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A Longo’s grocery store in Toronto on March 16, 2021.Melissa Tait/The Globe and Mail

Higher price tags are causing some shoppers to swap out items in their grocery baskets for discounted options, a trend that is likely to continue as inflationary pressures push food prices up, the chief executive officer of Sobeys owner Empire Co. Ltd. says.

“There’s no doubt that this is the highest inflation in almost everything – it’s not just groceries, it’s all over the place – that many of us have ever seen in retail,” Empire CEO Michael Medline said in an interview on Thursday.

Mr. Medline echoed comments from executives at both Loblaw Cos. Ltd. and Metro Inc., who pointed out last month that product suppliers have been asking for more, and higher, increases in prices in recent months. Grocers are negotiating with suppliers to mitigate some of those price hikes, but pressures are continuing.

Also on Thursday, an annual report predicted food prices will rise 5 per cent to 7 per cent in the coming year, the highest jump in more than a decade. While the number also includes restaurants, which are forecast to have the steepest inflation, Canada’s Food Price Report also predicted increases in grocery items including dairy products, bakery goods and vegetables. The report is compiled by researchers from Dalhousie University, the University of Guelph, the University of Saskatchewan and the University of British Columbia.

“Our No. 1 thing is to try to keep prices down,” Mr. Medline said. “We have discussions [with suppliers] about why there are price increases, whether this is really necessary, how transitory it will be.”

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In some cases, Empire’s buying teams are communicating to suppliers that if they raise prices too much, they may lose customers who opt for lower-priced items. “We’re in it together and we’re trying to work it out,” Mr. Medline said.

Shoppers often respond to inflationary pressures by gravitating to discount rather than full-price grocery stores. But Empire, which owns both full-service chains such as Sobeys and IGA, as well as discount chains such as FreshCo, has also seen shoppers stick with their regular stores, while opting to substitute certain products.

In addition to cost pressures facing their suppliers, grocers are also affected by labour shortages, which Mr. Medline said are particularly pronounced in B.C. and Quebec, but are a factor across Canada.

“It’s clear that there will be wage pressures throughout the country in every single industry, and we will have to deal with it,” he said. Retailers may also need to be more flexible in scheduling in order to attract and retain part-time employees, he added.

Retailers are also grappling with supply chain challenges, recently exacerbated by the floods in B.C., where rail service has resumed but a major highway remains closed, slowing the flow of goods. Mr. Medline said many retailers still have some empty shelves, a situation he said is temporary. “It’s just a reality, because it’s a slower supply chain – it’s working, but it’s slow,” he said.

Empire reported on Thursday that the acquisition of the Longo’s grocery chain and other strategic shifts helped to increase its second-quarter profit, even as shoppers continue to dine out more, and buy fewer groceries, than they did during the height of pandemic-related restrictions.

The Stellarton, N.S.-based retailer, reported net earnings of $175.4-million, or 66 cents a share, in the 13 weeks ended Oct. 30, compared with $161.4-million, or 60 cents, in the same period last year.

The company is benefiting from growth in e-commerce sales in Ontario, the conversion of underperforming stores in Western Canada to the FreshCo banner, as well as higher fuel sales as people venture out more. The company has also been making improvements to analytics that govern promotions. Sales grew 4.9 per cent to $7.3-billion.

Compared with a surge in demand for groceries last year during public-health restrictions related to COVID-19, Empire has seen sales soften. Same-store sales – an important metric that does not account for sales growth from new store openings or acquisitions – decreased 1.3 per cent compared with the same period last year, excluding fuel sales. But same-store sales are up compared with before COVID-19: The company reported two-year growth of 6.8 per cent. Mr. Medline said he expects some of that larger shift in consumer habits – including eating at home more often – will stick.

“We’re seeing that the average basket size is still much higher than prepandemic. We’re seeing elevated levels of e-commerce still, although slowed down from the peak,” he said. “There is some real change.”

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