One of the interesting debates that arises within mainstream media and kitchen table discussions alike is which party – grocers or global consumer packaged goods companies (CPG) – make more money? There is a lot of finger pointing when the cost of food and packaged goods increases as to whom is to blame and why.
In Canada, we are in a period of rising food inflation, not to the extent we felt during the pandemic but noticeable none the less.
There are a number of factors that have put upward pressure on grocery prices
of late: tariffs, geopolitical events, weather changes & crop yields, labour costs,
transportation costs & the need to expand profit margins.
I thought I would explore the last part of these factors: expanding profit margins. Which partner in the industry makes more money? Has it changed recently?
Methodology
I reviewed 3 years worth of income statements (2022, 2023 & 2024) from several global CPG companies and recorded the gross margin %, operating margin % and net income % to see how profitable they are and did the same for the 3 big Canadian grocers. I also looked at trends to see what was happening over the 3 years.
I reviewed the financials of the following CPG companies: Proctor & Gamble (P&G), Unilever, General Mills, Coca-Cola, Nestlé, Pepsi Co & Mondelēz. Some heavy hitters. I then did the same for Canada’s 3 largest grocers: Loblaw, Empire & Metro.
Findings
If I look at the 3 year simple average for the 7 CPG firms, they had a gross margin rate of 46.1 % while the 3 grocers had a gross margin rate of 25.8%. As a reminder, gross margin is the initial profit that a company makes calculated as net sales minus cost of goods sold. Clearly, the CPG companies are significantly more profitable than the grocers are within this metric.
Now, lets look at operating margin. The 3 year average of the 7 CPG companies was 17.6 %. The 3 grocers posted a 6.6% operating margin, about 38% of the packaged goods firms. Operating margin is the profit a company makes when subtracting selling, general & administrative costs from gross margin and is sometimes called EBITDA or earnings before interest, taxes, depreciation & amortization.
Finally, we work our way down to net income margin %. The 3 year average of the 7 CPG companies was 14.2%, while the 3 grocers delivered a 3 year average of 3.5% – about 25% of the margin rate of the CPG firms. Net income margin is operating margin minus interest, taxes, depreciation & amortization.
It is the true profit a company makes when subtracting all expenses from net sales. This means that for every $ 100 that each party sells, CPG firms make $ 14.2 dollars in profit while grocers make $ 3.5 dollars in profit.
Trends
Now, let’s look at trending across the 3 years. That is, have these metrics increased, stayed the same or decreased over time?
When we look at the 7 CPG firms, their average gross margin rate increased by + 280 bps. That means that what they charge grocers (or consumers if selling directly) has increased significantly more than what their costs of product is. The grocers average gross margin rate increased also but only by + 50 bps.
Operating margin was up + 20 bps for CPG firms & up + 10 bps for grocers. Net income % was up + 20 bps for CPG firms and roughly flat for grocers.
Key Takeaways
When looking at the 3 metrics together, one can conclude that the 7 CPG companies make a lot more profit, as a % than the 3 grocers. Full stop.
The gross margin rate from the 7 CPG companies has significantly expanded over the 3 year period. Much greater than the nominal growth of the 3 grocers.
Implications
Because grocers are often the last point of contact in the food and packaged goods value chain, they get the blame more often than not. I remember during the pandemic when inflation was running hot Canada’s big 3 grocers got some significant flack from consumers and governments alike.
Using an ice hockey analogy, grocers are the goalies and CPG companies are the forwards and defense. When a goal is scored against the team, everyone looks at the goaltender. The forwards may not have back checked and the defense may have been flat footed but it doesn’t matter – yell at the goalie!
I think the simple analysis presented above shines a light on where the true profitability in this sector lies and which party could be using price increases as a means to enhance margins. Maybe we shouldn’t blame the goalie after all?
More from Retail Insider: