How Supermarkets Make Billions

Now the beating heart of modern consumer and community culture, supermarkets offer incredible convenience and infinite choice.

Can’t come to us? We’ll come to you. Need it discounted? Here have 3 for 2 or BOGOF. Want more off? Join the club.

The whole thing is built around getting you exactly what you didn’t even know you needed – and as much of it as possible.

What DO these basket behemoths get out of all this giving?

Beneath the polished aisles and incredible, profit margin defying promotions, lies a formidable business model that not only generates substantial profits but also wields significant influence over farming and government.

Let’s look at how the “big four” (Tesco, Sainsbury’s, Asda, and Morrisons) make money, lobby government, shape pricing strategies and market like there’s no tomorrow.

The Big Four’s Big Bucks

In the past year, the big four supermarkets have continued to generate impressive profits despite challenges such as supply chain disruptions and inflationary pressures.

• Tesco: Tesco remains the UK’s largest supermarket chain, reporting a robust operating profit of £2.49 billion for the fiscal year ending in February 2024.

• Sainsbury’s: Sainsbury’s, the second-largest chain, posted an underlying profit of £690 million for the year ending March 2024.
• Asda: Asda’s financial performance was also strong, with the company recording an operating profit of £885 million in 2023.
• Morrisons: Morrisons, while the smallest of the four, still generated a notable operating profit of approximately £828 million for the year ending January 2024.

Lobbying for Good Food Standards

The big four supermarkets wield considerable influence in shaping government policies, particularly those related to food standards. They invest heavily in lobbying efforts to ensure regulations align with their business interests.

While ostensibly the goal of standards is to ensure consumer safety and product quality, supermarkets often push for regulations that allow them to sell lower-quality products at higher profit margins.

For instance, supermarkets have been known to advocate for lenient labeling requirements, allowing them to market products with lower nutritional value as healthy options. By influencing food standards, these retailers can reduce costs while maintaining the appearance of offering quality products.

Dictating Prices to Suppliers

Supermarkets have a reputation for dictating prices to suppliers rather than the other way around. This power dynamic is particularly evident in the dairy industry, where supermarkets have substantial control over the prices paid to farmers for milk.

Holy Cow: The Cause of the Dairy Farmers

Dairy farmers have long faced challenges in securing fair prices for their milk.

Supermarkets often use their purchasing power to negotiate prices that barely cover production costs, squeezing farmers’ profit margins.

The price of milk is often set below the cost of production, forcing farmers to absorb losses or find ways to cut costs.

This pressure has led to significant consolidation in the dairy industry, with many small farms being driven out of business. The remaining players are often forced to increase production to maintain profitability, leading to increased strain on the environment and animal welfare concerns.

Super Marketing: Massive Spending on Advertising

To maintain their market dominance and attract consumers, supermarkets invest heavily in advertising. The big four collectively spend billions of pounds each year on marketing campaigns designed to enhance their brand image and drive sales.

In 2023, Tesco’s advertising budget exceeded £180 million, focusing on campaigns that promote their “low prices” and “quality products” slogans.

Similarly, Sainsbury’s and Asda allocated substantial budgets for advertising, emphasizing their loyalty programs and product offerings.

This extensive advertising serves not only to attract new customers but also to retain existing ones by reinforcing brand loyalty.

Ultimately, the significant costs associated with advertising are often passed on to consumers through higher prices, further boosting supermarket profits.

Rewarding for Who? Lucrative Loyalty Schemes

Loyalty schemes have become a cornerstone of supermarket strategy, designed to keep customers coming back while providing retailers with valuable data.

The idea is simple: reward customers for repeat purchases, offering discounts, exclusive deals, or points that can be redeemed for future rewards. But behind this seemingly consumer-friendly strategy lies a highly lucrative system for the supermarkets.

Investment in Apps and Technology

The big four supermarkets have invested heavily in loyalty apps and technology platforms to drive customer engagement.

Tesco’s Clubcard, Sainsbury’s Nectar, Asda’s Rewards app, and Morrisons’ More card are not just physical cards anymore but fully integrated digital platforms.

These apps allow you to track points, receive personalised offers and access exclusive discounts.

This shift to digital platforms is about more than convenience. It also enables supermarkets to gather extensive data on your shopping habits. Data they can then use to target you more, tailoring marketing campaigns and special offers to encourage more frequent visits, larger baskets, and greater customer loyalty.

Discounting Mechanism and Rewarding Loyalty

These schemes work by offering discounts exclusively to loyalty cardholders or giving them points for purchases.

For example, Tesco’s Clubcard Prices offers significant discounts to those who scan their loyalty cards at checkout, while non-cardholders pay full price.

It’s a mechanism that builds a two-tier pricing system where shoppers feel incentivised to sign up for the card, ensuring that more consumers are tied into the supermarket’s ecosystem.

While these discounts may seem like a boon for the shopper, they are calculated to increase spending. Supermarkets track which promotions lead to increased customer spend and adjust their offers accordingly. Moreover, loyalty schemes encourage customers to become habitual shoppers at one supermarket, locking in long-term business.

How Lucrative Are Loyalty Schemes?

Very. By using the data collected, supermarkets can optimise their inventory, tailor promotions, and reduce costs associated with customer acquisition.

Tesco’s Clubcard, for example, contributed significantly to its 2023 growth, with over 20 million active users fuelling repeat purchases and enabling better-targeted promotions.

The investment in loyalty apps and rewards programs is relatively modest compared to the returns they generate in terms of customer retention, increased basket size, and valuable data on shopping habits. The loyalty schemes represent not just a marketing tool but a data goldmine that has become essential to the modern retail landscape.

Supermarkets: Pillars of the Community

In recent years, the big four have increasingly positioned themselves as vital pillars of local communities, engaging in charitable and social initiatives to enhance their public image. These community programs serve a dual purpose: improving brand perception while deepening customer loyalty.

• Tesco’s “Community Grants” program, which provides funding to local causes chosen by customers.
• Sainsbury’s “Active Kids” scheme, which donates sports and cooking equipment to schools.
• Asda’s “Fight Hunger, Create Change” campaign, in partnership with food banks to reduce hunger.
• Morrisons’ “Community Champions” initiative, which encourages each store to engage with local charities and causes.

These initiatives are often highlighted in marketing campaigns and in-store signage to show that the supermarkets are invested in the well-being of their communities, generate positive PR and help the perception of supermarkets being seen as socially responsible.

Investment vs. Profits

While these initiatives undoubtedly provide benefits to local communities, they represent a fraction of the supermarkets’ overall profits.

Tesco’s Community Grants allocated £8 million in funding to local projects in 2023.

While this is commendable, it pales in comparison to Tesco’s £2.49 billion in operating profit during the same period.

Similarly, Asda’s Fight Hunger campaign raised around £5 million, a mere fraction of its nearly £885 million in profits.

How much disparity is there between the scale of charitable initiatives and the enormous profits these companies generate?

While supermarkets market themselves as socially responsible entities, the investments they make in these programs are often dwarfed by their advertising budgets and profit margins.

Off Your Trolley: When Four Became Six

The UK grocery market has been transformed by the rise of Aldi and Lidl, the German discounters that have significantly altered shopping habits and forced the big four to rethink their strategies.

Market Impact

They entered the UK market in the 1990s but only really began to make an impact during the financial crisis of 2008, when cash-strapped consumers turned to them for low prices and a no-frills shopping experience.

Their influence has grown steadily since, with both retailers capturing an increasing share of the market by focusing on limited product ranges, efficient operations, and aggressive pricing strategies.

Between 2010 and 2023, Aldi and Lidl expanded rapidly, with Aldi now operating over 1,000 stores and Lidl over 960 stores across the UK.

As of 2024, their combined market share exceeds 18%, making them formidable competitors to the traditional supermarket giants.

Changing Shopping for the Better?

The key to their success? Offering a streamlined approach to grocery shopping, with fewer choices but better value. That and narrowing the gap between price and quality – something that wasn’t previously a priority for the big guys.

Aldi and Lidl have mastered the art of providing high-quality private-label products that closely rival, and in some cases surpass, leading brands, while keeping prices significantly lower.

Key shifts in shopping habits influenced by Aldi and Lidl include:

• Basket Size Reduction: Consumers now shop more frequently for essentials rather than doing large weekly shops.
• Brand Acceptance: Shoppers have become more accepting of own-brand alternatives over big-name brands.
• Price Sensitivity: More consumers prioritise value over loyalty to traditional supermarkets.

Response from the Big Four

The rise of Aldi and Lidl has forced the big four to respond with a variety of tactics, including:

• Price Matching Campaigns: Tesco and Sainsbury’s introduced “Aldi Price Match” initiatives to retain customers.
• Smaller Store Formats: To compete with Aldi and Lidl’s convenience model, the big four have opened smaller, more streamlined stores.
• Focus on Own Brands: Tesco, Sainsbury’s, and Asda have expanded their private-label offerings to compete on price and quality.

Aldi and Lidl Profit Margins vs. The Big Four

One of the key differences between the discount retailers and the big four supermarkets is their approach to profitability. Aldi and Lidl operate on much thinner profit margins, typically ranging between 2-4%, compared to Tesco’s operating margin of around 4.5%, Sainsbury’s at 3.2%, and Morrisons at 3.5%.

However, Aldi and Lidl compensate for their lower margins through:

• Lower Operating Costs: They operate with minimal staff, simple store layouts, and streamlined supply chains.
• Private Label Focus: Around 90% of their products are own-brand, allowing for higher control over costs and better margins.
• High Volume Sales: With lower prices and high footfall, they achieve profitability through sheer sales volume rather than high per-unit profits.

Despite their lower margins, Aldi and Lidl continue to grow. Fast.

Price Wars: Who’s Really Cashing in?

Here’s the bottom line: despite fierce competition and the arrival of discounters like Aldi and Lidl, the cost of food continues to rise, leaving consumers questioning why their shopping bills are higher than ever.

While supermarkets blame rising production and supply chain costs, their healthy profit margins suggest they are finding ways to maintain their bottom lines—often by balancing selective price cuts with increases elsewhere.

Price wars may create the illusion of savings, but shoppers ultimately pay more, whether through shrinkflation, higher costs for essentials, or hidden price hikes outside of heavily promoted items.

Meanwhile, suppliers, particularly farmers, face relentless pressure to accept lower prices, while supermarkets dictate terms and maximise efficiency to sustain their profitability.

Investments in technology, loyalty schemes, and convenience services also contribute to rising costs, with consumers shouldering the burden.

In the end, while the battle for market share rages on, it’s clear that supermarkets, not shoppers, remain the biggest winners.

And we’ve all got the receipts.