By Sylvain Charlebois, Director, Agri-Food Analytics Lab, Dalhousie University and Samantha Taylor, Professor in Accounting, Rowe School of Business, Dalhousie University.
Accusations of gouging in the food industry have reached an all-time high. According to a recent survey, 68% of Canadians believe food corporations are taking advantage of the inflationary cycle to increase prices, and it’s not just in retail. While both Quebec and British Columbia now have class-action lawsuits against the beef industry, many trade groups and politicians are now asking the federal government to investigate.
We will hear complaints from consumers about prices being exaggeratedly inflated in different sectors, such as automotive, telecommunications, pharmaceuticals, and airlines. But food is different. The stakes are different for everyone. The balance between profits and profiteering is incredibly delicate. Along with energy, food is the most volatile element when measuring inflation, essentially due to how the category is easily affected by weather, labour and geopolitics. Half of the products you see in a grocery store are perishable and rely on cold chains. That aspect alone of the business makes things more complicated than moving car parts or wood around. Getting food from farm to store, or to restaurant, is a battle of time and pressure, every day. Failure means more waste, more problems, more costs, and higher food prices.
It’s easy to blame food companies; it’s populist, really. Grocers get most of the backlash from consumers due to their exposure. In recent weeks, many have criticized grocers for recording historically high profits, and accused them of taking advantage of the current inflationary cycle. Grocers have been desperate to be ahead of the market and beat the unpredictable nature of what is happening. When carrying 18,000 to 20,000 products, it’s not that simple. Looking at the financial performance of our three largest grocers, the numbers have been consistent for the most part.
Our largest grocer, Loblaws, has posted consistent gross margin and profit ratios since 2017. While gross margins have varied between 29.35% and 31.47%, profits are anywhere between 1.64% and 3.53%. For Empire/Sobeys and Metro, the results are similar. Gross margins for Empire/Sobeys varied between 23.97% (2017) to 25.47% (2021) and profits from 0.67% (2017), to 2.48% (2021). For Metro, similar variations except for 2018, when profitability was at 11.93%. That was likely due to Metro’s acquisition of Jean Coutu. Acquisitions will skew how these companies perform financially, and we’ve seen many acquisitions in recent years. This is something we need to keep in mind.
Indeed, profits and margins are higher, but ever so slightly. Compared to some banks and other major economic players in our economy, the difference is relatively small. We also need to keep in mind that many Canadians will benefit from these decent financial outcomes as most pension plans in Canada will own shares in at least one of the big three.
The fact remains that any evidence of “greedflation” in food retail in Canada is weak at best. That said, some prices in some food categories have behaved unreasonably in recent years, so it doesn’t mean “greedflation” does not exist. Accepting that “greedflation” exists and accusing companies of being abusive, though, is the easy part. Where it gets challenging is to set thresholds. How much is too much? Where’s the line between good business practice and greed? Some consumers are still willingly paying $28 for steaks at the grocery store, pushing prices higher for the rest of us.
Further investigation would be warranted. Other links of the supply chain are harder to analyze, since many companies are privately owned, and contracts are not public. And consumers have every right to be doubtful, considering that we have seen our share of price-fixing scandals in recent years. The bread price-fixing scheme is just one example. Everyone would gain from looking at the more obscure sectors of the food industry, beyond retail, to better understand how our food supply chain works. A government-led inquiry would benefit us all, but the focus would need to be narrowed. The food industry is just too vast of a market to make any analysis worthwhile.
It’s also worth noting that the percentage of consumer expenditure spent on food consumed at home is one of the lowest in the world in Canada. According to the World Economic Forum, the average consumer spends 9.1% of a total budget on food. In the United States, it is about 7%. In 1950, that percentage was over 30%, so we have come a long way.
Food inflation will peak soon in Canada, or it may have peaked already. Food prices will continue to rise, but at a much slower pace in the coming months. The year 2022 was to be the year of recovery from the pandemic, but Russia had other plans. It’s important to keep in mind that food inflation is a normal economic phenomenon. In order to properly equip the industry in a way that Canadians get quality products at consistent pricing, prices should continue to rise. In recent months though, it’s been unsustainable for many families. Food inflation’s ideal rate is between 1.5% and 2.5%, which is what we have been getting for the last 20 years or so, except for this past year.
Canadians do have a strong food industry, but food affordability has been a challenge for many of us. But we need to look at “greedflation” rationally before slinging mud at everything and anything.