Thin margins and record profits

Calculating grocery store companies bottom lines requires special math

It takes some mathematical gymnastics to accept that grocery stores aren’t somehow profiting when food prices are climbing at twice the rate of overall inflation.

For the average Canadian watching their food bills spiking up each week, it is puzzling to hear grocery store barons talking about thin profit margins when they are making record profits.

And it’s galling to hear their denials of profiteering and lectures about the math of their profits.

This was the spectacle we had recently when the Big Three grocery chains were hauled up, marinaded and grilled before a parliamentary committee investigating food prices.

The chief executive officers (CEOs) of Loblaw, Empire and Metro, which operate major grocery chains including Sobeys and Superstore, showed up only after they were pressured to do so by the committee.

The hearings had a gladiatorial atmosphere as politicians lined up to accuse CEOs of price gouging and profiting on the back of inflation. NDP Leader Jagmeet Singh attacked them for making excess profits and accused them of “greedflation.”

The grocery executives hit back with the holier-thanthou counterattack, saying it’s simply not true. Don’t blame us. Look at the math. Inflation isn’t our fault.

It takes some mathematical gymnastics to accept that grocery stores aren’t somehow profiting when food prices are climbing at twice the rate of overall inflation.

Food is increasing at a rate of 11.4 per cent while inflation is declining and now standing at 5.9 per cent.

So how do the executives explain that?

Well, they say they’re just passing on increasing prices from suppliers who are also facing higher costs for labour, raw materials and transportation.

And how do they explain record profits of 12 per cent more than this time last year?

That is due to increased sales of non-food items like cosmetics, financial services and clothing, they explained.

According to Galen Weston, CEO of Loblaw, they are only making $1 profit on every $25 purchase of food.

One independent report into grocery store profits found that Loblaw made more profit in the first half of 2022 than in the previous five years. It concluded the chain was making a profit of a million dollars a day.

For the average grocery shopper, it’s hard to make sense of all this. We just know we’re paying a lot more for things like butter and yogurt. And that is taking a bite out of our budgets.

Canadians were already suspicious of the Big Three after allegations of bread price-fixing in 2017. The Canadian Competition Bureau accused some major grocery stores of colluding to inflate bread prices over a period of 10 years.

People were also disillusioned after big chains dropped the $2-per-hour “hero pay” for employees who worked through COVID-19 restrictions.

Whether or not you accept the explanations of the Big Three, it is also important to recognize the bigger picture.

Food inflation is a global problem. In countries like Germany, food inflation is running at 20 per cent. In the U.K., grocery stores have been limiting purchases of fruit and vegetables due to supply problems related to cold weather, which has affected production.

The war in Ukraine has hurt the supply and prices of grains, climate change and severe storms affected crop output and labour shortages have driven up costs of production.

It’s also worth considering the domination of the Big Three, which control about 60 per cent of the food retail market, reducing competition. This is similar to the domination of cellphone providers in Canada, which has some of the highest rates in the world.

Canadian food prices are also affected by a labyrinthine system of interprovincial barriers that drive up the costs of transportation of food.

Last year, the Competition Bureau said it would investigate food prices in Canada and make recommendations on opening more competition.

Theatrical hearings and finger-pointing will do little to address expensive food. Getting more transparency from these companies and forcing more competition in the Canadian food distribution system will create downward pressure on food prices.