Inflation is high, but price increases are even higher. Are (branded) manufacturers taking advantage of the situation to boost their margins and make monster profits? Rabobank looked into it.
Generous profits in times of crisis
Groceries have become more than 20% more expensive than a year ago. Inflation and sharply rising raw material and personnel costs are to blame, companies say. Yet it is striking that multinationals are still making generous profits and managing to keep growing despite the difficult market conditions.
While consumers are losing purchasing power and the cost of living keeps rising, some FMCG giants are even achieving record figures. Brewer AB InBev, for instance, had an excellent quarter, with profits outpacing sales, thanks to price increases. Players such as Henkel, Unilever and Mondelez also achieved significantly higher sales and easily managed to pass on higher costs to their customers.
Is this “greedflation”, the practice of raising prices more than would be necessary cost-wise to increase profits? Is inflation just an excuse? It is hotly debated at home and abroad. Even Frans Muller, the CEO of Ahold Delhaize, has now been accused of greedflation by unions. Rabobank’s Economics Department now puts it to the test.
Highest profits since 2008
It is true that profits have risen sharply in recent years. Faster even than pre-corona. Before the corona pandemic, in 2019, Dutch companies had a net operating surplus of 201 billion euros. In lockdown year 2020, profits dropped to 189 billion, but by 2021 there was already 213 billion euros, and in 2022 there was even 238 billion euros of net operating surplus. “Last year, the net operating surplus relative to the size of the overall economy reached its highest level since 2008,” Rabobank calculated.
The researchers conclude this for the Dutch market, but the broader trend is also applicable internationally. Both the International Monetary Fund (IMF) and the European Central Bank (ECB) concluded in recent studies that the rise in wages has not so much driven up prices in recent times as the extra margins of companies themselves. To counter this grape inflation, and protect consumers’ purchasing power, France, for instance, already froze the prices of 250 supermarket items.
Inflation could clearly be lower
What explains these high profits? In the fourth quarter of 2022, a net operating surplus of 66.3 billion euros remains below the line. That is 10.9 billion euros more than in the fourth quarter of 2021. But what is particularly striking is that input costs (intermediate consumption) fell sharply, despite the claims of many companies. Companies have started saving, for instance on energy. Rabobank also notes that entrepreneurs have seen their profits increase by 10.9 billion euros, while wage costs have risen by “only” 4.9 billion.
So would there have been less inflation if companies had limited the increase in their selling prices to what was minimally necessary to maintain their profit margin? The answer is yes: over the whole of 2022, prices in the Netherlands would have been 2.2 percentage points lower. That makes a big difference to the total price inflation of 11.8% that year.
Still, Rabobank doesn’t dare simply conclude that there is actually greedflation in the Netherlands. Indeed, apart from abuse of power, other motives may also come into play. For instance, companies often raise their prices in advance, in anticipation of upcoming cost increases. “It takes some time before price increases are passed through the entire production chain,” say the researchers.
Companies may also have already built a buffer for upcoming wage increases. Certainly retail chains (even faster in the Netherlands than in Belgium) already saw the scare in the autumn of last year, with increasing union protests and strike action. Wage negotiations would inevitably arrive. In Belgium, companies were perhaps anticipating the indexation in January.
“No greedflation in food”
The game of supply and demand is equally in play. Demand was a lot higher than supply in 2022, due to the supply problems caused by the corona pandemic and the global perils in the supply chain afterwards. By raising prices, demand fell, and sometimes that was just what was needed. If companies lowered prices, demand would become too high for supply.
Especially in food, Rabobank is far from certain that greedflation is possible. Ironically, because it is precisely in that industry that most blame falls. Due to intense competition, price negotiations there are “at the cutting edge”, while companies typically raise prices if their market share remains secure and if they expect competitors to go along with it. “Many food retailers and food producers – certainly private label producers – experienced pressure on their profit margins in 2022. This does not indicate greedflation,” the report concludes.