It seems easy to accuse certain food companies of “escroflation,” but one must distinguish between sound business practices and abuse within the food industry.
Posted at 8:30am
Fraud allegations in the food industry have reached an all-time high. According to a recent poll, 68% of Canadians believe food companies are using the inflation cycle to raise prices, and not just in retail. With Quebec and British Columbia now having class action lawsuits against the beef industry, many trade groups and politicians are calling on the federal government to investigate.
We will hear from consumers complaining about excessively inflated prices in various sectors such as automobiles, telecoms, pharmaceuticals and airlines. But in the food sector, the balance between profit and food security remains incredibly delicate. Along with energy, food is becoming the most volatile element in measuring inflation, largely due to the ease with which weather, labor, and geopolitics affect commodities. Half of the products found in a grocery store are perishable and depend on cold chains. Transporting groceries from the farm to the store or restaurant remains a daily struggle. A problem means more waste, more costs and higher food prices.
Easy to blame food companies. Retailers like Provigo, IGA and Metro are bearing most of the consumer backlash due to their role. In recent weeks, several people have slammed grocers for historically high profits and accused them of profiting from the current inflationary cycle. If we look at the financial performance of our three largest grocers, we find that the numbers have remained constant for most of them.
Our largest grocer, Loblaw, has reported consistent gross margin and win ratios since 2017. While gross margins have ranged from 29.35% to 31.47%, profits range from 1.64% to 3.53%. The results are similar for Empire/Sobeys and Metro. Empire/Sobeys gross margins ranged from 23.97% (2017) to 25.47% (2021) and profits ranged from 0.67% (2017) to 2.48% (2021). At Metro we see similar fluctuations, with the exception of 2018, where profitability reached 11.93%, probably due to the acquisition of Jean Coutu pharmacies.
Profits and margins have increased, but only very slightly. Compared to banking institutions and other major players in our economy, the difference remains relatively small. We also have to keep in mind that many Canadians will benefit from these decent financial results, since most pension plans in Canada own shares in at least one of the Big Three grocery retailers.
Still, all evidence of grocery retail fraud in Canada is weak. This does not mean that cheating does not exist in food.
The prices for some product categories are surprising. But what is the acceptable threshold for all of us? What exactly does a price that is too high essentially look like? Some consumers are still willingly paying $28 for steaks at the grocery store, pushing up prices for the rest of us. Supply and demand.
Aside from the details, other links in the supply chain remain more difficult to analyze as many private sector companies do not disclose the contents of their various contracts. Further investigation would therefore be warranted and consumers have every right to be skeptical as we have had our share of price fixing scandals in recent years. The bread price system has given us a good example. Everyone would benefit from looking at different sectors of the food industry beyond retail to better understand how our food supply chain works. A government-led investigation would benefit all but should be limited in scope as the industry is complex.
Food inflation will soon peak in Canada. Food prices will continue to rise in the coming months, but at a much slower pace. The year 2022 should provide a post-pandemic recovery, but Russia had other plans. It should be borne in mind that food inflation remains a perfectly normal economic phenomenon. In order to properly equip the industry so that Canadians can get quality products at consistent prices, prices must continue to rise. However, the past few months have been unbearable for many families. The ideal rate of food inflation should be between 1.5% and 2.5%, which is what we’ve achieved over the past twenty years, excluding the last few months.
Canadians have a strong food industry, but food affordability has been a challenge for many of us. But we have to rationalize “escroflation” anyway before we blame anyone.