Cooking the Books 2 – Wages, prices and profits

‘Greggs faces profit margin pressure amid rising wage costs’ reported Business Matters (15 May). Roisin Currie, the company’s chief executive, was reported as saying she expected that the company’s costs would rise by between 4 and 5 percent this year and that ‘the majority of cost inflation pressure that we face this year is wages’. This, the magazine said, underscores ‘that labour costs remain the biggest financial burden on the company.’ Wages a burden on profits? We thought it was the other way round.

Politicians and the media often lecture us that inflation, as a rise in prices generally, is caused by wage increases. Workers get a wage increase which employers, to maintain profit margins, pass on to their customers by increasing the price of what they are selling. The logic of this position is that workers should not ask for a wage increase or strike to try to get one as this won’t make them any better off.

Marx met a similar argument in his day. He countered it by pointing out that, faced with a wage increase, capitalists might want to compensate by increasing the price of what they sell, but the point was whether they could:

‘The will of the capitalist is certainly to take as much as possible. What we have to do is not to talk about his will, but to enquire into his power, the limits of that power, and the character of those limits’ (Value, Price and Profit, section 1).

In theory Greggs could increase its prices by 4 to 5 percent to compensate for the ‘financial burden’ of having to pay out more wages but this would not necessarily have the effect of protecting its profit margins. It could well do the opposite since its sales might fall as its customers bought their sausage rolls from one of its competitors.

The board of Greggs has evidently reached the conclusion that this is in fact what would happen. As Business Matters put it:

‘Greggs continues to navigate the challenges posed by rising wages while leveraging its expansion plans and affordable pricing to maintain its market position and drive growth’ (emphasis added).

Currie was reported as saying:

‘Greggs would continue to monitor and review price increases regularly. While the company does not have a fixed plan for pricing, she emphasized the need to remain flexible and responsive to ongoing economic conditions, reviewing their stance on a week-to-week and month-to-month basis’.

In other words, to keep testing to find out what price the market will bear without losing sales.

Greggs is in competition with others to sell take-away breakfasts and lunches. It claims to have overtaken McDonalds in the market for breakfasts and is planning to increase the number of its shops this year. In this competitive situation it would be counter-productive to try to pass on increased wage costs to customers. So Greggs has to accept the reduction in profits that follows from not raising prices. It might have the will but it doesn’t have the power to protect its profits.

Capitalist enterprises have to submit to the economic laws of capitalism just as much as workers and governments do.

Next article: Proper Gander – United by music, non-politically? ⮞