Let’s be honest, Tesco making big profits is a good thing
Instead of criticising Tesco for having a bumper year, we should praise it for providing cheap food and jobs for millions, says Matthew Lesh
There’s an unorthodox tourist sight that I always tick off on trips abroad. It’s not that I don’t check out the historic squares, the museums and galleries or even the nightlife. It’s just that I am obsessed with doing the most usual chores: going to the supermarket.
A quick visit can teach you much about a place and its people. From the whole squid in a Greek supermarket to the immaculate patisserie section in a French one, there’s always something exciting to discover.
I imagine myself to be like the former Soviet leader Mikhail Gorbachev, whose stunned visit to a Texas supermarket in 1990 is said to have demonstrated the folly of the socialist system. Looking out, marvelling at the plentiful fresh fruit and vegetables, Gorbachev decided capitalism was the way forward.
Our forefathers would have been absolutely stunned to see the variety of food on display at the average supermarket. The spice section has more flavours than would have been available for kings and queens in previous eras.
Yet many do not appreciate this wonder of the modern world. Last week, Britain’s biggest retailer, Tesco, came under fire for doubling its pre-tax profit in a single year to £2.3bn. This was labelled outrageous profiteering, while one social media post called for the CEO and owners to be arrested. Unite union’s general secretary Sharon Graham complained about Tesco “raking in mountains of cash while families struggle to put food on the table because of sky-high prices.”
But this entirely misses the facts. Tesco’s profit margin was just 3.4 per cent last year and 1.4 per cent the year before, significantly below the average UK private company’s profit of around 9.8 per cent. A key reason for the higher profit is customers switching to Tesco, including customers treating themselves by purchasing higher-end products instead of eating out.
Tesco claims to be cutting prices on 4,000 products by an average of 12 per cent. We should not fool ourselves into thinking that this is an altruistic act. Tesco is not a charity; it does not exist out of the goodness of its shareholders’ hearts. Rather, it is in an extremely competitive landscape, with several major alternatives, including Sainsbury’s and Asda, Iceland, and Lidl, and, most recently, Amazon. It’s this choice for consumers that keeps down prices.
Profit is an often misunderstood and wrongly maligned concept. In financial terms, profit is what is left after total costs are subtracted from revenues. But there’s also a moral case for profit making. It’s the just reward for a company that creates value, whose whole is greater than the sum of its parts.
Profit is the prize for a supermarket that keeps the shelves full, builds and renovates stores, and invests in complex logistics systems that improve productivity and keep down prices. The practical alternative to supermarkets making a profit is not some utopia; it would mean their operations ceasing. This would be a tragedy for millions.
Many will say we are now in the era of ‘stakeholder capitalism,’ where companies are meant to care less about the bottom line and more about trendy causes. But the true value of a company, particularly one like Tesco, is in their core mission. It’s entirely righteous to provide food to tens of millions of people, jobs to hundreds of thousands, tax for public services, and to do so while making a profit.
Matthew Lesh is director of public policy and communications at the Institute of Economic Affairs