Grocers need to get it right on inflation, but some in the industry don't think that is happening.
The cost of food has gone up but are grocery stores to blame?
The photo was taken by James Park.
Michael Medline spoke at an event at a business school. It was a corporate function that promoted a book that Medline and others wrote about management in the Pandemic.
The head of Empire Co. started off the way you would expect. The man talked about plexiglass. During the first few waves of COVID-19, the food industry was obsessed with safety and profits-be-damned. He said it was the best behavior from capitalism.
Someone never talked to me about maximizing profit.
He switched from talking about the present to talking about something else. He said that some people are quick to demonize corporations.
Medline had a different opinion. He said that he didn't think it was fair. In some cases, it is fair. I am not sticking up for all companies.
He argued that companies like his are more valuable to the country when they are doing well. We weren't giving back to the community as much when we weren't successful. You would like to be successful.
The fault line has become the most dangerous in the food business.
The worst inflation crisis in decades has made being successful a public relations liability. It is exactly what Canada's big grocers have done, quarter after quarter, to the point that some economists and customers have started asking a simple question.
Empire said margin improvements came from the launch of two major changes.
The photo is from the National Post.
That isn't a single question. If you try to answer it, you'll get more questions. David Macdonald is an economist at the Canadian Centre for Policy Alternatives who has written about the subject. He knows that the price of food has gone up due to a number of factors. He wants to know if Canada's grocery chains arejacking up prices more than necessary.
He wondered if higher prices would allow stores to take advantage of them.
Three of the country's top grocers say they're not. The Toronto Star, the biggest newspaper in the country's biggest city, published an investigation that concluded that the grocery stores are making money from inflation. The Star's analysis was done by five economists.
We are doing well in spite of inflation
Empire spokesperson Karen White-Boswell
Grocers say there are other reasons for their profit gains, including the fact that they have acquired new businesses, become more efficient in running the ones they have, or started selling more of the higher-margin pharmacy and beauty products.
One grocery spokesman said that they are doing well despite inflation.
If that is true, what is the best way to explain to Canadians that you are not ripping them off?
The industry is in the midst of scandals and trust is probably low. There is an ongoing federal investigation into allegations of bread price fixing, as well as a government campaign to stop grocery chains from abusing their suppliers. Grocers need to get it right on inflation. Some in the industry don't think that's happening
Steven Salterio, who holds the Stephen J.R. Smith chair in accounting and auditing at Queen's University, co-authored a case study about an innovation the company was using in auditing.
Salterio said that they got over 40,000 downloads on it. That is a large amount in the accounting case world.
The way he sees it, if a grocery company was inflating its profits, there would be consequences. The margins would increase in size. There wouldn't be a plausible explanation for the growth in the financial statements.
He said in June that his accountant's logic was in a nutshell.
In order to compare margins and efficiency metrics over the last year, Salterio looked at balance sheets from Metro. Detailed reporting on their Canadian operations is not provided by the other two major food retailers.
It was easy to take the first test. The operating and gross margins of the three Grocers increased in the last year. The second part was not easy to understand.
The debt-to-equity ratio, the quick ratio and the current ratio, as well as inventory turnover, asset turnover, and receivables turnover, were all reported. He was looking for signs that the company was improving.
He found that the chain was exploiting inflation to increase profits. The company's return on assets was lower than the five-year average. It shows that they have a long way to go to meet expectations.
The improvement in gross margins is due to a strong bounce-back performance in the company's pharmacy division after eight weeks of "labour conflict" in the first quarter of 2021.
Bonk said thatMetro is not taking advantage of inflation to increase its profits.
The inventory turnover rate is a measure of how quickly a store sells and buys inventory. The quicker you can sell your inventory, the more profit you make because you don't have to mark it down due to obsolescence, and you don't have to pay interest on the holding cost of the inventory.
A farm boy is owned by Empire Co.
The photo was taken for the newspaper.
In the past year, Empire's inventory turned over more frequently than it has in the last five years. Empire's gross margin improved to 25.7 per cent in the most recent 12 months of financial reporting from an average of 25.1 per cent in the last five years. Empire's asset turnover dropped to 1.9 times in the last year from 2.3 times in the previous five years.
Salterio said that it wasn't clear evidence.
The launch of two major changes to the business resulted in margin improvements. Karen White-Boswell said in an email that Project Sunrise reduced the cost of the business and simplified it. The goal of the project is to cut $500 million in annual earnings by driving an improvement in the margin of profit.
White-Boswell said in an email that they are doing well. Inflation has helped some businesses, but it doesn't help margins. The implementation of the transformation initiatives we have been focused on has resulted in our success.
When asked what other businesses might be getting help from inflation, White-Boswell didn't reply.
One efficiency indicator showed progress while the other didn't. The inventory turnover decreased by 10 basis points in the last year. Its asset turnover rate increased by 10 basis points.
He said that it doesn't give a good picture. Consistency in one direction or the other is what I would like to see in order for me to say yes. That isn't what the numbers show
In the last year, Loblaw's gross margin increased by 130 basis points to 30.8 per cent, compared to a five-year average of 30.5 per cent.
People are shopping in the produce section at a grocery store.
The photo was taken by Laura Pedersen.
Recent margin growth is coming from the drug retail side of the business. Demand for high margin products such as beauty products and cosmetics increased as people went back to offices and parties.
Weston said in a call with financial analysts that they were wondering what people were doing with all of the perfumes.
It makes sense to him. He said it was a plausible argument. It is not possible to check the data in the statements.
The method's critique is based on a flawed premise. It's unfair to use the inventory turnover rate as a gauge of internal efficiency.
Thomas said that inventory turnover is only a representation of sales efficiency.
The business that Loblaw spun out of Choice Properties has changed a lot over the last year, so comparing its margins over the last year to the five-year average isn't valid. In the past five years, Loblaw said it has made a number of changes to its business, including selling off gas bars, introducing new digital advertising and freight businesses, and finding operational efficiency that totalled over a billion dollars.
Thomas said that it's impossible to look at the business over the past five years and not take into account how the business has changed.
PC Financial is one of the businesses that contributes to the performance of the entire slate of businesses.
The business includes apparel, banking, mobile shops, pharmacy, beauty and food. In the past five years, we've seen faster growth in retail pharmacy than in grocery, and our increased profits can be attributed to higher margin items.
Partha Mohanram, an accounting professor at the University of Toronto's Rotman School of Management, said pointing to a boost in sales on high-margin category is proof that you're not price-hiking in food. We are not profiteers here, but we are profiteers in other places.
That is an "unfounded assumption" according to Thomas.
She said that it means that we are being opportunistic about margin. There are higher margin categories in our business. It hasn't changed. Customers are purchasing more of those.
Bananas and lipstick are examples given by Thomas.
She said that if someone bought two bananas with a profit margin of five per cent and one lipstick with a profit margin of 10 per cent and this quarter they bought two bananas and two lipsticks, nothing has to change for their profit margin to increase.
In order to show how profits are coming from a boom in pharmacy, Loblaw would have to give more information. The retail segment accounted for 94.3% of the company's gross profits in the first half of the 21st century.
Richard Dufresne told analysts on July 27 that the food retail division's gross margin was stable.
The Retail Council of Canada is a lobby group that represents grocery stores. In drugstores, same-store sales, a common metric used in retail, which ignores results from recently opened or closed stores to give a clearer picture on year-over-year performance, increased by 5.6 percent compared with the previous quarter. Same-store sales in food increased by less than 1%.
Health and beauty sales are driving much of the growth. The front of a pharmacy is where people are getting colds and allergy treatments.
Thomas said it won't break out numbers beyond what's published because the financial statements don't give breakdowns for the profit performance of food and pharmacy. She said in July that the grocery industry was one of the lowest-profit sectors in the country.
Shoppers Drug Market has helped the company.
The photo was taken byBrent Lewin.
Thomas was talking about the first quarter of the year. It takes less than four cents on the dollar to make a profit. The company's profits increased from $1.18 billion in 2020 to more than $1 billion in 2019. In the last year, the company has made nearly $2 billion in profit, according to data from the company.
The food and beverage industry made $7.3 billion in pre-tax profit in 2011. The industry had a pre-pandemic profit of $3.2 billion in 2019. Food and beverage manufacturers in Canada made more money in the next three years than they did in the previous two.
Pre-tax profits were 1.52 billion in the first quarter of 2022, below the 2.29 billion in profits at the same time in 2021. The industry earned more than a billion dollars in profits in the first three months of the year.
According to the Retail Council, the amount of total cents the Grocers made on each dollar was in the normal range. Empire had a 2.5 per cent profit margin, while Metro had a 4.7 per cent.
The historical norm for the grocery industry's profits is 2.5 to 4.5 percent, which is one of the lowest in any industry and isdwarfed by the level of profitability of most food vendors.
Canada's top grocers rewarded their shareholders with large dividends and share purchases as profits increased. On the same day that it reported a 41-per-cent increase in first-quarter profit, the company announced it was increasing its dividend. The company has raised its dividends 11 times in the last four years. The dividends have never been raised by as much as 11 percent. The increase was 9% last year. The annual dividends at Loblaw increased by an average of 6 per cent.
Loblaw said in its latest earnings update that it is now forecasting earnings per share in the "mid-to-high teens", higher than its previous forecast. The company said it would return capital to shareholders by allocating a significant portion of free cash flow. In the second quarter alone, the company spent $603 million on canceled purchases.
In June, the company announced a 10-per-cent dividend hike and said it would buy back $350 million in shares. Metro increased its dividends by 10 per cent in January.
Metro CEO Eric La Flche said that Metro's gross margins in food were not up. We are not passing on all the cost increases that our suppliers are giving us.
The jump in profits hasn't been fully explained by the Grocers.
According to Macdonald, there is a limit to what you can see in public statements.
It is a question of profits being up. Inflation is playing a role. Macdonald kept going. There will be a variety of factors in this operation. Inflation is not going to be the only thing. Changing preference isn't going to be the only thing it's going to be. It is not just going to be efficient.
The government should investigate if the financial statements don't show what's happening
Federal agencies have a role to play in making sure that price increases aren't excessive.
The Competition Bureau enforces competition law in Canada and was suggested by the office of the federal agriculture minister.
The bureau only has the power to enforce matters where competitors collude to raise prices. The Competition Bureau does not have the authority to regulate prices, and charging high prices is not illegal, according to Marie- Christine Vézina.
Food prices are monitored by the federal Agriculture Department.
The department stated that there are many factors that contribute to grocery retail profit. Keeping prices low is one of the key drivers of retail profitability.
Food inflation is up and so are profits at the country's biggest food retailers. That sounds terrible. There is no evidence that what the grocers are doing is actually bad.
Grocers have explanations for how they expanded margins. Some are wondering if that growth is correct. According to Partha Mohanram, the University of Toronto accounting professor who specializes in the analysis of financial statements, inflation has increased the sales dollars funnelling into grocery stores. The same percentage of a larger number is a larger number if food margins stay the same.
Four cents on the dollar is more when you make more money. If profit margins haven't changed, members of the grocery oligopoly chose not to use their heft to absorb the increases in food, fuel, and transportation costs. In a note in February 2021, the deputy managing director of the International Monetary Fund wondered if industry consolidation would protect against rising commodity prices. In the case of Canadian grocery, the three largest stores account for 75% of sales.
If the only reason sales have increased is because of inflation, you could argue that in an ideal world, their profit margins should go down. Mohanram spoke.
Grocers say they are facing a wave of requests from suppliers. The people are looking for the same thing. Their costs for ingredients, packaging, transport and labour are rising and they want the retail chains to pay more at wholesale.
Diane Brisebois, CEO of the Retail Council, said that even though profit margins are up, grocers are still absorbing cost increases. Consumers are sensitive to price.
The industry is too focused on shareholder value to absorb some of the cost increase in its margins according to a veteran grocery executive. They don't have the genetic makeup to take a lower margin. She said it's not what they do.
She doesn't expect anyone to do anything drastic on price unless they have to.
Kerr said it was a game of chicken. Nobody will do anything until it is a competitive issue. They are waiting to see where public outrage will go.
The email address is jedmiston@nationalpost.com.
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