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Are big grocery chains profiting from inflation? CEOs say no — but the truth is more complex

The heads of Canada's biggest grocery chains were in Ottawa this week to defend themselves against accusations that they are gouging consumers amid high inflation. While they insist their profit margins are as thin as they've ever been, their record profits suggest there's more than meets the eye.

Major grocery chain CEOs say profit margins are as thin as ever, even as they're raking in record profits

Making sense of grocery profits and rising prices

1 day ago

Duration 2:05

Grocery chain CEOs have pushed back against claims that they’re profiteering from high inflation. While there’s no question that grocery chains are benefiting from inflation, the real question is whether they’re driving up prices more than needed.

It's not hard to find Canadians upset with the skyrocketing cost of filling up a grocery cart.

"It's depressing, it's really depressing," Alex McCourt told CBC News this week, shopping for groceries at his local store in downtown Toronto. "Over the last several years, it's just way too much."

While high inflation has hit all aspects of Canada's economy in recent months, pushing the overall cost of living up by almost six per cent according to the latest data, the pain at the grocery store is most acute, where prices are up nearly double that pace in the past year.

"Quantity wise it has gone down," fellow shopper Ahamad Huq said of his just-completed grocery shop. "But price wise it has gone up."

The reasons offered for those spikes have been all over the map lately, from the war in Ukraine driving up the cost of commodities like wheatand oil, to logistical bottlenecks and an endless stream of natural disasters throwing the normal balance between supply and demand out of whack.

While all those excuses played legitimate roles to varying degrees, lately it has been the retail grocery chains shouldering much of the blame, as they rake in record profits.

"I feel like they're all in cahoots," said Caitie Butterworth, summing up a view held by many Canadians. "They think they can get away with such a deep deception, I think is really what it is."

Tough questions asked

She isn't the only one. Parliamentarians summoned the heads of Canada' three biggest domestic grocery chains to Ottawa this week, to testify in front of an agricultural subcommittee tasked with finding solutions to the ongoing food affordability crisis.

To Canadians like Butterworth, the problem of high food prices has a simple explanation: corporate profiteering. But the CEOs of Empire Company, Loblaws and Metro say nothing could be further from the truth.

"We are not profiting from inflation," said Michael Medline, the head of Halifax-based Empire Company, which owns Sobey's, Safeway and other chains. "It doesn't matter how many times you say it, write it or tweet it — it is simply not true."

WATCH | CEOs push back at allegations of price-gouging:

Grocery CEOs push back at price-gouging allegations

17 hours ago

Duration 4:13

At a committee hearing in Ottawa this week the heads of Loblaw, Metro and Empire Foods faced tough questions from parliamentarians about why food prices continue to skyrocket. All three pushed back forcefully against allegations they are profiteering from high inflation.

His compatriot at Montreal-based Metro Inc., Eric La Flèche, was singing from the same songbook in his testimony, saying it is "simply untrue" that the company is using food inflation to inflate its profits, noting that their costs are up by a similar amount.

He noted that the company's profit margin on food items actually declined last year, a slowdown offset by improving margins at the company's Jean Coutu pharmacy chain.

Profit margins are flat, grocers insist

Galen Weston, the head of the Loblaws chain, echoed that sentiment in his remarks, noting that while sales, profits and margins are up overall across the company's various holdings, most of the improvement has come from booming trade of higher margin goods like cosmetics and medicine at Shoppers Drug Mart, clothes at Joe Fresh, and the company's financial services arm, PC Financial.

On food alone, Weston says Loblaws profit margins are as thin as ever — about four per cent.

"On a customer's $25 grocery basket, we earn just $1 in profit," Weston said. "For those who say grocers are profiteering, the math just doesn't add up."

Galen Weston is shown testifying about food inflation at a committee in Ottawa on March 8th, 2023.

Even if Canadians take them at their word, grocery margins — essentially the amount a company books in profit on every sale after all of its costs have been subtracted — may indeed be about the same as they always have been: in the low single digits.

But economists and financial experts say that doesn't mean the big grocery chains aren't benefiting from the current era of high inflation.

Inflation cover for raising prices, expert says

"The reason why many of these grocery chains may have increased their prices is, I think inflation gives them very good cover," said Partha Mohanram, an accounting professor at the Rotman School of Management at the University of Toronto.

Mohanram says flat profit margins still don't mean the company isn't taking advantage of high inflation to push through higher retail prices. Even if the company isn't padding its profit margins by adding to its markup, he says, its profits would increase as prices rise.

While the costs of things like gasoline, diesel, labour, grains, dairy, meat and other inputs have indeed jumped sharply at varying points since late 2021, that's no longer the case for most of those products.

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In a vacuum, Mohanram says a $1 increase in the marginal cost of a product can result in roughly $1 getting tacked on at the retail level, but it's disingenuous to suggest that no part of that dollar hasn't been offset anywhere along the line.

"Fuel prices have not gone up in the last year. In fact, you can argue that they've actually gone down from the peak," he said. "They talk about salary inflation, but are they really paying their employees 10 per cent more than they were paying them last year? I don't think so."

Mohanram says these chains could be more transparent about how much specifically they make on different product categories, or in different stores more than they have, but in the absence of that, their claims of cost pressures amid record profits will fall on deaf ears.

He gives the example of a pound of butter, a product he says he recently paid $8 for in a major chain, up from $5 before the pandemic.

"Let's say inflation stops. That's not going back down to $5. All that we can hope for is it stays at $8 or maybe comes down a little bit to $7.50," he said.

"I think these guys are viewing this as a one time opportunity to increase prices because you know how things are — prices go up, they never come down."

A man shops for groceries with a hand-held basket

Inflation caused by profit-taking, economist says

Jim Stanford, an economist at The Centre for Future Work, says the brouhaha over grocery profits has tapped into something fundamental in the minds of fed up consumers.

"There's something about supermarkets that gets Canadians angry, I guess because we have to go there every week [but] at least we're now talking in the right direction about what is causing inflation," he said. "It was not caused by workers having too many jobs and making too much money. It's been caused by profit taking — not just by supermarkets, but by powerful companies at every step of the supply chain."

Stanford says none of the grocers' defences hold water since ultimately they are profiting from the higher costs Canadians pay when they shop. Even by the grocery chains' own admission, the typical shopping cart now has fewer items in it than it did before, even as the overall price of that shopping basket is up, he notes.

"Contrary to what the CEOs said, they're making more money off of smaller sales and we're paying for it," Stanford said.

And he dismisses the argument that it's somehow OK for these companies to be making excess profits on things that aren't food, as long as they aren't gouging on essentials.

"Whether that came off of lettuce or canned beans or frying pans or aspirin doesn't really matter. At the end of the day. These companies are making more money than they ever have."

Stanford has been an outspoken critic of corporate profits write large during the pandemic, but even Mohanram, who describes himself as "a believer in well regulated, well functioning capitalism," says major chains can't rake in record profits and claim to not be benefiting from the current era of high inflation.

"There's nothing illegal here," he said, but noted that it's opportunistic on the part of the grocery chains to be more profitable than they potentially could have been.

"You can't have it both ways. You can't profiteer and say that 'I'm not profiteering.' "

Credit belongs to : www.cbc.ca

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