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Canadian grocery chains: profiteering from the ‘pandemic’ or justifying price increases?

Canadians struggling to cope with persistent food inflation may be faced with another tough trip to the grocery store for holiday staples. Despite a slowdown in headline inflation, groceries remain expensive, driven by record profits at the five major supermarket chains. This article explores the complex narrative surrounding grocery inflation and the role played by these dominant players.

Public outrage and government pressure: Canadians instinctively blamed supermarkets for high prices, as did politicians, who summoned chief executives, launched investigations, and proposed changes to competition laws, voluntary codes for supplier access, and even an excess profits tax.

Supermarkets are bucking the trend: while corporate profits in other sectors have moderated, the grocery giants are posting record profits. Against the backdrop of a slowing economy, this apparent profiteering is questionable.

Canadian grocery chains: profiteering from the ‘pandemic’ or justifying price increases?

Profits Trigger Inflation: Initially, many businesses, not just supermarkets, benefited from the disruption of the pandemic by jacking up prices beyond cost increases. Oil and gas, minerals and building materials were the biggest profiteers. This “profit-price” spiral leads to an inflation rate of over 8% in 2022.

Normalization of profits in most industries: Since then, profits have slowed in most businesses, leading to lower inflation (currently 3.1%). However, despite supply chain normalization and falling commodity costs, the grocery sector remains stubbornly unchanged.

Food retail profits are double what they were before the pandemic: industry-wide profits will exceed $6 billion in 2023, the highest level on record and more than 100 percent above typical pre-pandemic levels.

Supermarkets defend their margins: CEOs claim that these profits simply reflect rising costs, but critics point out that supermarkets have doubled their net profit margins (from 1.25% before the pandemic to more than 3% consistently since mid-2021).

Low Margins, High Returns: While a 3% margin may seem small, it’s important to remember that grocery stores don’t produce products; they purchase them and mark them up. Additionally, the grocery store business model is not capital-intensive, so returns on invested capital are high (e.g., Loblaw’s owners report an annualized return on equity of 26.5%).

Conclusion: Supermarkets, while not the sole cause of inflation, exploit it and exacerbate the problem. Unless grocery prices stabilize and profits moderate, food inflation will remain a hot political topic in 2024.

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