Prices and profiteering in the food sector

Michael Taft: There will be many attempts to explain the high costs of food and beverages in Ireland – a state of affairs that is hardly new. Everyone throughout the food supply chain, from the farm-gate to the retail shelf, will be blamed and will seek to lay the blame somewhere else. I’d like to highlight one aspect – profit levels in the food and beverage manufacturing sector. This is not the full explanation for high food and beverage costs; but any explanation that doesn’t factor in our extra-ordinary profit levels will be unsatisfactory.

There are three databases that refer to profit levels (or ‘gross operating surplus’ or ‘capital compensation’).

First, is the Eurostat dataset that measures gross operating surplus as percentage of turnover; in other words – how much turnover is taken as profit. The latest year we have data for this measurement is 2003. After that, Irish data is not disclosed on the grounds of ‘confidentiality’. But in that year, Irish profit levels headed the table by a long ways. Nearly a quarter of turnover was taken as profit. With the exception of the UK, profits made up less than 10 percent of turnover in other EU countries for which we have data.

The second measurement is contained in Eurostat’s European Business statistical book 2007. While this contains the same numbers as the Eurostat dataset, it provides nominal turnover and gross operating surplus numbers. From this, we can assess what would happen if Irish companies took the same amount of profit as other countries and reduced their prices accordingly.

• If Irish companies took the same amount of profit as UK companies, food and beverage prices could be reduced by 10 percent.

• If Irish companies took the same amount of profit as other non-UK EU-15 countries, food and beverage costs could be reduced by between 14 percent and 17 percent.

The third measurement comes from the EU Klems database. This has the advantage of having more current numbers – from 2007 with the ability to measure profits per employee hour worked in the Food & Beverage sector. This shows an even more dramatic gap between Ireland and the Eurozone.

Ireland is well ahead of the game, making well over four times the Eurozone average. If the profit take in Ireland were at Eurozone levels, prices could be reduced by 16 percent.

In all these measurements, however, there is a problem – the statistical distortions created by the accounting activities of multi-nationals which, through transfer-pricing, use Ireland as a tax-laundering stop-over. It is difficult, though not impossible, to assess the extent of these distortions. In the Food sector, such activities would be less than in the manufacturing sector at large. Indigenous companies make up nearly half of all turnover in this sector (as opposed to 21 percent for all industries). However, in the Food sector anyway, it is difficult to see profit levels returning to European averages even taking into account multi-national accounting activities, though I will try to follow this up in a subsequent post.

The only organisation that has considered this issue in any depth is UNITE the Union, with its publication, ‘The Truth About Irish Profits’. It took a similar approach – using European data – to assess the contribution of high profits to high prices.

This is only the manufacturing sector. A broader analysis of profit levels would have to be conducted in all elements of the food supply chain – wholesale, retail, input costs, etc. But it is clear that high, potentially inexplicably high, profit levels may be contributing to high costs.

PS: For the real devaluationists among you, labour costs can’t be blamed for high costs. Irish labour costs per hour in the Food & Beverage sector were in 2007, according to the EU Klems, 9 percent below the EU-15 average and 21 percent below our peer group (non-Mediterranean countries).

Posted in: Economics • Labour market

Tagged with: profitability • Wages