Let’s get one thing out of the way. Having CEOs of major grocery chains showing up in Ottawa on March 8 to testify before the Standing Parliamentary Committee on Agriculture is nothing more than political theatre. Not much will be accomplished. Still, for the sake of Canadians, CEOs needed to show their faces.
Hardly anyone will know the names of the two other CEOs, Michael Medline and Eric La Flèche; the real face of the entire industry, not just for Loblaws, is Galen Weston, who will likely be testifying in Ottawa for the first time. He is the face, which most Canadians see daily on television and hear on the radio, has become the lightning rod of consumer frustration at the grocery checkout. It didn’t matter if other grocers have raised prices to the same extent as Loblaws, or even that Canada’s food inflation remains the third lowest amongst G7 countries, including the EU. The blame was mostly and unfairly directed at one company, one man. It’s been a little silly.
Global phenomenon
Food inflation is inherently a global phenomenon, mainly affected by supply chain woes, energy costs, higher commodity prices and climate change. The United Kingdom, the sixth richest country in the world, is experiencing food shortages in many parts of the country. In comparison, Canada’s situation is not all that bad.
Furthermore, when looking at balance sheets, the evidence of “greedflation” is weak at best. Operating margins for all grocers in Canada have remained overall within the realm of acceptability, between 4.3 and 6.1 percent. Métro has the highest at 6.16 percent. Loblaws’ food sales last quarter increased by 8.4%, which is below our nation’s food inflation rate. What’s driving sales and profits higher are most non-food categories like cosmetics, prescription drugs, and clothing. The morality of high profits on clothing or lipstick is far different than when food is involved. It needs to be underscored.
But most Canadians, or politicians, don’t bother looking at balance sheets or at any data for that matter. Food inflation has been incredibly politicized, and skepticism has only grown as a result, especially in the last 12 months or so.
Canadians should be concerned
Still, the Canadian public has every right to be cynical about the grocery business. The bread price-fixing scheme became the symbol of corporate arrogance in the sector. After breaking the law for 14 years, Loblaws and executives were granted immunity by a branch of the federal government, the Competition Bureau, and the investigation is still ongoing after almost 8 years. Some have speculated that other food categories may have been influenced by collusion or price-fixing, like meat packaging and salmon; still, nothing has been investigated. Some abuse may exist in the food industry, but getting any conclusive evidence has been close to impossible. Canadians feel unprotected due to lingering unfinished inquiries.
Beyond the political artifice, for the session with CEOs to be worthwhile, the right questions need to be asked. For one, CEOs need to be clear as to how much profit is generated specifically from food sales. Some questions in relation to the “blackout” period are also warranted. From November to February, grocers have historically not accepted price increases from vendors. Some have argued vendors will routinely boost prices before and after the blackout period, which to some degree could open the field up to some price-fixing in the industry. Hard to see how consumers can win with these industry-wide practices going on.
The other issue is our food distribution competitive landscape. We have lost plenty of independent grocers over the years in Canada. Even though operating margins have remained stable in the grocery business in Canada, they are double those in the United States (The operating margin measures how much profit a company makes on a dollar of sales after paying for variable costs of production, such as wages and raw materials, but before paying interest or tax). Kroger’s and Albertson’s are barely at 2 percent. How to make our food retail industry more competitive should be top of mind for members of the committee. Grocers are experiencing a so-called “detente” period. It’s been cozy for them, let’s be honest.
As a result, many believe the newly introduced grocer code of conduct will help the industry become more competitive. The idea of the code is to countervail the immense power some grocers have and bring more bargaining fairness for independent grocers and food manufacturers. The government-coordinated, industry-led code is being implemented right now. CEOs need to be clear on whether they support the initiative or not. Canadians would undoubtedly gain from a forceful, authoritative code.
Canada not an attractive market
The harsh reality in Canada is this: for years, Canadians have had an apprehensive relationship with the concept of competition. We loathe monopolies and oligopolies, even if many of them are policy-induced. We want more control, that is, until retail prices become an issue. Many sectors have been impacted by this: banking, telecoms, airlines, the list goes on. But for food retailing, the margin of error is nil. We need to get it right.
Canadian grocers are just one part of a much larger picture. Canada is not all that attractive for external investors, unless you’re Walmart or Target, and we know what happened with Target in 2015. Its exit was brutal. Higher labour costs, a lower productivity rate, higher taxes, lopsided regulations between provinces, interprovincial trade barriers, and our country’s geographical vastness just adds more underappreciated complexity to the issue of competitiveness. Both Lidl and Aldi, major discount grocers, have flirted with the idea of investing in Canada for years, but the economics of food distribution barely make sense for an expansion northwards, at least for now.
For months, Canadians have criticized, even attacked grocers, blaming them for their misfortunes at the grocery store. As unpopular as it may be right now, that line of reasoning is as linear as it is unsophisticated. The “greedflation” nonsense is simply not helping. Grocers will show up in Ottawa before the committee. The least we can do now is to calm down and listen to what they have to say.
A no-nonsense analysis of the current Grocery marketplace!
Sylvain lists the areas we should focus on rather than directing ire at heads of our three homegrown grocery chains.
Shoppers Drug Mart in particular is price gouging. An 8% increase in cost has them increasing retails by +30%
That doesn’t exactly explain why a bag of apples at No Frills (owned by the Westons) selling for $4.99, is $14.99 down the street at Zehrs. And yes, that is a real world example. Yes. $14.99. For a bag of apples.
And the fact their margin %’s are reasonable makes no difference at all when the true dollars those percentages generate are rising astronomically. Now if you told me they had lowered their margins to deliver the same YOY dollars instead of maintaining them and pocketing huge $ profit growth, I might have had some sympathy. War profiteers are no better that this monopoly. Time for the government to put an end to them.