A recent article from the BBC has stated that shopping prices are predicted to increase due to the rising “Brexit red-tape.”
The red tape in question refers to the extra cost associated with Brexit. This cost is in the form of additional tariffs as well as time as additional border checks have caused suppliers to bear costs of up to £400, the Reuters reports.
So, because delays in the supply chain have caused suppliers to bear increased costs, businesses, such as supermarkets, bear these increased costs as they may be potentially passed down onto the said firms.
These costs are passed down onto firms as the tariff price and the opportunity cost associated with increased time lag costs suppliers extra.
This extra cost reduces increases the overall operating costs meaning suppliers cannot supply as much as they are spending more on each delivery.
This decreases supply within the market, thus leading to an increase in price which firms, such as supermarkets, have to bear to continue operations.
And these rising costs for supermarkets is what may cause shopping prices to increase in the future as experts predict that consumers will also have to pay the increased costs associated with Brexit.
This potential increase in prices comes after a period of falling food prices as the annual price of food fell by 0.6% in April.
The annual decrease in fresh food prices specifically was 1 per cent, which followed a drop of 1.5 per cent for April.
The supermarket industry is extremely competitive as giant firms such as Tesco, Asda, Morrisons and the others compete which each other to find the most cost-effective products within a price-elastic industry.
This price elasticity of demand within the supermarket industry comes from the fact that there is high competition, high competition means prices can be easily compared, therefore, consumers favour cheaper, cost-effective options, which is what has led to the success of chains such as Aldi.
So, will supermarkets have to pass the costs down to the consumers?
As previously illustrated, due to rising supplier costs, supermarkets will also have to bear increased costs, these rising costs have the same effect on these supermarkets as the suppliers which is a decrease in supply as operating costs rise.
Hence, this increase in costs leads to an increase in price as goods are more scarce and the market has to be rationed.
However, due to the price elasticity of demand of the supermarket industry, these firms have a large incentive to keep prices low to stay competitive, as increases in the price of price elastic products decrease revenue due to the reduction in demand and consumption.
So, could these retail giants such as Tesco take the rising costs on the chin and have it eat into their profits rather than passing it down onto consumers?
This decision would certainly give these supermarkets a competitive advantage over their counterparts who decide to raise the price, however, the question is if they can actually afford to bear the costs by impacting profits.
The profit margins within the supermarket industry are very low as they are typically between 1 to 3%.
This significant as absorbing the rising costs through reducing these profits will further decrease the profit margins of supermarkets, which, due to them already being low, will significantly impact their overall profitability.
This is terrible for these supermarkets as they will have fewer profits available for the future, an organic expansion which would hurt chains such as Aldi who plan on opening a new store every week for the next two year.
The other option is to increase the price of their products, however, this also impacts consumers as they have to pay the increased price.
This decision may have an even worse effect as the way in which supermarkets make so much profit is due to their large volume sold, however, raising the price of their products will significantly reduce volume sold due to the reduction in demand as products are price elastic.
The decision for supermarkets is difficult as both decisions will lead to some form of lost revenue, so, in future, consumers should either expect rising prices or alternatively, firms will see lower profits.
If you enjoyed this article and love what we are doing please consider showing us further support by following our social media accounts, we also appreciate any feedback as we aim to improve our work.
Written by Hubert Kucharski
Research compiled by Jonas Theaker