The Economics of Supermarkets
I never used to think much about why supermarkets are laid out the way they are - until I realised I always left with things I didn’t mean to buy. I’m sure we’ve all had this experience - you went in just for milk, came out with grapes, crisps, a fancy new pasta, and forgot the milk entirely. I used to laugh it off as forgetfulness, but after a while, I started to realise I was falling into patterns. Patterns that supermarkets had designed - because they aren’t just shops. Supermarkets are carefully engineered economic systems. Every product, price tag and shelf is part of a bigger picture - one that quietly encourages us to spend more, stay longer, and come back next week.
At first glance, it all seems straightforward: people need food, supermarkets provide it, and we choose what to buy. But in reality, supermarkets don’t just respond to what we want - they shape what we want.
Walk into Carrefour and you’ll see the same product offered at different prices depending on whether or not you are a Share member. You’ll often see one price for members and a more expensive one for everyone else. That’s not just a loyalty perk - it’s a pricing strategy. The supermarket gets your data and your loyalty in exchange for a discount. You get cheaper bread and they get to study your shopping habits.
Psychology is also ever-present in supermarkets. Have you ever noticed how the essentials - like bread or milk - are always at the back of the store? That’s no accident. It’s done so you walk through as many aisles as possible before you reach what you actually came in for. Things placed at eye level usually earn the store the most money. Those “Special Offers” aren’t always cheaper either - they’re often designed to make you feel like you're getting value, even if the price hasn’t changed much at all. For example, a lawsuit filed in 2023 accused Safeway of raising the price of items only to use them in 'buy one, get one free' events. One customer bought a pint of ice cream at a BOGO price of $7.49 - but the very same product was priced at $4 on all other days.
Most large supermarkets operate on tight margins, typically between 2 and 3%. According to the Food Industry Association, the average net profit margin across US grocery stores dropped to 1.6% in 2023, the lowest since 2019. In the UK, Tesco’s operating margin for 2023/24 was about 3%, a recovery from COVID lows, but still far below the margins seen in industries like tech or finance. These low margins mean that supermarkets have to put an intense focus on high sales volume. A supermarket must sell millions of dollars worth of goods to generate a profit, meaning continuous inventory and cost control is necessary for survival.
A key factor allowing for these thin margins is economies of scale. Large supermarket chains use their enormous purchasing power to bulk buy products at significantly reduced costs. This advantage allows them to offer more competitive prices to consumers, while simultaneously creating a significant barrier to entry for smaller, independent stores who cannot match these purchasing efficiencies as they do not have the demand to buy a large number of items.
However, supermarkets don’t just compete on price - and they actually try hard not to. The UK grocery sector is an oligopoly, with Tesco (28.5%), Sainsbury’s (15.9%), Asda (12.6%), Aldi (10.2%) and Lidl (7.2%) controlling the majority of the market. With so few dominant players, firms are reluctant to trigger price wars, which use already thin margins. Instead, they focus on non price competition: loyalty cards, ethical branding, delivery speed, and private label/own brand goods. For example, Sainsbury’s has committed to saving £650 million over two years through automation and cost cutting rather than lowering prices.
Another thing supermarkets have quietly mastered is how to use your data. Every swipe of your loyalty card, every online order, even what you scan at self checkout - it all builds a detailed picture of how you shop. It’s not just about sending you coupons for things you’ve bought before (though that’s part of it). It helps them figure out what you tend to buy together, how often you restock certain items, and even how your habits change when the weather shifts. If the forecast shows a hot weekend coming up, and past data suggests people tend to buy more ice cream when the sun’s out, they can quickly boost stock or launch a promotion.
So the next time you’re standing in the cereal aisle trying to decide between 27 options, know that the layout, the brands, even the pricing isn’t random. From loyalty schemes that quietly track your habits to carefully chosen store layouts and their own high-margin products, supermarkets are designed to guide you toward what they want you to buy. They’re not just places to grab groceries. They’re highly calculated machines, built to understand and influence what we consume.
Thank you for reading! I hope you enjoyed it! You can find my last article, The Economics of Coffee, here: https://www.linkedin.com/pulse/economics-coffee-tanvi-gupta-4navc