UK grocer price cap recipe requires juicy carrot

J Sainsbury

20/05/2026 11:38

The author is a Reuters Breakingviews columnist. The opinions expressed are her own. Refiles to fix style in paragraph four.

By Aimee Donnellan

LONDON, May 20 (Reuters Breakingviews) - Demanding pricing restraint from companies battling supply crunches and wafer-thin margins is a tall order. Yet that is what British finance minister Rachel Reeves is doing with a voluntary programme that would encourage the likes of Tesco TSCO.L, Sainsbury’s SBRY.L, Morrisons and Asda to slash the price of staples like eggs, bread and milk. It may seem necessary, with the conflict in the Middle East driving up food inflation and interest rates. But grocer CEOs can only play ball if they get juicy concessions in return.

Food inflation in the United Kingdom was just 3% in April, official figures revealed Wednesday. Still, the Bank of England said in April that businesses it had spoken to last month expected it to reach 6% to 7% later this year. Moreover, officials are placing a lot of weight on how the frequency with which supermarkets raise prices will influence the psychology of consumers: the BoE fears that surging grocery prices would lead them to demand higher wage increases, fuelling an inflationary spiral. Reeves may thus reckon that, if she can keep the cost of essential goods somewhat at bay, the central bank will raise interest rates by less. This would in turn ease pressure on the government's debt-servicing bill. Ten-year gilt yields are now about 5%, having recently hit an 18-year high.

The problem is that grocers are already struggling to grow sales and keep margins steady. Tesco and Sainsbury’s are only expected to deliver revenue growth of around 2% over the next five years, according to LSEG forecasts. And they are just getting by with operating margins of just 3% and 4% respectively amid a ferocious price war with German discounters Aldi and Lidl. That structural squeeze makes the government's ask a very hard sell.

Slashing VAT would certainly help, a source close to the grocers told Breakingviews. Although the levy doesn't apply to staples like bread and milk, a 20% charge is added to pre-prepared hot food, soft drinks and alcohol as well as crisps and confectionery. Were Reeves to cut this tax temporarily to help fund discounts on more essential goods, the annual windfall for British supermarkets could be in the region of £2 billion, according to Breakingviews calculations, based on official tax-liability numbers and retail sales data by product category and sector. This isn't a lot, but it could be significant: assuming that prices were left unchanged, it would imply a one percentage point lift to grocers' margins, giving them greater wiggle room to absorb cost increases.

The danger for Reeves is any new shortfall in public finances, however small, would be badly digested by the market at a time of political uncertainty surrounding the future leadership of the country. Grocers could help her navigate the latest cost-of-living crisis, but she will have to make it worth their while.

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CONTEXT NEWS

Britain's finance ministry is pressuring major supermarket groups to introduce voluntary price caps on key products, such as eggs, bread and milk, in return for easing some regulations, according to a Reuters report on May 19 citing two people with knowledge of the situation.

The finance ministry had no immediate comment.

Prices for food and non-alcoholic beverages in Britain rose 3% in April compared with a year earlier, official figures showed on May 20.

Shares in Tesco and Sainsbury’s were down 1.7% and 1.54% by 0834 GMT on May 20.

The yield on long-dated government debt has been rising https://www.reuters.com/graphics/BRV-BRV/byvrnwbmdve/chart.png

(Editing by Jon Sindreu; Production by Streisand Neto)

((For previous columns by the author, Reuters customers can click on DONNELLAN/Aimee.Donnellan@thomsonreuters.com))