Supermarkets profiting from inflation, investigation suggests


For retired child-care worker Kim Agnew, inflation means putting TV dinners in her cart instead of meat.

“It’s terrible. It was $13.50 for a pack of chicken thighs, but the frozen dinners were only five bucks. So I had to do what I had to do,” said the 67-year-old after her regular shop at the Superstore on Brimley Rd. in Scarborough.

“Forget the boneless, skinless that I used to eat,” she said as she schlepped her bags across the bridge over Highway 401 on her way home.

It’s not just meat. All of Agnew’s groceries have jumped in price.

Last November, Agnew paid $4.69 for four litres of milk. Now, it’s $5.39 — a 15 per cent rise. Carrots sold for $2.58 a bag then. They’re up 35 per cent, to $3.49.

But what really gets under her skin is ground beef. It has gone up by four bucks a kilo.

Sure, it’s only a loonie or a toonie on each product, but it adds up. And it’s money Agnew doesn’t have — with a weekly food budget of $40, she has to leave some of her usuals out.

You don’t have to be frugal to notice soaring grocery prices. They’ve been in the headlines and on your credit card bill for months.

Food prices are rising faster than many other goods. Statistics Canada reports that while year-over-year inflation is 7.7 per cent for all products, groceries have gone up 9.7 per cent.

These prices are being driven by increased costs across the board: farmers are paying more for fertilizers and feed, and processors are paying more to truck food to market.

But there’s another factor driving prices up — profit.

A Star investigation has found that Canada’s three largest supermarket chains are making money from inflation.

A deep dive into the financial statements of Loblaw Companies Ltd., Empire Company Ltd. (which owns Sobeys) and Metro Inc. shows that profit margins — the difference between how much they buy and sell their products for — are rising.

The numbers suggest these grocers are raising prices more than they have to. Rather than just passing along higher costs to customers, they’re passing them along — and then some.

“Yes, some prices are rising because of problems in global supply chains. That is absolutely happening,” said DT Cochrane, an economist with Canadians for Tax Fairness. “But some prices are rising because corporations are jacking up their markups to serve their bottom lines.”

“There’s a very simple reason for this inflation, for this affordability crisis: It’s because corporations are taking the opportunity to raise prices,” said Cochrane. “The people who set the prices are setting them higher.”

The three supermarket chains did not dispute that their margins had grown, but all said attributing their gains to increased markups was “simply inaccurate” and the “wrong conclusion.”

Instead, they credited operational efficiencies, lower costs and changing consumer habits, including increasing sales in their pharmacies.

Meanwhile, inflation has forced shoppers to spend more for less while the large corporate grocers are pocketing a bigger piece of every dollar rung through the till.

The Star shared its findings with five economists, all of whom agreed that the supermarkets’ own financial reporting shows their profit margins are on the rise.

“The usual narrative about inflation, that poor businesses are caught in the middle and just have no choice but to pass on higher costs to us, it just does not apply in this situation. It’s business that’s driving inflation,” said Jim Stanford, an economist and director of the Centre for Future Work, an economic think tank.

The top three supermarket chains, which receive 60 cents of every dollar Canadians spend on groceries, were the focus of the Star’s analysis. Walmart and Costco, the next biggest chains, are part of larger international conglomerates and do not break out Canadian operations in enough detail to include them in the comparison.

The level of market concentration in Canada, said Stanford, forms a de facto oligopoly that harms competition.

“That gives them the power to push up prices. They have the ability in our economy to charge as much as they can, and that’s exactly what they’re doing,” he said.

Excessive market concentration has “negative social and economic effects,” according to an academic study on food policy in Canada by Roderick J. MacRae, a professor at York University.

“High levels of concentration also typically penalize suppliers, who receive lower prices for their goods relative to what they would receive in a more competitive environment. Consumers also pay more because sellers can charge higher prices for their goods in the absence of a base of competing sellers. There’s also evidence that concentration suppresses wages.”

Stanford said this lack of competition has real effects on regular people.

“You and I are paying for their higher profits through higher prices for the food we buy.”

When it comes down to it, selling groceries is a simple business: supermarkets purchase goods at a wholesale price and sell them for more — the retail price.

The difference between these two prices is commonly known as the markup, and it’s different for each product sold. Company-wide, however, the supermarket chains report the difference between their cost of goods and their sales revenue as “gross profit.”

It’s the most basic measure of how much money supermarkets make from selling goods — and it’s been growing.

Much like the rest of the Canadian economy, the COVID-19 pandemic threw a wrench into the supermarket business, adding unforeseen staffing and cleaning costs. But unlike other industries, supermarkets were allowed to remain open during lockdowns. Sales went through the roof.

In the first six months of the pandemic, the three chains’ sales revenue increased by almost $4 billion. It was more than enough to make up for the increased costs. Gross profit was $1 billion higher than it had been the previous year.

As a percentage, gross profit has grown faster than sales or costs.

Compared to pre-pandemic, the amount Loblaw (the company that owns Loblaws, Superstore, Zehrs, No Frills and Shoppers Drug Mart) paid in first quarter of 2022 to purchase its goods has gone up 13 per cent. But its sales have risen 15 per cent and its gross profit has jumped 21 per cent.

It’s a similar story at Empire (the company that owns Sobeys, Safeway, IGA, Foodland, FreshCo, Farm Boy and Longo’s). Cost of goods is up 25 per cent since the first quarter of 2019. But sales receipts are up more: 26 per cent. And gross profit has risen by more than 27 per cent.

(For its analysis, the Star aligned the three companies’ financial quarters as closely as possible with real calendar quarters, which are the time periods referred to in this story.)

At Metro (which owns Food Basics), the increases are more modest. Costs, sales and gross profit are all up by about the same amount: 15 per cent.

(The Star’s analysis uses numbers from Loblaw’s retail segment, Empire’s food retail segment and Metro’s consolidated results.)

While it’s true that the supermarkets are paying more than they used to for their goods, they’re also selling them for more than they did previously, and pocketing more of the difference.

In the last four quarters before the pandemic, Loblaw made 29.8 cents from every dollar collected at checkout. Two years later, it is keeping 30.9 cents from every dollar.

In the period from February 2019 to February 2020, the gross margin at Empire was 24.8 per cent. It rose to 25.5 per cent over the same months in 2021-22.

Metro’s gross margins have remained the most stable. But they have still gotten slightly larger, rising to 20 per cent in the last four quarters from 19.8 per cent in the year before lockdown.

While a few percentage points may not seem like much, the grocery chains’ operations are so large — collectively, they made more than $100 billion in sales last year — that these small changes in profit margin work out to hundreds of millions in extra profits.

To quantify those extra profits, the Star calculated how much lower prices would have been if each chain had not increased its profit margin during the pandemic.

If gross margins had remained stable at 2019 levels, shoppers would have saved $1.4 billion on their grocery bills in the last year.

When the Star contacted the three grocery chains for comment, none agreed to on-the-record interviews, sending written statements instead.

“The suggestion that our food prices have driven our recent profit increases is simply inaccurate,” wrote Loblaw spokesperson Catherine Thomas.

“In the past quarter in particular, we’ve seen faster growth in retail pharmacy than in grocery, and our increased profits can be attributed to higher margin items, like cosmetics,” Thomas said.

Front-store sales in Loblaw’s Shoppers Drug Mart chain (where cosmetics are sold) only represent 13.3 per cent of total sales for the company, and that proportion has been dropping over the last year.

In response to followup questions, Thomas declined to quantify the increase in cosmetics sales, saying they are “just one example of how our sales mix is contributing to margin improvement.”

In an emailed statement, Empire CEO Michael Medline said: “We are doing well in spite of inflation.”

“Empire neither likes, nor profits, when inflation is at these levels. Customer behaviour changes,” he said. Customers are “trading down on product such as from beef to pork as well as on size, while also stocking up on promotions.”

Sobeys spokesperson Jacquelin Weatherbee added: “The analysis you have provided to us jumps to a wrong conclusion.”

“While our overall gross margin has increased, it is not because of inflation, it is from other operational improvements we’ve implemented.”

In response to followup questions, an Empire spokesperson said the company has trimmed more than $550 million in costs since 2017 and pointed out that the purchase of Farm Boy in 2018 and Longo’s in 2021 helped improve margins.

Metro spokesperson Marie-Claude Bacon said in an email: “Our gross profit margins are essentially the same as before the pandemic.”

Bacon said sales were lower last year because of a strike and Quebec’s six-week ban on the sale of non-essential products. This year’s margins have improved, she added, due to strong over-the-counter medication sales in the company’s pharmacies (Metro owns Jean Coutu).

The Retail Council of Canada, an advocacy group for the sector, objected to the use of gross margin as a measure of profitability.

Council spokesperson Karl Littler said gross margin doesn’t take into account many of the costs supermarket chains incur, including rent and utilities and head office costs like marketing and accounting.

But if you look beyond gross margin to the companies’ true bottom lines — called “net earnings” — which takes into account all overhead and expenditures, including taxes, depreciation and executive bonuses, the increase in profitability is even more pronounced.

Compared to the first quarter of 2019, Empire’s net earnings have gone up 46 per cent, Metro’s have gone up 63 per cent, and Loblaw’s have more than doubled.

Net earnings margins (the percentage of revenue the company gets to keep after paying for everything) are also up, meaning the supermarkets are pocketing more from every dollar rung through checkout.

This net earnings margin has risen 16 per cent at Empire, 41 per cent at Metro, and doubled at Loblaw.

“What’s often underappreciated is the profit price spiral whereby corporations realize that consumers are willing to pay higher prices, and they increase their prices to not only pass on their own costs, but take a slice on top,” said David Macdonald, senior economist at the Canadian Centre for Policy Alternatives.

“In essence, they front-run it. If they see inflation at six per cent, they say, ‘Well, we should increase our prices by eight per cent to ensure that we stay ahead of inflation,’ ” he said. “The prices are going up because companies want to make more money.”

Empire spokesperson Andrew Walker objected to the analysis provided by the economists in this story, saying none of them had contacted Empire to better understand their publicly reported financial results, “so it is, at best, disingenuous to have them comment on a grouping of retailers.”

While the supermarkets say inflation has been difficult and not good for business, their executives present a very different message to shareholders, proudly touting how increased margins have improved profitability.

At Loblaw, Canada’s largest private-sector employer, chairman and president Galen Weston boasted of achieving “strong top-line growth” and “margin expansion” in the company’s 2021 annual report.

“Loblaw creates value … by leveraging its scale and strategic assets,” the annual report states, with a “focus on growing sales while improving gross margins and reducing operating costs.”

The company was profitable enough during the pandemic that it was able to raise its dividend (profits it pays directly to investors) by 3.2 per cent in 2020, nine per cent in 2021 and 11 per cent in 2022. Loblaw also had enough extra cash to buy back more than $2.2 billion in shares during those years.

Empire CEO Medline boasted in the company’s 2021 annual report that last year had “delivered our strongest gross margins as far back as we can look.”

“Not only did we sustain our strong margins, we improved them,” Medline said on the company’s most recent earnings call. “We have never felt better about our business or our future.”

Empire also raised its dividend — nine per cent in 2020, 15 per cent in 2021 and 10 per cent in 2022 — and bought back more than $500 million in stock.

Metro’s chairman Pierre Boivin wrote in a letter to shareholders that the company’s strong performance in 2021 “compares favourably to pre-pandemic results.”

Metro increased its dividends by 12 per cent in 2020, 11 per cent in 2021 and 10 per cent in 2022, and spent more than $900 million repurchasing shares.

With inflation on the rise, the typically staid grocery business has been thrown into a tempest of uncertainty, said Sylvain Charlebois, a professor of management who heads the Agri-Food Analytics Lab at Dalhousie University. But instead of minimizing the impact on customers, supermarkets appear to be overestimating how much prices need to go up.

“You want to know what the cost of goods is going to be next week or next month. And right now, nobody knows. So you price things up,” Charlebois said.

On its most recent earnings call, Loblaw CFO Richard Dufresne said the company sets its prices based on the competition, not on inflation.

“We’re not trying to manage our business to an inflation number. We’re trying to manage our business as to where we are priced versus our competition,” he said. “If we have good pricing levels versus our peers and everybody is living the same inflation as us … that’s how we satisfy ourselves.”

How are supermarkets making more money? Are there particular products where grocery stores have marked up more than others?

Determining the markup on individual products is difficult, if not impossible, because the wholesale prices supermarkets pay are closely guarded secrets.

But in Canada, a few select products have a publicly available wholesale price. Thanks to supply management, we know the prices farmers are paid for milk, eggs and chicken. By comparing this “farmgate” price with the average retail price for those products, it’s clear the farmers’ share for some goods is going down.

This is true for egg farmers in Ontario, where eggs sell for more than they do in other provinces. In 2019, Ontario egg farmers were paid $2.06 for a dozen large eggs, or 64.2 per cent of the average retail price. By 2022, they received $2.43 a dozen, but that only represented 57.6 per cent of retail.

The same goes for dairy farmers nationwide who sell milk and butter.

In 2019, farmers received 92 cents per litre of class 1a1 milk (the kind sold as liquid milk). That was 70.7 per cent of the average national price of a litre of milk that year. In 2022, dairy farmers received $1.01 for a litre of class 1a1 milk, but that only represented 68.1 per cent of the retail price of a litre of milk.

It’s a similar story for butter. In 2019, dairy farmers selling class 4a butter fat received 81.5 per cent of the national average price of a pound of butter. This year, those same farmers are getting 72.4 per cent of the retail price.

Chicken farmers, however, don’t seem to be suffering the same fate. Their take from the average retail price — whether whole chicken or different cuts of chicken — is increasing slightly. For a whole chicken, farmers were getting 29.6 per cent of the retail price in 2019. In 2022, their share has risen to 33.9 per cent.

According to the study by York University’s McRae: “Farmers are selling wholesale, at prices substantially below retail prices, and these wholesale prices are generally suppressed by (high) levels of corporate concentration.”

Charmaine Marston, a mother of four, works three jobs to make ends meet. Standing outside the Brimley Rd. Superstore, she couldn’t believe her grocery bill.

“I just spent $200 and I don’t even know that I got,” she said.

Marston said she had sticker shock inside the store. Fruit and vegetables, bread, rice and oil — “Everything’s gone up.”

Living in an expensive city like Toronto is tough enough, but inflation is squeezing consumers in places where they can’t cut back, she said. Whether it’s skyrocketing prices for gasoline or groceries, people will pay because they have to drive and eat.

“And some families have to choose between gas and food,” she added.

Cochrane, from the Canadians for Tax Fairness, calls this an affordability crisis that disproportionately affects those at the bottom.

Standing outside the Brimley Rd. Superstore, Charmaine Marston, a mother of four who works three jobs to make ends meet, said she couldn't believe her grocery bill. "I just spent $200 and I don't even know that I got," she said.

“The people who have the least are being asked to sacrifice the most,” he said.

When people spend more on groceries, it pads the profits of the supermarkets, said the Centre for Future Work’s Stanford, acting as a kind of trickle-up economics and transferring wealth from the poorest to the richest.

The inflation we’re seeing “wasn’t caused by wages,” Stanford said, or by workers. “It’s caused by greed. And if we allow prices to keep rising without wages keeping up, we are literally transferring billions of dollars from workers to the billionaires who own the grocery stores.”

Or as Marston put it:

“Big companies are charging each other more, but it all comes trickling down to us, and people end up paying for everything.”

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