Front Burner - What’s driving supermarkets' record profits?

Episode Date: December 12, 2022

The price of food is soaring and so are the profits of Canada’s major grocery stores, raising questions and concerns among consumers, politicians and economists about their conduct. A parliamentary committee is scheduled to question officials for Metro and Save-On-Foods about their prices today and representatives from Loblaws and the owner of Sobeys defended themselves at the committee last week, saying they are not taking advantage of inflation to drive profit. Today on Front Burner, we’re talking to Jim Stanford, an economist and the director of a progressive think tank called the Centre for Future Work, who says grocery stores are profiting off of inflation, at the expense of struggling Canadians and that they are far from the only industry doing it.

In the Dragon's Den, a simple pitch can lead to a life-changing connection. Watch new episodes of Dragon's Den free on CBC Gem. Brought to you in part by National Angel Capital Organization, empowering Canada's entrepreneurs through angel investment and industry connections. This is a CBC Podcast. Hi, I'm Jamie Poisson. Everything is costly here right now, so that's difficult for us. We struggle for the money a little bit, so yeah, and this is like a life-saving.

You're on a fixed income and they don't care, and everything just goes up so high. And then when you go shopping, all the people that have the money get all the good things. People like us? That's an assortment of Canadians from across the country relying on food banks. There's always been the need, of course, but inflation over the last year and a half or so has made it more difficult for a lot of people to put food on their table. Prices are still going up. You're not going crazy. Everything is more expensive. The thing we were looking for here

is just how much more expensive. These days, a full grocery cart means an empty wallet. Everything costs more. The basics, milk, bread. The latest stat scan data for inflation goes back to October, and it hasn't been pretty. The consumer price index rose 6.9%. Food prices increased by 10%.

And just last week, a report from Canadian researchers predicted the average family will spend over $1,000 more for food next year. Foodbank's Canada CEO Kirsten Beardsley has seen how that affects Canadians already struggling to afford essentials. Now we're seeing more people spilling into the food banks. I've been speaking to food bankers across the country and they are telling me they're heads down, you know, working long hours and just trying their best. This is the toughest time in our history, in our 41-year history in this country,

but I know that food banks are tougher. We'll keep at it. We'll make sure there's food on those shelves, sorted and out into the communities, healthy food. But what we need is to see government action. We need to see the number of people relying on food banks in this country come down. And unfortunately, it's only headed in the wrong direction right now. Beardsley says charities have been forced to buy more food than ever before, and their money isn't going as far. Meanwhile, there are fewer people in a position to donate and demand just keeps increasing.

These are people who are working and, you know, no one who is working at a job should have to go to a food bank. And yet we don't have the supports that we need for folks to make sure that their incomes are enough to pay for all the necessities of life. So it's people who've never thought they would be in this position. That's who we're seeing a lot of at the food bank right now. We've talked before on the show about the many factors driving the price of food up. Climate changes, impact on crops, supply chain disruptions, high oil costs for shipping. But it's been much harder to say whether grocery stores are also jacking up their prices

and using inflation as an excuse to pull down record profits. A parliamentary committee is actually scheduled to question officials for Metro and Save on Foods about their prices today. Reps from Loblaws and the owner of Sobeys defended themselves at the committee last week. We're in the customer business and we're in a very competitive sector. And our principal motive is to have the best possible prices in our stores

at all times. So today we're talking to someone who says grocery stores are absolutely profiting off of inflation at the expense of struggling Canadians. Jim Stanford is here with me again. He's an economist and the director of a progressive think tank called the Center for Future Work. And while we've got him here, we're going to talk about this concept of greedflation a little more generally and take a look at who else is posting big profits.

Jim, hey, thanks so much for coming back on to FrontBurner. Oh, it's a great pleasure to join you, Jamie. Thank you. We've talked on the show about why costs to produce and ship food have gone up, climate change, the war in Ukraine, supply chain disruptions, high oil costs. But let's talk about how the actual stores cut might also be in that sticker price. And how much have grocery stores increased their profits since before the pandemic? Grocery store profits have more than doubled since 2019. They surged in the initial months of the pandemic. I mean, just think about what was going on, right? We were all rushing to the store to buy toilet paper and stock up on pasta and everything else because we were afraid of what was coming. And then they've stayed very high ever since, including through the current round of inflation.

Even year over year, their profits are up significantly. But the big, big contrast, if you look back to a pre-pandemic norm, their profits have more than doubled. So they've had a heck of a good time while the rest of us have been living in fear. Yeah. I want to pull that apart with you. Is it just the grocery stores that have been posting higher profits? Or is there anywhere else in the food supply chain. So the energy industry, for sure, their profits have absolutely exploded up over 1,000% since before COVID. Then you've got food manufacturers. Think of the big meat processing plants or the big grain handling firms, very huge global corporations. Their profits are up quite substantially, about 50% compared to before COVID. And then at the retail end of it, by the time it gets to the Loblaws store,

they are passing on all those higher costs, yes, but then some. You know, it's interesting, Jim, listening to you right now, it is very different from what I heard last week in Ottawa at the parliamentary committee looking into grocery profits. That's shocking, Jamie. I'm really surprised to hear that the grocery executives didn't make that case. Yes, they're cool, according to them. grocery officials, including one from Loblaw, said, hey, look, like as a percentage of what we sell, we're actually making the same percentage of profits that we always have, which I think they said is less than 4%. The best way to judge us is to look at our

food gross margin, the gap between what suppliers charge us and what we charge customers. Since inflation took off last year, that margin has not increased. This gives us confidence to say Loblaws prices are not growing faster than costs, and we are not taking advantage of inflation to drive profit. And actually, there were industry experts who echoed this. They agree there's little evidence of price gouging. Dalhousie food distribution professor Sylvain Charlebois told the committee these margins were normal. In one of our recent reports, we used publicly available data to look at gross profit for each of the three big Canaan grocers, Empire, Sobeys, Metro, and Loblaws. We calculated their respective best and average performances for the last six years.

We failed to see any evidence of profiteering on all accounts. So what is the divide here? If witnesses are seeing industry profits as relatively stable, why are you seeing them as soaring? First of all, the margins have increased. If you look at the net profits of the grocery stores relative to the total flow of revenue, that's what the margin is. It is absolutely up since before pandemic. Statistics Canada does us the favor of amalgamating all the data across the whole food and beverage retail sector so that you don't have to look through each individual company's financial reports. And before the pandemic, on average, they were making a certain margin,

about 1.6% after tax relative to total revenues in the industry. Since the pandemic, they've been making 2.8% after tax. That is about a 75% increase in the margin. So first of all, the margin has increased. But secondly, this argument that we're just taking a small cut of the ongoing business itself is incredibly, incredibly misleading. If the only reason your total revenue went up is because you jacked up the prices, even if you were just taking the same share of it, and they aren't, they've increased their share. But even if you were, you're still profiting from inflation. Here's the best example of this I can think of, Jamie.

Think of a real estate agent, okay? They take a typical commission of, say, 2.5%. And if you sold the house for a million dollars, then they take their 2.5%. Well, they made $25,000 to sell your house. If there's a housing bubble and the house is now worth $2 million, okay, which isn't actually unrealistic. That's sort of what's happened in Canada.

No, I think that did happen. And they're still taking 2.5%. Well, now they make $50,000 for selling the house. Can you honestly say the real estate agent didn't profit from inflation? Of course they did. And the grocery stores, even with a stable margin, would be profiting from inflation because they're passing on the costs but fattening their total take of profits at the same time. And it's worse than that because they have increased their margin.

Right. So to use a very basic math class example here, they're saying this profit pie might be bigger because of inflation, but it's still being sliced up the same way. And you say the same slice of a bigger pie is still overall bigger. You get a bigger slice of pie. And then on top of that, you don't actually agree it's being sliced up in the same way as it was even a couple of years ago before the pandemic. Yeah, and then it's even more complicated

than that, Jamie, for the following reasons. Number one, they haven't admitted that the pie is bigger just because of inflation. They're coming up with all kinds of hocus pocus about how their marketing has improved and they're delivering a better service

and a richer mix of products, et cetera, et cetera, to justify why the prices are higher. But in fact, it is almost totally inflation driving it. Secondly, the actual size of the pie in physical terms has shrunk. This is the other shocking bit of it. Canadians are buying less groceries. This is a natural reaction to the fact that we can't afford them. So initially during the pandemic, of course, we bought a lot of groceries because we were panicked. We were stocking up and we couldn't eat out in restaurants. That's all changed. We kind of got back to normal. And now in the last year, the actual real quantity of groceries that Canadians are buying is shrinking.

And it's now below the physical quantity that we bought before the pandemic, even though our population is bigger and everything else. So this is a very, very worrisome sign. Canadians cannot afford food. So they're buying less groceries, yet supermarket profits are bigger in absolute dollar terms and as a share of the total revenue. We're buying less, paying more, and they're profiting. Did they single-handedly cause this with their greed? No, but that's a straw man, okay? That's a windmill to tilt against.

Their greed is absolutely part of the problem here, and the prices we pay are significantly higher because we're subsidizing the profits of supermarkets and all the other companies along the supply chain that are taking advantage of this crisis to fatten their bottom lines. So, you know, I think a problem a lot of businesses in Canada are seeing is that when you raise your prices, the amount of goods you sell drops. And so that can destroy your profits. But why is that not happening with supermarkets? If Canadians are buying less food? Yeah, and it frankly, it isn't happening yet across the

whole economy, either. There are signs that the whole economy is slowing down. And the real amount that Canadians can buy has has started to shrink now starting in the autumn of 2022. What the economists call final domestic demand is now shrinking, which means the domestic economy, in essence, is already in a recession. Right now, our exports are still growing, and that's what's keeping the overall economy growing. But the overall quantity of what Canadians buy is shrinking, and that's a very, very bad sign. But the overall mass of profits and as a share of GDP have continued to grow. And this, I think, reflects the complicated conjuncture of circumstances coming out of the pandemic. Greed was not invented last year.

Okay, Jamie, I think it's safe to say. Right, I think this isn't new, right? The idea that companies want to maximize their profits isn't new. Corporations were put on earth to maximize their profits. That's what their DNA tells them to do. And the question for us as a society is not to be surprised at that. The question is to say, what sort of limits do we put on corporate profit motives, particularly at a time of social and economic emergency, which is what we've been through, and I would argue we're still in. So companies have taken advantage of the supply chain disruptions, the fear and changing makeup

of consumer spending, the fact that consumers still had money to spend for a while anyways, thanks to the CERB and all the other income supports that governments, you know, quite wisely in my view, put out quickly during the pandemic, so that Canadians wouldn't be thrown onto the streets. So we were able to keep spending despite the higher prices that were being charged, put all those things together, and you've got a recipe for profit taking. And the reality is, corporate profits in Canada have never been higher as a share of our GDP, about 17 and a half percent of total GDP has shown up in after-tax profits in Canada so far this year. And that is higher than any year in our entire history.

And at some point, we have to ask, why do we let supermarkets charge whatever the market will bear? Why do we let oil and gas companies charge whatever the market will bear? Why do we let housing developers charge whatever the market will bear at a moment when Canadians are struggling to survive? And I think there's a sort of existential question there that we should be asking. What is it about the structure of our grocery industry in Canada that does let, you think, these grocers charge whatever they want, whatever the market will bear? Well, first of all, food is obviously a necessity. So we have to eat. So there's a, you know, in a way, consumers are caught there. We have to eat. We can make choices in what we eat. And we see that happening. This is why Canadians are buying less groceries. We're trying to find other ways to feed ourselves. But the reality is,

in economic terms, demand is very inelastic. Consumers have to pay no matter what the price is. That's one factor. Another factor is the incredibly concentrated nature of the supermarket industry. So you've got three big chains, Loblaws, Sobeys, and Metro that control about 60%. If you throw in Walmart and Costco, we're probably close to 80% in a handful of corporations. And they squeeze their consumers, they squeeze their workers, they squeeze their suppliers because of the dominant market position. Another example Canadians might think of when they think of the power of our big grocers might be the bread fixing scandal. Loblaws, Sobeys, Metro, Walmart, Giant Tiger, but also all the brands they own,

which ultimately captures just about everywhere most Canadians do their shopping. Since 2001, the companies allegedly agreed to raise prices at least 15 times. And each time, about 10 cents was added to each loaf. So after 16 years of artificial price increases, we're all paying at least an extra $1.50 for each loaf of bread. Well, that highlights another issue here, which is the kind of pathetic state of Canada's competition laws. So, you know, we know that this happens all the time, that, you know, implicitly or sometimes explicitly, the companies get together and decide what they're going to charge consumers or what they're going to pay their workers or what they're going to pay their suppliers. But every now and then you get, you know, a window into the bitter truth. And the

bread pricing scam was one of them, the fixing of bread prices across the supermarket chains. And the Competition Bureau decided to investigate, you know, and there was a kind of a token slap on the wrist and, you know, a token mea culpa. Loblaws was handing out, if I recall, little gift cards to people. Yeah, to get for your bread. little gift cards to people. Yeah, to get for your bread. Right. And, you know, nothing really happened. And that, in a way, is an infuriating example of how mealy-mouthed our competition regulators are. I think we need to be more ambitious of how we enforce our laws. I think we need to strengthen our laws and a bigger set of potential remedies for countering anti-competitive behavior, including breaking up companies sometimes. That's what used to happen. You know, think back to the last robber

baron age in the 1920s and big oil companies and big railway companies and so on got broken up to promote more competition. And sometimes those types of things are going to be required to protect everyone else in the industry, not just the consumers, but the workers and the suppliers as well. In the Dragon's Den, a simple pitch can lead to a life-changing connection. Watch new episodes of Dragon's Den free on CBC Gem. Brought to you in part by National Angel Capital Organization. Empowering Canada's entrepreneurs through angel investment and industry connections. Hi, it's Ramit Sethi here.

You may have seen my money show on Netflix. I've been talking about money for 20 years. I've talked to millions of people and I have some startling numbers to share with you. Did you know that of the people I speak to, 50% of them do not know their own household income? That's not a typo. 50%. That's because money is confusing. In my new book and podcast, Money for Couples, I help you and your partner create a financial vision together. To listen to this podcast, just search for Money for Couples. I help you and your partner create a financial vision together. To listen to this podcast, just search for Money for Couples. You mentioned other industries that have been posting huge profits since the pandemic. I know

you mentioned oil for sure. And you wrote this really interesting report that came out last month, and you actually identified 15 industries in Canada, including grocers. And so it just, I run through a couple of them with me. Yeah, well, we've mentioned the food industry, so both supermarkets themselves, and to a lesser degree, the food processing, food manufacturing sector. We've mentioned energy, of course, the oil and gas sector. And that's like a thousand percent, right? The increase there. Yeah. And every time I say that, people think I've made a typo and I've added an extra zero to the number, but I haven't. It was a thousand percent higher, their profits, over tenfold since 2019. And energy prices have been the biggest single source of the inflation that

we're all grappling with. So, you know, here we are about to go into a recession because the Bank of Canada is responding to inflation with high interest rates and needs to increase the unemployment rate, they say, in order to combat inflation, the major single cause of which is oil and gas companies jacking up their prices many times and their profits 1,000%. So, you know, again, I come back to this question, do we allow companies to charge as much as they possibly can? In this case, it was because of a global energy shock and OPEC and cartel behavior. And then it all flows through into Canada's energy system where we've tied our prices to those kind of global casinos where the world oil prices futures are set. And we're all paying enormously for gasoline and natural gas and home

heating oil. And we're going to pay again because of what the Bank of Canada thinks it has to do to offset that inflation. So we've also seen extraordinary profits in the banking and financial sector. And that's happening even further now as interest rates rise. Just think of all that extra money we're paying to the banks in interest. Real estate and housing has been another one. There's been a few kind of strategic supply chain industries, Jamie, where profits were extraordinary. Building supplies and wood products is one, in part

because of supply chain problems, in part because during the pandemic, we couldn't travel, we couldn't go out. So what did we do? We went to Canadian Tire and bought stuff and fixed up our basements. In every case among these 15, you see industries that had a sort of unique, strategic, powerful position in the supply chain that allowed them to take advantage of all of the disruptions associated with the pandemic, and they milked it for all it was worth. And it turns out these sectors are exactly, you know, you don't need a PhD in economics to see this, they're exactly the sectors that have been driving inflation. So, you know, the higher prices that you and I are paying for so many things are showing up absolutely in record profits in these key, powerful parts of the economy.

Earlier, we talked about real estate agents and how they're making tons of money when there was a bubble and oil companies, how they're posting record profits now. But what about the argument that these industries, they're not the most stable, right? Like they can be quite volatile. Oil prices in recent years plummeted. volatile. Oil prices in recent years plummeted. And now today, real estate agents, for example, probably aren't making anywhere near as much money because not as many people are buying houses. So what about the argument that these industries have to grab what they can when they can't? They have to sort of strike when it's hot. I think that there's an element of truth in that, Jamie. Industries rise and fall, no doubt about it. But the question is, how much broader social and economic pain are we prepared to tolerate in the course of that? And we have always put limits on the actions of

private businesses. We've always put limits on greed, if you like, where we consider that it confronts sort of fundamental principles of moral and social behavior. And I think what we've seen in the pandemic is exactly that limit to being confronted and why I think we should have this conversation. You know, instead of assuming that this inflation is the result of kind of the traditional old stories about what caused inflation. You know, the old narrative is an overheated labor market and unemployment too low and wages rising and workers being too greedy. That's the typical storyline. And that is, in fact, the narrative that the Bank of Canada is communicating to Canadians today to justify why they are out to try to increase unemployment and suppress wages. Instead of that, why don't we look at the actual industries, 15 specific industries, where a combination of strategic position in the supply chain and corporate pricing power and the desperation of consumers allowed prices to shoot up.

And it isn't just that it means we pay an outrageous amount for a liter of gasoline or a bundle of wood. It also means we're going to enter a recession, a deliberately engineered recession, to offset the macroeconomic consequences of that greed. And it also means that groups of Canadians can't buy enough food. And it seems to me that's a pretty fundamental limit on how much we should be allowing these companies to charge whatever the market will bear. I don't know, you and I have talked about this, you don't agree with them, but the labour market is too tight, it's too hot. And I guess what Tiff Macklin, the governor of the Bank of Canada, is worried about is a wage price spiral. There is a risk that we could get into something that's called a wage price spiral, where higher inflation pushes up wages, that pushes up inflation again, and then inflation starts to become reinforcing. If that happens, we'll have to raise interest rates a lot more and slow the economy a lot more to get inflation back to target. So what about that argument?

When you look at these 15 sectors where the price pressures came from, Jamie, it really to me highlights that this story that the whole problem is because of an overheated labor market is just unbelievable. Like I imagine this scenario, okay? Imagine that Tiff Macklem goes down to the parking lot at Loblaws this afternoon, okay? And he talks to a few shell-shocked consumers who've come out just paying $200 for their cart of groceries. And he says to them, you know what, folks? You know what the problem is? Too many of you are working and you're making too much money. And that's why your grocery prices are high. Okay.

What, what is going to happen? They're going to chase him out of that lot. He's going to have to, he's going to have to run for his life, you know, and does anyone think, does anyone think if we cause a recession and throw, you know, 300,000 Canadians or 500,000 Canadians or 700,000 Canadians out of their jobs, that the price of groceries will then fall because Loblaws feels sorry for us, or the price of gasoline will fall, or the price of rents in Toronto and Vancouver will fall. It is not too many people working that caused those things to shoot up. And those are the factors that drove this inflation.

That is arithmetically undeniable. So this storyline that it's our fault is, I think, wrong economically and it's wrong morally. Scotia Bank just released a report on inflation. Yes. And they seem to agree with you that it's not all domestic. They said 85% of inflation is caused by global factors and supply chain issues. And then they said that they thought pandemic support programs like CERB, right, that we talked about earlier, and SUZE that gave money to companies went on for too long and that that has affected inflation here at home a little bit.

But they didn't zoom in on this idea of greedflation that I could see, right? And so why not? Yeah, I think that the, you know, and again, on that term greedflation, I could see, right? And so why not? Yeah, I think that the, you know, and again, on that term greedflation, I'm very cautious about that. I don't actually like to use that term myself because of this point that, you know, greed existed long before. So it's not like greed just suddenly burst out. It's a combination of the profit motive and the power and the freedom that we give companies in this moment of post pandemic stress and disruption. That's what's causing it. So, and people are reluctant to talk about it. The same thing goes for the Bank of Canada. If you look through Tiff Macklem's

speeches or his assistant governor's speeches or the monetary policy report that the bank puts out, you literally can't find the word profit even mentioned. You can do a scan, you know, where you look for a certain word, and it doesn't even show up. They're all on about wages and tight labor markets and labor shortages and employers complaining they can't find enough workers, and they don't mention profits once. And there's a reluctance to sort of recognize the elephant in the room here,

which is we are paying very high prices. And even worse, we are going to suffer a painful and avoidable macroeconomic disruption to try and control those high prices. That's, in fact, what I'm worried about more than just the prices themselves, because we're not even questioning the right and power of companies to charge whatever the market will bear. And I don't think we should be ignoring that elephant in the room. The question about what you do about it is complicated. There's no magic bullet solution. But at least I think we should be honest about what caused the problem, rather than inventing this false narrative that it's all because too many Canadians are working and earning too much money, that we're facing inflation and then a recession to cure the

inflation. That is a dishonest story about what's happened. And I think it's been developed and propagated to justify what the bank is doing because the Bank of Canada can't think of anything else to control inflation, even if they, in their heart of hearts, know it was not actually caused by workers. Okay. Jim, thanks so much for this, as always. Thank you. Thank you for having me, Jamie. Great discussion.

All right, that's all for today. I'm Jamie Poisson. Thanks so much for listening, and we'll talk to you tomorrow.