A shopper buys produce at a Toronto Loblaw store on May 31.Ammar Bowaihl/The Globe and Mail
Stubbornly high food prices should not be continuing to rise at their current pace, executives from Canada’s largest grocery retailer say – making the argument that food manufacturers are to blame, and not store owners.
Suppliers have raised the prices they charge to grocery giant Loblaw Cos. Ltd. L-T by more than $1-billion so far this year, chief financial officer Richard Dufresne told analysts on a conference call Wednesday to discuss the company’s second-quarter results.
“This is double what we would expect normally,” Mr. Dufresne said. “We have received double-digit increases from the same suppliers who gave us double-digit increases last year. That’s why you see products that are noticeably more expensive than they were just a couple of years ago.”
Mr. Dufresne added that many of these cost increases are not justifiable, considering that prices for commodities that go into those products and their packaging are coming down. Prices for transportation, wheat, flour, paper and plastic have all receded from last year’s highs, he said, and Loblaw is pushing suppliers for cost decreases on that basis.
“With lowered costs, we will lower prices,” Mr. Dufresne said.
Grocers have faced criticism from politicians and the public, for not doing enough to combat food inflation. Canada’s annual inflation rate eased in June to its lowest level since early 2021, Statistics Canada reported last week, but grocery prices have resisted this trend. While the Consumer Price Index rose by 2.8 per cent in June compared with the same month a year earlier, down from 3.4 per cent in May, grocery prices rose by 9.1 per cent, nearly matching the 9-per-cent increase in costs reported in May. Food inflation has outpaced the general rate of inflation for more than a year.
On Wednesday, Loblaw reported its revenue grew by 6.9 per cent in the second quarter ended June 17, to $13.7-billion. Sales growth was driven by inflation-weary shoppers continuing to visit its discount grocery stores more frequently, such as No Frills, Maxi and Real Canadian Superstore, and the company plans to open 25 more No Frills stores this year. Loblaw has also seen shoppers redeem points from its PC Optimum program more often, as people look for ways to save money.
Loblaw reported that its own internal food inflation measures were “generally in line” with CPI increases. But the retailer contends that while its overall sales and profits are up, it is not passing on all of those increases to customers, and the profit margins it makes on each grocery sale have fallen. Grocers negotiate with suppliers on the wholesale prices they pay for products, but retailers set the prices on shelves, deciding how much of a markup to take on each item.
“As has been the case since this period of inflation began climbing, our food gross margins declined,” Loblaw president and executive chairman Galen Weston said on the call. He also highlighted suppliers’ responsibility for price hikes.
“We’re seeing meaningful shifts in a whole line of commodities that are core ingredients in these products,” Mr. Weston said. “… You’ll have to ask packaged goods manufacturers what their perspective is on why they’re not bringing retail prices down.”
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While commodity costs are coming down, long-term contracts mean that manufacturers may experience prices that are locked in for a period of time before cost decreases trickle through the system, said Michael Graydon, chief executive officer of supplier-industry group Food, Health & Consumer Products of Canada. Even when there are decreases, he added, costs are not returning to previous norms, and many suppliers are also continuing to see elevated costs for labour and other factors.
“There’s no profiteering within manufacturing. It’s unfortunate that the prices have had to go up. But every input cost that a manufacturer is dealing with has gone up,” Mr. Graydon said. He added that retailers also impose costs on suppliers – such as deducting fines from their payments if shipments are late.
“Some of those factors are driving inflationary impacts as well,” he said. “There are solutions that I think the manufacturers and the retailers can work together on. My perspective would be that the energy needs to be put into finding those solutions rather than pointing fingers at each other in regards to blame for inflation.”
Loblaw reported that its net earnings available to common shareholders grew to $508-million, or $1.58 a share, in the second quarter, compared with $387-million, or $1.16 a share, in the same period the previous year. According to the company, the majority of that 31-per-cent jump in profit was accounted for by an earlier $111-million charge related to a tax matter in its PC Bank business, which significantly reduced the comparable profits in the prior year’s quarter.
Same-store sales – an important industry metric that tracks sales growth not tied to new store openings – grew by 6.1 per cent at Loblaw’s grocery stores, and 5.7 per cent at drugstores. E-commerce sales grew by 13.9 per cent in the quarter.
Loblaw’s profit forecast for the year remains unchanged, with the company expecting earnings to grow in the low double digits.
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