Raw Materials (Hansard, 29 July 1976)

§ Mrs. Shirley Williams

The report by the Price Commission, "The Effect of Movements in the Price of Raw Materials on the Retail Price of Goods", which has been published today, examines the effect on retail prices of changes in the price of raw materials during a period of pronounced fluctuations in world prices. It examines in detail the effect, on the prices of selected consumer products, of changes in the price of four individual raw materials. It finds that:

In general, manufacturers' net profit margins were eroded during the period.

Distributors for the most part maintained their gross profit margins on the products selected for study. The Price Commission points out that the gross profit margin has to meet the expenses of running the business as well as provide the net profit. Maintenance of the gross profit margin in the selected products studied in the report does not necessarily mean that the net profit margins were maintained either on these products or over the business as a whole.

Lags between changes in commodity prices and their effect on retail prices varied from a negligible interval to 18 months.

The proportion of manufacturers' costs attributable to raw material varied according to the length of the production chain.

Where the commodity element of manufacturers' costs fell, the decrease with one exception was virtually counterbalanced by other costs. Where the commodity element was still rising, the rate of increase of other costs in the most recent year was even higher.

The report also suggests that if, when the prices of raw materials increase sharply, distributors maintain standard percentage mark-ups on their goods, this can have the effect of magnifying the impact of such increases on the consumer. In present circumstances, I believe that this danger is much diminished in recent 327W years costs have risen more rapidly in retailing than in most other sectors of industry and commerce, and the most recent quarterly report of the Price Commission shows that during the year ended 31st March this year net profit margins for the larger food and drink retailers averaged only about 50 per cent, of the net margins achieved in the period before price controls were introduced, and those of non-food retailers about 60 per cent.

However, costs in retailing are likely to rise more slowly from now on, while it is unavoidable that the cost of imported raw materials will rise as a result of the fall in sterling and a recovery in world commodity markets. This and the upturn in our domestic economy may mean that distributors will in due course be trading in less unfavourable conditions. If in these circumstances some less competitive sectors of distribution maintain gross margins in percentage terms, this may result in an undue increase in retail prices: that is, an increase beyond what is necessary to cover increases in costs and to generate the overall level of profit required to maintain employment and stimulate investment.

This risk is much reduced by the Price Code as it stands. Paragraph 88 of the code ensures that if a distributor's net profits rise above a certain level he must reduce the percentage mark-ups he applies to the goods he sells, in order to keep his overall gross margin within a lower ceiling.

If buying prices in any one sector of distribution rose so fast that the reduced ceiling on gross margins proved excessive, a further reduction in the permitted level might be needed.

I am concerned that increasing raw material costs do not in any sector lead to a situation where retail prices rise faster than is necessary to provide firms with an adequate level of profitability. Accordingly, T am asking the Price Commission to identify those classes of consumer products for which the risk of sharp increases in the retail price seems to be greatest and to keep under review the movements in the gross and net distribution margins of those classes of products so that appropriate action could be taken if the Price Code proved inadequate.