Food | The delicate balance between profit and affordability

The big chains are often accused of abusing the situation when their profits increase at the same rate as food inflation. They shouldn’t be judged too quickly.

With skyrocketing food prices, some people tend to suspect retailers of greed to take advantage of an inflationary phenomenon to raise prices, with or without justification. We recently learned that the food inflation rate in the country has reached 7.4%, and that it will most likely rise again in the coming months. It will hurt. So skepticism towards the industry will certainly increase. Everyone remains free of their opinion, but you have to be careful before judging too quickly.

A simple little examination, comparing the profit margins of the big three retailers, Loblaws, Sobeys and Metro, with Canadian companies in other sectors, shows us that their financial results turn out to be rather modest. Thus, at the end of their respective fiscal years in 2021, with at least one good pandemic year, profit margins for these retailers were 3.7% for Loblaws, 2.7% for Empire/Sobeys and 4.5% for Subway. Certainly, these are interesting results; profits are indeed on the rise compared to pre-pandemic years. However, these yields are generally below or at the same level as the food inflation rate for this period.

In other words, the performance of these chains has stagnated if we compare it with the increase in the cost of living.

Meanwhile, in other industries, the profits of large Canadian companies over the same period far exceeded those of the major grocery chains. For example, for the year 2021, Enbridge’s performance in the energy field reached 13.4% and that of Telus in telecommunications was 9.8%. In the banking sector, the profit margin of the bank of Nova Scotia was 33.8%, or almost 10 times more than the large food distributors.

We chose these companies randomly, just to illustrate the situation. The fact remains that profit margins in the food distribution sector are generally more timid than in other sectors of activity. We must also remember that several of our pension plans, and probably also that of the Caisse de dépôt et placement du Québec, own shares in these companies whose results remain constant and involve limited risks in our old age. The profits allow the industry to reinvest in its stores, to innovate and to offer safe and quality products.

For the food sector, the stakes vary differently for obvious reasons.

The unease between profit and a people’s food security has always existed, here as elsewhere. To see a company take advantage of an inflationary windfall would be both irresponsible and immoral.

Wanting to demonstrate beyond any doubt that there is abuse is practically impossible, unless there is a confession like during the bread scandal in 2017, when Loblaw admitted to having participated in a kind of cartel. Nothing to reassure the population, especially since the investigation by the Competition Bureau had not yielded much. In light of certain scandals, the industry deserves its share of imputations.

The balance between profits and social responsibility remains fragile in food, while other types of businesses do not have this reality to manage. But if some people believe that our retailers are making too much money, then the question must be asked: what is the acceptable threshold of profitability in food distribution? 1%? 3%? 5%?

To protect consumers, some often refer to retail price regulation. This strategy already applies to a few products such as milk and beer, among others. However, state intervention for thousands of products would become a veritable bureaucratic and managerial nightmare, leading to high management costs that would end up being passed on to taxpayers.

In Canada, we have fairly well-run food retail businesses, but the lack of competition in the country often invites criticism.

We only have five big players in distribution. Although the profit-related accusations still exist, the distributors could still show some empathy towards the public. There are few in-store discounts and promotions these days and flyers seem to be getting thinner since the start of the pandemic.

If the big chains don’t demonstrate their intention to help the consumer struggling to balance their budget due to inflation, criticism of their profits will intensify.