Sales inflated to inflation and an increased profit margin… Food stores have been accumulating profits at an accelerated rate since the start of the pandemic.
Quarterly financial statistics for enterprises released Wednesday by Statistics Canada shine a spotlight on data from stakeholders in the food sector. One big observation stands out: grocery stores are experiencing significant profit margin growth, to use the wording of the federal agency.
Upstream, the food and soft drink manufacturing industry’s margin averaged 5.3% between 2017 and 2019, rising to 5.4% in the first three quarters of 2022. For stores food industry, the average pre-tax profit margin was 2.2% before 2020 and 3.5% in the first three quarters of 2022, representing an increase of 1.3 percentage points between the two periods selected, or 59%. While it remained, with some exceptions, below 3% between the first quarter of 2017 and the fourth of 2019, it reached an average of 3.7% from 2020.
In dollar terms, quarterly pretax net income averaged $828 million from 2017 to the end of 2019. It has since risen to $1,575 million, an increase of 90%. In food manufacturing, it rose from 1,707 million to 2,320 million, for an increase of 36% between these two comparison periods. Having reached the $1 billion mark only twice between 2017 and 2019, pretax net income for grocery stores passed that milestone in the first quarter of 2020 — peaking at $2.3 billion a year later — , to stay well above it ever since.
Describing the increase as significant, Statistics Canada points out that “overall, the increase in pre-tax net income of food stores is mainly attributable to a higher volume of sales and an increase in their profit margin”. However, the agency is keen to point out that businesses in this store industry can also generate revenue from sales of non-food items.
Economic cooling
Although the net profit of food stores increased in each of the first three quarters of 2022, a decline in the average quarterly profit was however observed this year compared to the average recorded in 2021. This decline reached 11% and erased in part of the 30% increase measured in the first year of the pandemic. However, from 2020 to 2022, the increase is 15%, compared to 5% in the food manufacturing industry.
A decline in 2022, which must be put in the context of a deterioration in the economic outlook for companies. The 350 basis point increase in the Bank of Canada’s key rate since March has had the effect of a cold shower on the economy. “The continuing labor shortage, the downward trend in the price of energy and metal products, and the 2.3% depreciation of the Canadian dollar against the US dollar have heightened uncertainty and concerns about an economic downturn,” added Statistics Canada.
Canadian companies recorded an 8.1% drop in net income before taxes in the third quarter. The decline was 11.6% in the financial sector, 6.7% in the non-financial sector.
A little less oil surplus profits
Accused of swimming in excess profits, oil and gas extraction companies saw their pre-tax profits fall 3.4% in the third quarter due to the drop in the benchmark price of West Texas Intermediate and the widening gap with Western Canadian Select, the Alberta benchmark. Prices for crude energy products fell 10.6% in the third quarter. Added to this is the decline in crude oil exports to the United States, as the increase in supply in the United States has made it possible to release more barrels of their strategic reserves, explains Statistics Canada. For its part, the natural gas price index fell by 15.8%.
In petroleum and coal product manufacturing, profits fell 61.7% from the second quarter, amplifying the effect of a 9.6% drop in revenues. However, this profit shows an increase of 17.1% over one year and revenues, of 35.5%.
Among the other major problems, the financial sector had to combine a 175 basis point hike in the key rate in the third quarter, with inflationary slippage, growing uncertainty and a slowdown in economic activity. The pre-tax net profit of financial companies fell by 11.6%. The decline was 23.1% in the Banking and other financial intermediation activities segment, which is not without reflecting the increase of more than 150% in the provision for credit losses. Over one year, the decline in profit exceeds 10%.
Coming back to food stores, the increase in net profit before taxes was 4.3% between the second and third quarters, 10.6% year on year.
That’s nothing compared to pharmaceutical and drug makers, which saw theirs jump 201.6% year-on-year, 100.5% between the second and third quarters, on a 17.4% rise in revenue. % and 11% respectively.