Why Toronto’s 4-Store public grocery test will not work: Bruce Winder

Last week Toronto City Council approved a motion to study and develop a plan for a 4-store public grocery test. But should government focus on food insecurity this way & will these stores work?

Food Affordability

I think we can all agree that there are serious issues in Canada and in Toronto as it relates to food affordability.

Global food inflation has increased significantly since the pandemic due to a number of factors such as changing weather patterns & its effect on crop yields, herd sizes, cost increases from large global consumer-packaged-goods (CPG) companies who have used price as a way to meet earnings targets, increasing input costs such as fertilizer, ingredients, energy, labour and more.

This has become more critical as other household spending costs such as housing & rent, insurance, taxes and the like have taken a bigger bite out of consumer disposable income.

Wages too, particularly for lower income consumers (bottom quartile), have not kept up with inflation. These people are feeling the squeeze more than others as their disposable income is lower & an increase in food costs hits harder.

Also, unemployment has ticked upward, particularly for younger consumers.

So how should governments address this issue?

Public Run Grocery Stores

On paper, the concept of opening non-profit government run grocery stores may sound attractive at first glance. Why?

First, the concept is easy to understand and discuss. It makes for a great political soundbite. Second, the perception with consumers is that grocers make a lot of money and by operating these stores at break-even, they would save shoppers a significant amount of money (30-40%). Thirdly, it conveniently paints grocers as the “bad guys” taking on the role as scapegoat for decades of poor policy decisions & inaction.

Challenges With Opening & Running Public Grocery Stores

If and when the government completes its business case for the 4-store public grocery pilot, they will no doubt face a number of challenges with making the concept viable.

Current Grocery Margins

Last year, I completed an analysis that looked at the average net income % for Canada’s big 3 grocers (Loblaw, Metro, Empire) over a 3-year period and it was about 4%. This profit rate has remained fairly constant pre and post pandemic. Compare this to global CPG companies who have seen margins climb steadily over the last few years & according to my analysis were about 14%.

This means that after the 3 grocers pay all of their bills, they make $4 of profit on every $100 they sell. Therefore, the most that government can save on prices by operating at break-even is 4%. Even this outcome will be impossible for reasons I discuss below.

Required Infrastructure

To run a grocery store, never mind 4 of them, you need significant infrastructure. Examples include management teams, staff to receive goods, stock shelves, pay suppliers, and much more. You also need technology to administer payment to suppliers, employees & receive payment from shoppers. Store fixtures are not cheap either, particularly for frozen goods. Material handling equipment is a must also.

Does the city already have this infrastructure? If not then they need capital to purchase it or operational cost to lease equipment. This must be factored in too.

Scale Economies

Combined, Canada’s 3 big grocers buy many tens of billions of dollars a year from suppliers. That volume allows the grocers to buy food at very low costs. The more you buy, the lower the price. If Toronto opens 4 grocery stores, food costs will be exponentially higher based on volume.

If the city does not have its own supply chain infrastructure & suppliers must handle that capability, then prices go up even further as the city will need to buy from distributors who add their mark-up.

Expertise & Efficiency

Canada’s existing 3 big grocers have a combined three hundred years of experience and expertise selling food. This has enabled them to become incredibly efficient at what they do. Same with independent grocers who have sold into Toronto neighborhoods for decades.

Can governments really offer the same or anywhere near this efficiency? If not, costs soar and service falters.

Pricing & Demand

Based on the challenges that have been outlined above, I can’t see a world where the city could sell groceries cheaper than existing discount grocers & still break-even. Therefore, the city would need to spend tens of millions of dollars of taxpayer money on subsidies to attempt to do so. This would no doubt cause significant harm to local independent grocers who sell in the GTA, not to mention larger grocery chains who employ thousands of Torontonians.

Now, let’s assume for a moment that the city has an appetite to sell at a tremendous subsidized loss to save consumers 30-40%. How would the city manage the demand of millions of GTA shoppers rushing the stores from all income groups and all geographies to buy cheaper than existing grocers?

Shelves would be bare. Crowds would be massive. Parking lots would be jammed. Line ups would be hours long. Social unrest would ensue.

Opportunity Cost

If the City of Toronto gets into the grocery business and spends tens of millions of dollars on the initiative, what else could it have spent that money on?

If one believes in specialization & doing what you do best then the City of Toronto should focus on governing and let grocers of all sizes focus on selling food.

Certainly, the city could use more attention in other key areas such as crime, transit & housing.

What is the solution?

The inconvenient truth is that global food prices will continue to increase.

From my perspective, the way out of this involves 2 steps:

1. Invest the money earmarked for the test to bolster Toronto’s existing food bank network. Buy more food for these facilities to offset a drop in donations.
2. Increase Canada’s productivity. Champion key industries that provide high paying jobs (ie. technology, energy) to eventually increase real wages for all income groups, especially those in the bottom half of the economy.

(Bruce Winder is a retail analyst and author)

More from Retail Insider:

• Government Grocery Stores Won’t Fix Food Affordability in Canada