"Greedflation" and Grocer Annual Financial Reports: What Can We Learn?

Grocers in Canada have been accused of capitalizing on inflation to hide price increases greater than are warranted by other price pressures. Politicians and pundits have pointed their fingers at increased profits as a clear signal of this “greedflation.” It is worth looking at financial statements to see if there is enough information to verify these claims.

It is important to note that financial statements are not a full picture of the specifics of grocery pricing and profits. The Canadian Competition Bureau highlighted this challenge and asked for greater power to ask for more granular data to make a determination of anti-competitive behaviour. They did, however, note increased margins without making a direct connection to raised prices. It is worth taking a look at financial statements across seven years and compare results to those of two significant players in the US to see what, if anything could be concluded about price gouging.

The top five retailers in Canada, Loblaws, Empire Group (Sobey’s), Metro, Walmart, and Costo are estimated to represent 76% of the domestic market for food retail. Loblaws is estimated to have 28% of the market. If we consider the top five in the US market, they are estimated to control a much smaller proportion of the market at 50%. It is worth noting that Walmart, through its own stores and the Sam’s Club brand controls a larger share of the American market (30%) than Loblaws does in Canadian. There may be more concentration in specific regions as there are fewer national chains (like Walmart and Kroger) in the US with more regionally based retailers. Given the size of the American population, these regional players may have larger sales than Canadian national brands. While Kroger has a relatively small share of the US market at 6%, it has sales revenue more than three times that of Loblaws.

The Competition Bureau of Canada highlighted changes in profits (net earnings) in absolute terms to indicate an increase in margins at grocers from 2019 to 2022. Operating income, which excludes non-operational costs like interest and taxes, might be a better measure of change over time and will also make for an easier comparison to the US market as tax structures are different. Operating income as a percentage of total sales (OIPTS) might also be a better measure to normalize difference between years relative to inflation and changes in market share. The graph below presents OIPTS for three Canadian chains (Loblaws, Empire (Sobeys), and Metro) and two US ones (Walmart and Kroger). Operating income is not a perfect measure of price differences but might provide a high-level indication of the degree of competition in both markets.

Metro is consistently the highest is OIPTS despite being the smallest of the three Canadian retailers included. If concentration and market power is the dominant factor, one might Loblaws and Sobey’s to be higher.

There are a number of factors that could be at play here:

• Metro has a large proportion of its revenue from drug stores which likely operate at a higher margin than pure grocery. It is worth noting that Loblaws also has a significant pharmacy business and is consistently the second highest OIPTS. Their 2022 Annual Report highlights that they delivered 4.4 million COVID vaccinations and administered 3.7 million COVID tests and screenings. This is new business in pharmacy which did not exist before 2021 and may explain some of the increases in margins. Empire does not have a separate pharmacy business.

• The majority of Metro’s business is 70% of the grocery stores in Metro’s portfolio are in the province of Quebec as are more than 80% of the pharmacies. The competition or pricing norms may differ from the rest of Canada. As an example, there is a mandated minimum price for fluid milk in Quebec while it is often used as a loss leader in other provinces. The mix of flags in the portfolio may also make a difference. Metro has a portfolio of neighbourhood stores in Quebec that have smaller footprints and carry less inventory and, as such, may generate higher margins. The share of total revenue in discount stores may also be a factor.

The second largest Canadian retailer is Sobey’s, who has the lowest OIPTS of the three. Performance has trended upwards since losing money in 2016. OIPTS actually went down slightly in 2022 which suggests that they were not driving inflation and may actually have absorbed a very small proportion of the price increases. This begs the question as to whether any of the retailers did. If Sobey’s didn’t drive price increases it would limit the ability of their competitors to drive price increases. Loblaws saw increases in OIPTS which raises the question whether they did. They might have but their sales were up less than the overall rate of inflation and in the same range as those for Sobey’s. They could have increased prices and lost some share. As outlined above, it might relate to pharmacy business, markets, or relative shares of discount and regular stores. More likely, they took the same price increases as their competitors and grew margin by pushing back on suppliers relative to their price increases. In fact, Galen Weston said in his comments to the Parliamentary Committee that they did exactly that but did not say anything about price increases (link). The burden of the increase in OIPTS likely fell on suppliers and not customers. This is part of the rationale for a Grocery Code of Conduct and is also likely one of the reasons that Loblaws has spoken against the current draft and suggested that it might increase consumer prices (link).

OIPTS is higher for all of the Canadian companies relative to those in the US. These differences are hard to explain in the absence of more data. It is worth noting that Walmart is not just a food retailer and that its numbers reflect more than the US market. Despite these caveats, this may suggest that concentration is contributing to higher prices generally in the Canadian market, but this is a supposition and not firm evidence. The recently announced legislation to provide the Competition Bureau with more power to demand data to investigate this is a step in the right direction for real evidence of an impact.

The question of whether retailers have benefited from and contributed to food price inflation is also difficult to answer. It seems most likely that the growth for Loblaws was driven by pressure on suppliers and not on consumers. It is unlikely that Loblaws would have been able to increase prices at a rate faster than their primary competitors. The Bank of Canada also concluded that “the data do not necessarily support the notion that the recent high inflation is a consequence of firms leveraging their market power to increase their prices through higher markups.” If there is a contribution to the rate of food price increase, the amount would be very small relative to the total price increases.

Keywords: food, food price, prices, affordability, inflation, food inflation, retail, grocery, supermarket, policy, competition, competition bureau

Recommended citation format: von Massow, M. "Greedflation and Grocer Annual Financial Reports: What Can We Learn?". Food Focus Guelph (134), Department of Food, Agricultural and Resource Economics, University of Guelph, Nov. 11, 2023.