Executives at Loblaw Cos. Ltd. L-T are calling out multinational companies that produce consumer packaged goods for “outsized cost increases” on products, an accusation that one industry representative said is untrue and an attempt to deflect anger grocers have faced for not doing enough to fight food inflation.
On a call to discuss the company’s quarterly earnings on Wednesday, chief financial officer Richard Dufresne said that so far this year, suppliers have increased Loblaw’s product costs by nearly $1-billion, which is lower than the increases seen in the same period last year but still more than double historic norms.
Prior to the pandemic, it was typical for Loblaw to see roughly $400-million in cost increases from suppliers in an entire year; in the 2022 fiscal year, those increases totalled more than $2-billion, he said.
“We wanted to call it out because it is one of the big drivers of cost inflation that we are seeing,” Loblaw chairman and president Galen Weston – who faced questions on the subject along with other grocery CEOs before a House of Commons committee in March – said on the call Wednesday. Cost increases seem to be out of line with commodity prices, he said.
But Michael Graydon, chief executive of Food, Health and Consumer Products of Canada – which represents manufacturers, including multinational suppliers – said that commodities are not the only factor in price increases, adding that costs for distribution, packaging and labour all continue to rise.
“I see this as an attempt to deflect some of the public criticism of these organizations’ profits,” Mr. Graydon said. “The grocery industry has been [perceived as] the bad guy, in regards to inflation discussions. … I’m not sure that it’s fair that they take all of the responsibility from a public perspective. But I think this is just an attempt to deflect the messaging to camouflage very good performance.”
Loblaw reported that its adjusted profits grew by 10 per cent in the first quarter, as grocery prices continue to rise and sales of high-margin drugstore items such as beauty products and over-the-counter medicines remain strong.
Large suppliers have confirmed that their prices have gone up. Last week, for example, both Coca-Cola Co. and PepsiCo Inc. – a company that has clashed with Loblaw in the past over price hikes – reported revenue and earnings that beat analysts’ expectations, partly driven by higher prices.
“We are definitely seeing more inflationary cost pressure from the large multinational CPGs than we would have expected at this time, based on what’s happening in the commodity cost environment,” Mr. Weston said, referring to consumer packaged goods companies.
Canada’s largest grocer, like others in the industry, has seen profits grow as sales have gone up – driven partly by food inflation, which has begun to moderate but is still outpacing the general rate of inflation.
Loblaw reported on Wednesday that its internal food-inflation measure was “generally in line” with the consumer price index for food purchased from stores, which Statistics Canada uses to measure food inflation and which averaged 10.5 per cent over the quarter ended March 25. On the call, Mr. Weston said that Loblaw has not been passing on all its cost increases in the form of higher prices.
The grocer, based in Brampton, Ont., reported that while overall profits are going up, its profit margins on food sales have been decreasing slightly as costs remain high – and that growth in its total profit margins is because of strong sales in “front store” categories such as makeup and cold medicines at its Shoppers Drug Mart chain. The company does not provide separate gross margin numbers for its grocery and drugstore retail businesses.
Suppliers have also pushed back on the notion that they are benefiting from inflation. “I know it’s an inconvenient truth, but we have not been profiteering in any way, shape or form,” Unilever PLC chief executive Alan Jope said on a conference call last week to discuss the packaged-goods giant’s earnings, adding that the company had only passed on three-quarters of its cost increases to its customers.
Loblaw’s net earnings available to common shareholders decreased in the quarter, because they compared with a period in the prior year when the company recorded a one-time contribution of $11-million resulting from a favourable court decision in a tax matter.
Loblaw reported net earnings of $418-million, or $1.29 per share, compared with $437-million, or $1.30 per share, in the same quarter in 2022. Excluding that prior-year benefit and adjusting for other items, adjusted net earnings rose by 10 per cent.
The company’s revenue grew by 6 per cent to nearly $13-billion in the 12 weeks ended March 25, compared with the same quarter the prior year. Same-store sales – an important metric that tracks sales growth not related to new store openings – grew by 3.1 per cent at the company’s grocery stores and 7.4 per cent at its drugstores.
Loblaw will soon undergo a leadership transition, as Mr. Weston plans to step back from day-to-day operations by early next year. European retail executive Per Bank will take over as president and CEO of the grocery retailer. However, Mr. Weston will remain chair of Loblaw’s board and chair and CEO of parent company George Weston Ltd. In that role, he will remain closely involved in overseeing the strategic direction at the family-controlled company.
In his dual role at Loblaw and George Weston, Mr. Weston received a $1.2-million raise in 2022 after consultants hired by the company determined he was underpaid. That brought Mr. Weston’s total compensation to $11.79-million last year.