The Decibel - Are Canada’s big grocers to blame for your food bill?

Episode Date: March 13, 2023

Could the rising price of groceries be chalked up to corporate greed? That was the question at a House of Commons committee last week when the executives of Canada’s three biggest grocers testified. Loblaw Cos. Ltd. president Galen Weston, CEO of Empire Co. Michael Medline and CEO of Metro Inc. Eric La Flèche all refuted claims that they were gouging customers under the guise of inflation.Food economist Michael von Massow says blaming Canada’s big grocers doesn’t explain the complex web of factors that have led to sustained food inflation. He helps untangle exactly what’s behind the rise, how much ‘greedflation’ is a part of it and how Canada could make things easier for consumers.Questions? Comments? Ideas? Email us at [e-mail]

A great deal has been said about the role Canadian grocers play in food price inflation, many directly blaming us. This is understandable, but inaccurate. It doesn't matter how many times you say it, write it, or tweet it. It is simply not true. The truth is we are at the end of a very long food supply chain that has economic inputs at every step and stage. Revenues have gone up, expenses have gone up, margins have not gone up.

They've been stable for a long time and food margins have actually declined. So those are facts. Last week, grocery execs testified at a House of Commons committee meeting about the rising cost of food in Canada, which on average is about 10% more than the price of food last year. And this is compared to the overall inflation rate, which is closer to 6%. We've talked about food inflation before, but today we're looking into what's actually behind the sustained rise. Mike von Massau is a food economist and an associate professor at the University of Guelph.

He's here to untangle the complex reasons behind food inflation and where the idea of greedflation fits in. I'm Mainika Raman-Wilms, and this is The Decibel from The Globe and Mail. Mike, thank you so much for joining me today. Well, thanks for having me. I'm excited to have a conversation. Yeah, me too. I want to start by talking about the committee hearing last week with the big grocery store executives, because even after that, I honestly, I didn't feel like I had a really good understanding of why food inflation is so high. So you study food systems, and I'm sure there's a number of factors at play here. But Mike, if you had to pick three big factors that are behind this persistent rise of food costs, what would they be? So first, let me say I agree with you. We didn't get a lot out of the committee hearing the other day. And to a degree, I think there was a purposeful focus,

which wasn't terribly productive. So in my view, the three things that are probably most important are the war in Ukraine, which has had a significant impact on trade in some commodities, wheat and vegetable oils primarily. The next one is extreme weather events arising from climate change, and that's causing disruption in production and shipments. And the third one I would say that's important, especially at this time of year, is the lower Canadian dollar. Okay. Okay. So greedflation, corporate greed or price scouting was not on your list there. That was the focus of the committee hearing. Is that a factor at all?

I'm not convinced that greedflation is a significant factor here. Could I say to you definitively that they haven't taken a little bit extra as it's gone up? No, but I've seen no evidence of it. And I think there are lots of reasons, A, that food prices are going up and B, that profits are going up. So if I can explain both of those things separately, it strikes me that it's unlikely that there's any greedflation. And if there is any, it's relatively small in the grand scheme of food price inflation. Okay. But there definitely is a public perception, at least, that retailers are taking advantage maybe of inflation to increase those prices. I guess, what would you say to Canadians who really are feeling that way? Well, A, I feel your pain and I understand where you're coming from. Food prices are going up and

they're going up a lot. We're seeing generational food price inflation. So it's not surprising people are feeling it and are upset about it. When you say generational, you mean like once in a generation kind of thing? Yeah. We haven't seen numbers like this for a long time. So we've seen food price inflation on individual items. We've seen bumps in food price inflation when we've had events in the past, but we've not seen sustained levels and levels across the board. We talk about food price inflation, but really food price inflation is a composite of a whole bunch of things that are happening underneath.

And so while prices have gone up 11.7% in the last year, that's not all food prices. They haven't gone up equally, which is maybe one signal that there's not greedflation, but they've gone up in response to specific events. So it's sort of like we see this duck on the surface, which is this big inflation number. But underneath, there's a whole bunch of other things happening. So if you look at the overall number, the price for flour, pasta, some of those things, you know, vegetable oils that I talked about as a result of the war in Ukraine have gone up significantly last fall when we started to feel those impacts.

And so they've gone up over 20% in the last year. Tomatoes have gone up a bunch recently because of extreme weather events in Southern California. I don't know if you'll remember, but a few years ago, we were talking and complaining about $10 cauliflower about this time of year. And it was because there was a production issue in California. And so specifically, cauliflower got expensive. Well, what we're seeing now is that sort of cauliflower effect across the board. I would also highlight the fact that Canadian food price inflation has been less than most other G7 countries. It's less than the US, it's less than the UK, it's less than many countries

in Europe. And so again, while prices are up here, they're not up a bunch. And if our retail industry was sort of leading food price inflation, we might expect our numbers to be a little higher. Can I just ask, why is Canada seeing better numbers here than other countries? Is there a reason? Well, I think a little bit of it is serendipity. So rather than good management, you know, we produce a lot of food here. And so that buffers us a little bit. We're seeing price inflation here in the winter because of the Canadian dollar and the problems in the US. But the weather issues aren't unique to the US. If you look at Northern Africa and Southern Europe, which is where produce for Europe is produced in the winter, they've had significant droughts.

And not only have they had significant price inflation, but they've had some empty shelves, frankly, in Northern Europe. That means that there are fewer places for us that we've been sort of, not to say we haven't felt the pinch significantly, but looking around, there's others who felt it every bit as much or more. Okay. Okay. So we've talked around some of these issues now, but let's actually dive into the factors that you listed off the top there, Mike, which of course is not a comprehensive list, but kind of the big factors which we're going to focus on. Let's start with the war in Ukraine here. This is one of the big factors that you listed. And we have learned before that Ukraine is a big producer of wheat, as you said. So I can see how that would raise wheat prices, but is there more to it than that? Ukraine is a big producer of

wheat, but it's not one of the biggest producers of wheat, but it contributes significantly to trade, which means that when that product comes off the market, people who import wheat are bidding more to get it from other places. It drives the world price of wheat up. And then wheat goes up everywhere. And wheat is a staple in many countries. That was made worse by countries protecting their domestic markets. So Argentina said, we're going to put an export tax on wheat, and we're going to limit how much wheat we can export. What that does is it says it keeps the domestic price for wheat lower. It means that the problem becomes worse globally. The same thing happened. Ukraine is a significant exporter of sunflower oil, which is we can lump into vegetable oil category. And so if we look at that comes off the market, the price goes up. Malaysia then said, we're going to protect our domestic market. We're going to limit the exports of palm oil to keep it cheap. And so we have these sort of knock on effects. Similarly,

the Ukraine and Russia both are significant exporters of fertilizer. And that means costs of production have gone up across the world because that fertilizer isn't coming to the market. Prices are going through the roof. Fertilizer from Russia is also being subject to tariff as part of the sanctions for the war. So costs are going up too. So we have these sort of dramatic sort of knock-on effects due to the war in Ukraine that have affected products and their substitutes, which are exported by Ukraine. Okay. Okay. So that makes sense. And so when you're talking about fertilizer, we're talking about like, this is something that farmers would need in order to grow their crops, right? So even Canadian farmers would have a bit of a challenge there potentially.

Yes. That cost is going up. That cost has to be absorbed somewhere. So we're seeing this sort of, it's this complex web of factors which are affecting prices. Yeah. And when we talk about things like wheat and oil, I mean, these sound like staples in a lot of food, right? Bread, bagels, pasta, like all kinds of things would rely on those as the source material essentially to make those things. Yeah. Wheat is fundamental, right? And it is an ingredient in so many things that we don't think about. So it's affecting lots of products. Okay. So that's the war in Ukraine, how that's affecting food prices. Let's go to your second factor, Mike, which is extreme weather events and ultimately climate change, which would be behind

that. So how has that resulted in higher prices over the last year and a bit? Well, if we get extreme weather events, we can produce less. Our production of fresh vegetables sort of moves around the U.S. in the winter. 80% of the lettuce that we consume in the month of December in North America comes from the area around the Salinas Valley in California. So if they have a problem, then all of a sudden we have a pricing problem. After Christmas, we had flooding in the Salinas Valley. Tomato prices have gone up. Broccoli comes from the Salinas Valley. We don't have a lot of diversification of supply. So when those weather events happen more frequently, there's more likely to be disruption of production. It means supply goes down, means price goes up.

Okay. Okay. And the effects of climate change and these extreme weather events, I mean, unfortunately, these are probably going to get worse in the coming years. Does that mean that, I guess, if this issue isn't dealt with, like food costs might just continue to climb over time? I think in the absence of other changes, that's probably true. Okay. So, Mike, your third factor that you listed was a weaker Canadian dollar. How does that affect things? Particularly in the winter when we're importing fresh fruits and vegetables, the low Canadian dollar makes things more expensive. The good news is that that means as we get into Canadian production, we'll probably see more relief than we usually see. So we always see some seasonal variation in prices.

So we often see as we get into Canadian fruit and vegetable production, we see prices coming down. We're not transporting it as far, those sorts of things. They might come down even more because we're paying for Canadian products and Canadian dollars, and we might not have that same sort of exchange rate penalty. We'll be back in a moment. All right. So that was actually that was interesting to break down those three factors, Mike, because it really shows that there's it's a complicated issue here. There's not kind of an easy answer. I want to come back to the committee hearing from last week. It had some heated moments.

I'm thinking specifically of the exchange between NDP leader Jagmeet Singh, who's not a regular at the committee, but he made a special appearance there, and Loblaw President Galen Weston. How much is too much then? For you, is there no limit to how much profit you can make? A six cent. On the backs of Canadians that are struggling because they can't afford the groceries, there's no limit? Reasonable profitability is an important part of operating a successful business. So things got a little dramatic in that exchange there. And it is true grocers are seeing higher profits.

The executives, though, of course, pushed back about how much higher. And this is what Mr. Weston was saying, that if a shopper had $25 worth of groceries in a basket, only $1 from that would be profit. The CEO of Empire, which includes Sobeys, said that their profit margins were only 2.5%, which he described as, quote, paper thin. But Mike, everyone agrees that these companies are highly profitable. So we know the grocery stores have these gains and profit, but so where's the money coming from? Well, I think there's a couple of reasons that, and again, I've not looked at their books. The Competition Bureau will take a more close look at their books. My guess is there are a couple of things that are happening. The first is

volume is up, right? So you can have the same percentage margin, but if you sell more, your profits will go up because your overhead, your fixed costs haven't changed. When prices go up, one of the ways we deal with higher food prices is to eat out less. Okay. So if we're not spending our money on restaurants, we're actually spending more money at the grocery store. So even if they're only making 2.5%, it's a lot more money that they're making that percentage on. Yes. Even though average margin per product hasn't changed a whole lot, the product mix has changed and that will increase profits as well. So we're buying more of the items where they make a slightly higher margin on maybe.

Yeah. And that's the argument they're making about pharmacy sales too. So they say, you know, Michael Medline said, our margins are a little bit lower, but we have a much smaller proportion of pharmacy sales. Galen Weston at Loblaw said our margins are a little higher, but a lot of that is because we bought Shoppers Drug Mart. We're selling more cosmetics. You know, to me, that product mix can be driving profit, even if sort of the average margin they're making on individual products hasn't changed.

We don't have full visibility into their books, though. Why are these stores, I guess, not being more transparent with where they make their money? Couldn't this help their argument? Yes, you're right. Most of these are publicly traded companies. So we can see sort of the high level financial results. They made the argument that what we make on individual products is a competitive issue we don't want to share. So one of the things that the committee sort of focused on, which I thought was valid, is can you separate food profits from non-food profits, clothing, pharmacy? To me, I think it would make sense for grocers to do that,

particularly since that's been part of their argument. The grocers took a reputational hit. Many of us are pointing the finger. It's not surprising that people are angry with the grocers. That's where we're feeling the pinch. From a PR perspective, sharing a bit more, being a bit more transparent without compromising sort of competitive position, I think would make some sense. It's also worthwhile to point out that at this committee hearing that we're talking about last week, there were only three grocery executives at this hearing. And of course, there are a lot of ways for people to buy groceries beyond those three. So there's a lot

of people shop at Costco or even Walmart, or you can get your stuff online with Amazon or something too, right? And there are a lot of US giants, frankly, that are in the Canadian market. So how does the presence of these other giant companies affect things like pricing here in Canada? Well, one of the reasons that, so my expectation is that Walmart and Costco will be there before long. The three CEOs who were there highlighted the fact that they were there alone. We would also ask that you look at the entire industry to consider solutions. There are giant American grocery retailers doing business in Canada who were not called to the floor here today. Are they exempt from playing a role in these issues? I think it had less to do with the fact that Costco and Walmart are American companies and more to do with the reputational damage that was being, you know,

getting called up, you know, Jagmeet Singh banging on the table with his big pile of letters, made for great theater and reinforced the perception that these grocers are bad corporate citizens. So I'm asking if you would respond to these questions that I'm going to table to this committee. Will you respond to these questions? I'd certainly be happy to take a look at them. So you're not going to respond to the questions? No, I said I'd be happy to take a look at them. I didn't ask you to take a look at them, though. I said, will you respond to these questions? It's an important question.

If you're not going to, just say it. If you are, that's an important thing to hear. I would like to take a look at them and, you know, determine, you know, what the most appropriate form of response is. And we heard at the committee people talking about a grocery code of conduct to sort of control or moderate the power that grocers can inflict on their suppliers. And I think that that's a valid thing to do. What happened is it was conflated with greedflation. It does sort of highlight maybe not perfect behavior on the part of grocers, but it has nothing to do with food prices. If anything, a grocery code of conduct may actually increase food prices rather than decrease them because it'll stop grocers from

being able to do as many things to their suppliers, which means suppliers will either make more money, grocers will make less money or will pay more. And in some cases, it's probably some combination of all three of those. Before I let you go here, Mike, we've talked about how focusing on grocer profits isn't necessarily going to explain or solve the issue of food inflation in Canada. So moving forward from a government perspective, what can the government focus on to help Canadians, frankly, spend less on food? That's the big question here. And it's not an easy one. The government can't stop the war in

Ukraine. It doesn't look like we're approaching a resolution anytime soon. The government can't control the Canadian dollar, although the Bank of Canada's interest policy has an impact. But the Bank of Canada is independent, and they have to balance broader price inflation with food price inflation, right? The government can't do a lot in the short term about climate change. So I would argue that the things that are fundamentally affecting food prices are unlikely to be affected by government. So if the government wanted to do something, I think the only approach would be direct payments. I think that the people on assistance,

the people at the lower end of the income scale are bearing a disproportionate burden of inflation generally and of food price inflation specifically. So direct payments- To consumers then directly. To consumers might be the only way to buffer food price inflation. Mike, this was really interesting. Thank you so much for speaking with me today. Well, thank you for having me. That's it for today. I'm Mainika Raman-Wellms. Our producers are Madeline White, Cheryl Sutherland, and Rachel Levy-McLaughlin. David Crosby edits the show. Adrian Chung is our senior producer, and I'll talk to you tomorrow.