Business

Big Three grocers must be transparent about profits

It’s time to differentiate between the Big Three supermarket chains, which many Canadians have come to dislike in this day and age of stubbornly high food inflation.

Of the three, Loblaw Cos. Ltd. by a profit growth that was significantly higher than the growth in sales and costs in the past three years.

Food inflation remains unacceptably high at nine percent in May, according to Statistics Canada, even though the headline inflation rate fell to 3.4 percent that month.

Inflated food prices are a burden on poor and working-class Canadians.

In April, Toronto’s Daily Bread network of food banks recorded about 270,000 visits per month, quadrupling its pre-pandemic level.

There is a precedent for government intervention to address prohibitive prices.

In the 1970s, Ottawa’s Anti-Inflation Board (AIB) achieved some success in curbing the inflationary growth of prices and wages.

Fast forward, and Ottawa imposed a one-time windfall tax on profits at major banks last year.

And the result of this year’s Agriculture Committee of the Commons inquiry into grocery pricing was a recommendation that Ottawa impose a windfall tax on grocers’ profits if improper pricing is discovered by the Competition Bureau.

For its part, the Competition Bureau reported that supermarket gross profit margins have increased by as much as two percent in recent years in a “modest but meaningful way.”

It largely attributed that to industry consolidation that has reduced customer choice.

“Canada needs solutions to control food prices,” the Bureau concluded. “More competition is an important part of the answer.”

But at least in the short term, new food entrants don’t stand a chance against the Big Three, which control about 60 percent of the market.

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To achieve the competition that the Bureau commendably calls for could be most effectively achieved by breaking up the major chains.

The Big Three grocers insist their higher profits are due to inflation itself; to efficiency gains; and to a recovery in their pharmacy and cosmetics business as Canadians return to the office.

“Profits in the supermarket chain are not the reason for food inflation,” Galen Weston, whose family controls Loblaw, told the House Agriculture Committee in March.

But we just don’t know if, say, higher sales of higher margin health and beauty products lead to higher overall profits. The industry does not break down profit (and loss) performance by product segment.

To establish their credibility, the major grocers must be transparent about the source and magnitude of the profits and costs of their goods.

Meanwhile, we have Galen Weston’s claim, which fails to account for the huge gap between Loblaw’s cost and profit growth.

Over the past three years, Loblaw’s revenues have increased 7.2 percent. And the cost of doing business is up 5.6 percent.

And yet Loblaw’s profits rose more than 67 percent during that time to nearly $2 billion last year.

To put that number in perspective, Ottawa’s current distribution of one-time food inflation checks to about 11 million Canadians is expected to cost more than $1 billion.

A Star survey found that between Jan. 1, 2020, and Jan. 1, 2022, Loblaw’s gross profit margin increased about 1.3 percent, while that of his Big Three peers remained essentially unchanged.

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Empire Co. Ltd., owner of Big Three grocer Sobeys Inc., recorded a 4.8 percent share drop in profit over the past three financial years, with a cost increase of 8.5 percent.

And Metro Inc.’s 6.7 percent profit increase. at that time, also much lower than Loblaw’s, is a bit out of step with the 7.4 percent drop in costs. But as with Sobeys, we don’t see the gaping gap between profit and cost escalation at Metro that we see at Loblaw.

Loblaw’s sheer size gives it tremendous pricing power.

At $56.5 billion in 2022, Loblaw’s revenue is greater than Empire and Metro combined.

About 90 percent of Canadians live within 6 miles of Loblaw’s more than 2,400 stores, operating under more than a dozen banners including Shoppers Drug Mart, No Frills, Fortinos, Provigo and Zehrs Markets.

Any tax on windfall profits would be retroactive to last year and would also apply to Walmart and Costco’s sizable Canadian grocery operations.

And there is precedent for a breakup of the Big Three grocers.

In the 1970s, George Weston Ltd., Loblaw’s parent company, had to grow too large to split off divisions or risk insolvency.

But the Big Three could probably avoid such interventions, inside or outside firms, if they simply lowered their prices.

And then settle for the lower but sufficient profits that allowed them to reinvest in their companies before the inflationary crisis.

With all the money they have invested in information technology, the grocery giants can immediately start lowering prices.

They could start today.

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