabags and vegetables. The items appeared to be piled on top of each other until they sat just proud of the rim of the trolley.

A nearby poster suggested to customers that they could complete their family’s shopping for just €100 – the cost of everything in the apparently-full trolley. That’s very cheap, I thought as I strolled by. I haven’t filled a supermarket trolley for €100 since the days when Manchester United were a good football team.

Something didn’t seem right. The trolley, almost up to its rim, was wrapped around the outside in thick paper carrying the supermarket’s branding. I doubled back and tore the paper down the side of the shopping trolley. This revealed, as suspected, that it was nowhere near full at all.

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The €100 worth of grocery items that appeared to be piled high were actually laid out thinly on a cardboard base that acted as a false floor near the rim of the trolley. Beneath this surreptitious platform was nothing but fresh air, all the way down to the real bottom of the trolley.

All of this chicanery was concealed from view by the paper wrapped around the outside. It created the false impression that the trolley was overflowing with groceries when, in reality, you could have fitted all the goods on view into two small handbaskets. It seemed like a trick to plant a misleading image in the minds of passing customers about the supermarket’s affordability in a crisis period.

It was small-time stuff, and probably just the work of an over-enthusiastic supervisor. But it got me thinking. If a supermarket can mislead over such a minor aspect of its inflation communications, how honest should we expect it to be when on more substantial issues, such as its probity when justifying price increases? Grocery inflation is at a 15-year high. Who knows how many supermarkets are passing on bigger price increases than necessary, using inflation as an excuse.

Companies that impose egregious or unwarranted price increases and blame it on inflation are, essentially, engaged in profiteering. This is a loaded term, most often bandied about by the sort of people who always accuse private companies of unethical behaviour, regardless of any evidence.

But in the current crisis, the accusation of profiteering has been a common charge from observers of various hues who point to the trend of record company profits in several sectors in recent years as an unheralded driving force of inflation. In the US, a snazzy new portmanteau has been coined for the alleged act of the exaggerated boosting profits using inflation as an excuse: greedflation.

Inflation crises always become apparent in the heating and the eating. Energy companies and retailers are the ones most often accused of greedflation. Companies, especially those that are about to report hefty profits as customers struggle to protect living standards, would be wise to avoid being tarred by it.

If profits galloped away again in 2022, Tesco might be called upon to explain its success while so many of its customers are struggling to make ends meet

In the US, corporate profits were highest in 2021 than in any year since the 1950s, according to a study by Roosevelt Institute. The seeds of the inflation crisis began to sprout last year, well ahead of this year’s Russian invasion of Ukraine. A recent paper by two of the Roosevelt Institute’s researchers, Mike Konczal and Niko Lusiani, levelled the charge of greedflation at a range of major US retailers.

The financial performance of the grocery industry inevitably will come under a spotlight. Tesco doesn’t break out its Irish profits. But the group’s overall results for last year showed its pretax profits doubled to £2.2 billion (€2.6 billion). The company has, wisely, warned that profits this year may not rise by much as it says it is attempting to keep a lid on prices for its struggling customers. If profits galloped away again in 2022, Tesco might be called upon to explain its success while so many of its customers are struggling to make ends meet.

Evidence of excessive price rises in the grocery sector could be hard to extract from financial statements this year, because profits for the comparative period last year were already elevated by the impact of lockdowns. Theoretically, companies could jack up profits this year and it wouldn’t look like a rise. So the trick is to look at profit margins instead.

Escalating energy costs are crippling households and small businesses. Yet look at the gargantuan profits of the big energy companies

Margins tell you a lot. Aldi, for example, last year broke out its Irish financial results for the first time. They showed that its profit margins in Ireland in the early part of the pandemic were 70 per cent higher than its margins in the UK, when measured relative to turnover. We can only speculate as to why Aldi’s Irish shoppers are more profitable than comparable British ones. But it is a fact that they are.

Tesco’s quarterly results so far this year seem to suggest that it is prepared to eat up some contraction in its margins. We will never know its Irish margins, of course, nor those of Dunnes Stores or Lidl. Musgrave, the owner of SuperValu, reported an 11 per cent rise in group profits a year ago. When it reports its next set of results, in about 10 weeks’ time, pay close attention to the trajectory of its margins.

On the heating side of the inflation crisis, the charge of greedflation is more easily deployed. Escalating energy costs are crippling households and small businesses. Yet look at the gargantuan profits of the big energy companies. Shell recently reported record profits of almost £10 billion between April and June. BP’s profits are so big it is raising dividends and accelerating share buy-backs to put cash in the pockets of shareholders.

Closer to home, the Centrica-owned Bord Gáis Energy recently reported record profits of €39.5 million for the first half of the year, up 74 per cent. Alive to the charge of greedflation, it got its retaliation in first by explaining that the bump was all down to the reopening of the Whitegate power plant. Nevertheless, its parent company has resumed paying dividends at a time when its customers are gearing up for a long, hard, cold and expensive winter.

But of all Irish companies, the one most exposed to the accusation of greedflation is State-owned ESB. Last year, it made record profits of €679 million. Its next annual results are due in early March, by which time people are likely to be cranky after a series of escalating energy bills. If ESB’s profits rise sharply again after a series of price rises, it will face a torrent of public recrimination. The possible imposition of a windfall tax in next month’s budget won’t help it to save face, either.