Tesco breaks £1 billion barrier

Tesco became the second British retailer in history, after Marks and Spencer, to post profits in excess of £1 billion.

The biggest supermarket retailer in the UK is making around £3 million in profit a day, and accounts for 25 per cent of grocery sales in Britain.

Some consumer and farming groups reacted angrily to the news, with the National Consumer Protection Council calling for price cuts to be passed on to Tesco's customers.

The Small and Family Farms Alliance accusing the retail giant of being a "new baronial class". The NFU supported the company, saying that farmers had to work with the retailers, not to "go to war" against them. Farm incomes have dropped by a third in the past 5 years. The Liberal Democrats have called for the establishment of an independent retail regulator.

Are farmers victims of Tesco?

Tesco has made pre-tax profits of £1.07bn at a time when UK farm incomes are about one third their level of six years ago.

Is Tesco reaping undue rewards from struggling farmers? Is anyone upset by the bumper profits? The National Farmers Union said that profits would be hard to understand for many of its members, who have been devastated by the foot-and-mouth crisis.

The National Consumer Protection Council warned Tesco that country dwellers would find such profits "hard" to comprehend. Liberal Democrat MP Lembit Opik, meanwhile, has demanded the formation of a regulator to "ensure a fairer deal" for suppliers such as farmers. "What is galling is that farm gate prices have gone down. Someone, somewhere is making a lot of money out of farmers." Will the government listen?

Cast your mind back to the early months of the current administration and you may remember a campaign against "rip-off Britain". Supermarkets were one of the areas where the price of goods were more expensive in the UK than abroad. But while the government has claimed some success in, for example, prompting cuts in the prices of new cars, efforts to tackle food retailers have been less clearcut. Fair trade watchdogs in 1999 referred supermarkets for investigation by the Competition Commission. In October, the commission found that, really, retail giants had little to answer for. Tesco itself says that prices are 11% lower in real terms in the past five years. The commission found the industry was "broadly competitive" and "overall, excessive prices are not being charged, nor excessive profits earned".

So £1bn does not count as "excessive"? Not, if you take a more detailed look at where the money is coming from, Tesco says. The group's 12% profits increase was almost exactly in line with the rise in sales, indicating that it had not raised prices. The firm credited the growth in profits on increased volumes of sales - on its success in selling rather than charging customers more, or indeed paying suppliers less.

So who exactly has been "making a lot of money out of farmers"? That question seemed to puzzle the Competition Commission too. But it said that when falls in the costs of farm produce had not been reflected in supermarket prices, the difference had been swallowed up not by retailers but "elsewhere in the supply chain". The "supply chain" might include businesses such as abattoirs, hauliers or packaging companies. So what hope is there for UK farmers?

One area where the Competition Commission did find supermarkets, including Tesco, were not behaving as well as they might was in their relationship with farmers.

Suppliers were being unreasonably forced, for example, to underwrite store discounts, or pay to have goods prominently displayed. The commission has drawn up a code of conduct, which Tesco will implement in October, to protect suppliers. But as agriculture's largest representative body, the National Farmers' Union, points out, it is also up to farmers to help themselves. They recommend that growers form alliances, which can benefit from synergies and "collective muscle", when dealing with the likes of Tesco. "They can prove they can run themselves as well as any supermarket chain," an NFU spokesman told BBC

BRITAIN'S consumers are still being forced to pay over the odds for their groceries. Despite recent decisions by the Monopolies and Mergers Commission (MMC) to investigate "excess profitability" in the grocery sector, the gap between food prices in Britain and some foreign countries is becoming wider.

Seven months ago, a major British newspaper revealed that consumers were being charged far more than shoppers in America and Europe. (surprise, surprise!!)

The new study, based on the same items, found that despite the retailers' claims to be offering better value, the gap has stayed virtually the same or even widened. A year ago British consumers were paying about 30% more for their food than the French, now the figure has risen to 43%. In Germany the price difference has fallen from 35% to 32%. The National Consumer Council said: "There is a suspicion that British consumers are paying considerably more in the supermarkets and there is no clear reason why."

In both surveys a basket of 22 grocery items were bought from various stores in Britain, France, America and Germany. The items were chosen because they were available in each country in similar sizes. In the latest survey the goods cost £81.46 at Sainsbury. In France, however, they cost more than £34 less, in Germany the saving was almost £26 and in America the saving was more than £19. The American figures, although showing lower savings, are particularly surprising because the goods were bought at Shaw's, which is owned by Sainsbury!

Of the 22 items it was the meat and vegetables that seemed to show the biggest price discrepancies between Britain and other countries. In a parallel survey of Marks & Spencer stores in London and Paris, the prices of the 14 bestselling food items were compared. It showed that a customer buying them in London would pay £54.59 whereas in Paris they could cost £48.44, a difference of 11%. The Office of Fair Trading (OFT) has written to 25 retailers to warn them it was about to ask the MMC to carry out a full investigation into their high profits.

The retailers included the big four supermarket chains, Tesco, Sainsbury, Asda and Safeway. There was uncertainty whether Marks & Spencer would also be included. John Bridgeman, director-general of the OFT, said in the letter that he had collated evidence of "excess profitability" in the grocery sector. He said he had looked at a range of indicators, all of which highlighted the same issue. Among the areas to be examined by any inquiry are the relationships between supermarkets and their suppliers.

Some suppliers have revealed how retailers mark up many fresh foods such as milk and poultry by more than a third. Similar margins are made with fresh fruit, vegetables and eggs, on which the supermarkets typically impose mark-ups of 40%. Some exotic fruits and fresh organic products cost 50% more in-store than the wholesale price. Other products such as instant coffee, prepared meals and continental meats were as much as 50% above their wholesale price. A common theme among all suppliers was the way retailers forced them to make discounts but then failed to pass them on to consumers.

Any inquiry must focus how supermarkets can generate such high profits. Tesco and Sainsbury are likely to be particularly closely scrutinised since they announced pre-tax profits of more than £1.5 billion between them last year. Tesco made £832m and Sainsbury made £728m. Many smaller retailers, along with Asda and Safeway, accuse Tesco and Sainsbury of profiteering and say they are bringing the whole sector into disrepute. Between them the two stores account for 39% of all British grocery sales. It has been revealed that the OFT believed the two stores were making "super-normal" profits - far higher than were reasonable given the size of their investments.

Gillian Bridger, a Sainsbury spokeswoman, said the chain welcomed the forthcoming MMC investigation. "We note that the OFT found no evidence that the largest four supermarkets are acting in an anti-competitive manner or to the detriment of the consumer," she added.

A spokesman for Tesco agreed that prices were higher in Britain but said this was because of factors outside the company's control, such as the cost of buying land for stores, high distribution costs and other overheads.