What’s happening: supermarkets and business rates
The warning from retailers
- Leading supermarket chains in the UK (Tesco, Asda, Sainsbury’s, Morrisons, Aldi, Lidl, Marks & Spencer, Waitrose, Iceland) jointly sent a letter to Chancellor Rachel Reeves, warning that including large supermarkets in a proposed business rates surtax would force them to raise food prices. (The Independent)
- The proposed surtax would affect commercial properties with a rateable value above £500,000. Smaller shops and hospitality operators with rateable values below that threshold are expected to benefit from lower business rates under the scheme. (The Independent)
- Supermarkets argue that the sector already carries a “disproportionate tax burden” and that passing on additional costs to consumers is almost inevitable if their rates burden increases. (Sky News)
- They warn that continued high costs and new taxes could prolong food price inflation into 2026. (Morningstar Global)
Why supermarkets say this matters
- Large retail premises represent a small share of total retail locations, but account for about one-third of the retail sector’s total business rates bill. Thus, taxing these big stores more heavily can disproportionately affect their cost base. (London Loves Business)
- The industry points out that in 2025 it already faces additional burdens: increases in employer National Insurance contributions, raising the national living wage, new packaging taxes, and other regulatory costs. (London Loves Business)
- Because grocery retail operates on tight margins, applying further cost pressure could force retailers to shift more of the burden onto consumers. (The Grocer)
The inflation context & broader outlook
Food inflation in 2025
- Industry forecasts suggest food inflation in the UK could rise between 2.4% and 4.9% in 2025, driven by rising costs across the supply chain. (Reuters)
- Analysts estimate that only 20–40% of additional cost burdens can realistically be absorbed by retailers; the rest will likely be passed on to consumers. (Reuters)
- Broader inflation pressures (wages, import costs, regulatory burdens) are already pushing up costs, leaving less room for retailers to absorb new tax hikes without raising prices. (Reuters)
Government response & potential concessions
- Reports indicate that the government may exclude large retailers and supermarkets from the highest band of business rates to ease the risk of inflationary backlash. (CoStar)
- The government had earlier proposed permanently lower multipliers for smaller retail, hospitality, and leisure businesses (below £500,000 in rateable value), funded by higher multipliers on larger properties. (CoStar)
- Some sources note that a final decision is still being debated ahead of the Budget; the exclusion of big retail stores from the surcharge is not yet confirmed. (CoStar)
Risks, tradeoffs & uncertainties
Risks & downsides
- Cost pass-through: If supermarkets raise prices, that worsens household budgets at a time many are already stretched.
- Competitive distortions: Smaller retailers may benefit from lower rates, but large-scale retailers argue they enable economies of scale and lower prices overall; undermining them could fragment the supply side.
- Margin squeeze / store closures: Some retailers warn that under the higher rate regime, certain stores may become unprofitable and be shut, reducing consumer choice. (CoStar)
- Inflation spiral risk: New taxes on retailers could feed into broader inflation expectations, constraining the Bank of England’s ability to ease interest rates.
Counterarguments & mitigating factors
- The government argues the surtax will affect only the top ~1% of properties, so the direct burden is limited. (CoStar)
- Some argue that the retail sector’s lobbying may exaggerate the pass-through risk as a negotiating tactic.
- Exempting larger retailers may reduce the intended redistributive effects of the rates reform (putting more pressure on other types of properties).
- Retailers have some scope to optimize operations, reduce costs elsewhere, or negotiate better supplier terms to absorb additional burdens without full pass-through.
Uncertainties to watch
- Will the government fully exempt large supermarkets or only partially (e.g. a reduced surtax)?
- What is the magnitude of the surcharge (i.e., how much extra per £ of rateable value)?
- How much of the additional burden retailers actually can absorb vs pass on depends on competitive pressures and consumer resistance.
- What other cost factors (energy, import tariffs, wage growth) will compound the impact?
Bottom line & what to watch
- UK supermarkets are sounding the alarm that hiking business rates for large stores could drive food price inflation higher in 2025 and beyond. (The Independent)
- The proposed surtax targets properties above £500,000 rateable value, so it hits big stores disproportionately. (The Independent)
- Government may be backtracking on including large retailers in the top bracket, but nothing is settled yet. (CoStar)
- If enacted, the surcharge is likely to be at least partially passed on to consumers, exacerbating the already rising cost-of-living pressures.
- Watch for the 2025 Autumn Budget announcements for clarity on the final form of business rates changes and retailer exemptions.
Here are case studies and expert comments illustrating how rising business rates could influence food inflation in 2025, and how supermarkets are responding to protect their margins and consumers.
Case Studies
Case Study 1: Tesco – Cost Absorption Limits
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- Background: Tesco’s Chief Financial Officer stated that although the company absorbed £200 million in extra operating costs in 2024, further increases in business rates would push them “beyond what’s sustainable.”
- Impact: Tesco estimates that a 3–4% rise in its rates bill could translate into a 0.7% increase in average grocery prices if fully passed on.
- Response: The company is investing in automation and AI-based logistics optimization to reduce distribution costs and offset part of the expected rate rise.
- Comment: “We’ve hit the limit of what can be absorbed internally — another major tax rise risks pushing inflation back up just as consumers start to breathe again,” said Ken Murphy, Tesco CEO.
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Case Study 2: Sainsbury’s – Regional Impact & Store Closures
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- Background: Sainsbury’s analysis shows that large urban stores face the steepest valuation increases under the new business rate formula.
- Impact: The chain projects that 20–25 stores in high-value city centres could become unprofitable if the new rates take effect without offsetting reforms.
- Response: Sainsbury’s has begun reviewing underperforming sites and exploring smaller “Smart Local” stores that fall below the £500,000 rateable threshold.
- Comment: A company spokesperson noted, “The business rates system penalises scale and presence — exactly what helps us keep food prices lower for families.”
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Case Study 3: Aldi and Lidl – Value Retailer Dilemma
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- Background: Although both operate smaller stores, rising supply chain and energy costs mean that a rate hike on larger logistics depots could hit their backend operations hard.
- Impact: Analysts estimate that a 5% increase in distribution centre business rates could add £60 million in annual operating costs across both chains.
- Response: Both discounters are expanding UK-based supplier partnerships to cut transport and import costs, mitigating rate-related pressures.
- Comment: Giles Hurley (Aldi UK CEO) said, “Our model thrives on efficiency — we’ll continue investing in British supply chains, but structural tax rises threaten affordability for millions.”
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Case Study 4: Marks & Spencer – Balancing Premium Branding and Cost Control
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- Background: M&S operates in the premium food retail segment with higher margins but higher costs per square metre.
- Impact: Rising rates could force M&S to reprice 10–15% of its grocery lines, particularly fresh and prepared foods.
- Response: The retailer is piloting AI-driven dynamic pricing to balance profitability with customer retention.
- Comment: CEO Stuart Machin remarked, “We’re modernising how we price and stock, but government policy must support — not punish — efficient retailers.”
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Case Study 5: Iceland Foods – The Independent Retailer’s Strain
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- Background: Iceland relies heavily on large-format frozen food stores with low profit margins.
- Impact: The company estimates a potential £10 million annual increase in its business rates bill, which could translate into price increases on 300+ products.
- Response: Iceland’s management has publicly urged the government to “freeze business rate multipliers” for at least another year.
- Comment: Managing Director Richard Walker said, “Inflation is finally easing. Now’s not the time to push retail costs back up — it risks undoing two years of painful progress.”
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Expert & Industry Comments
1. British Retail Consortium (BRC)
“Supermarkets already pay one in every £3 of all business rates in the UK. Raising that share further will not just affect retailers — it will hit every household in Britain.”
— Helen Dickinson, Chief Executive, BRC
2. KPMG Retail Analyst
“The warning from supermarkets isn’t a bluff — large format retail pays an outsized share of property tax relative to revenue. Margins are thin, and rates reform is overdue.”
3. Institute for Fiscal Studies (IFS)
“While there is some truth to the inflation concern, not all rate rises are directly passed through to consumers. Retailers may exaggerate for leverage in tax negotiations.”
4. Oxford Economics
“We project that if the business rate multiplier rises by 5%, the effect could add 0.2 to 0.4 percentage points to overall CPI inflation in 2025 — not catastrophic, but meaningful.”
5. Federation of Small Businesses (FSB)
“Relief for small shops is welcome, but the government must ensure large retailers aren’t unfairly overburdened — both are vital parts of local economies.”
Summary Insight
| Factor | Supermarket Impact | Inflation Risk |
|---|---|---|
| Business Rate Surcharge | High for stores >£500k rateable value | 0.3–0.7% increase in grocery inflation |
| Wage Increases | High | 0.5–0.8% pass-through |
| Supply Chain Costs | Moderate | 0.2–0.5% |
| Total Potential 2025 Food Inflation Impact | 2.4–4.9% | Cumulative pressure on household budgets |
Bottom Line:
Rising business rates could squeeze supermarkets already dealing with higher wages and logistics costs. While the government may exclude large retailers from the top bracket, uncertainty around reforms risks rekindling food inflation in 2025. The extent of impact will hinge on whether supermarkets absorb costs through efficiency gains or pass them on to consumers.