Money, food, and gross profits

Grocery store magnates claim they aren't profiteering, but what does that mean?

Siobhan Morris @siomoCTV

I beg your pardon

Galen Weston was in Ottawa this week, defending the pandemic profit margins of his company. Weston and his fellow grocery CEOs have said that their profit margins haven’t gone up, they’re just passing along higher input costs. Galen Weston also asked Canadians to “trust him” that Loblaws grocery profits are being driven by margins on cosmetics & cold medicines, not food. It’s a weird flex to try and deflect concerns about profiteering by suggesting that your higher profits are actually coming from sales of cold medicines during a pandemic.

Weston said Loblaw grocery profit margins are steady around 4%, and Empire’s CEO said Sobey’s profit margins are around 2.5%. As Jim Stanford outlined over at the Progressive Economics Forum back in December, if higher input costs are the only element that is changing then stable net profits as a share of revenue actually means higher profits in both dollar terms and as a share of invested capital.

We see this in Loblaw’s 2021 financial review (pg 73), where they report an “adjusted return on equity” for 2021 of 17.3%, up from 12.9% in 2019. In their Q4 2022 report (excerpt show in image below), adjusted return on equity was up even higher, to 20.2%.

In other words, even if all they were doing was keeping net margins steady, they’re still pushing the full cost of inflation back onto somebody else in the supply chain - in this case both consumers and workers.

But somebody’s margins have been going up. The food and beverage retail sector in Canada is highly concentrated, with Loblaw, Metro, and Sobey’s making up an estimated 60% of the market share, and Costo and Walmart taking up another 15-20%. I’ve replicated Jim’s chart on net margins for the sector from December with the latest data from Q4 2022. The 2020 - 2022 average is one percentage point higher than the 2017 - 2019 average. And this isn’t all driven by the higher margins from early on in the pandemic, the 4 quarter 2022 average is the same as the 3 year pandemic average, 2.7%.

The grocery sector in Canada is so concentrated, and the goods they sell so necessary, that consumers have little ability to punish retailers for too high prices. The big three also operate under a whole bunch of different names, giving the appearance of more competition, making it even harder for consumers to flex their muscle ‘en mass’ and discipline retailers for out-of-line price increases.

As others have shown, food retailers weren’t even the worst offenders. Food manufacturing, auto dealerships, oil & gas all increased their margins by more during the pandemic. But it’s not like everything was perfectly balanced before March 2020.

What comes next?

Corporate profits have been elevated in Canada for the past two years, but that trend might be coming to an end. Separating out financial and non-financial after-tax corporate profits as a share of GDP shows that non-financial profits are a lot more volatile. During the pandemic non-financial profits reached levels similar to just before the 2008 financial crisis, but the most recent data from the fourth quarter of 2022 shows that the party might be ending. Financial profits as a share of GDP have increased more steadily over the past 20 years, but took a bit of a hit during the pandemic.

Which leads me to the question - how is profit determined? How much is OK, or desirable even?

Socially and economically profit that comes from productive investment is more desirable than profit that squeezes out returns to labour or relies on capturing unproductive rents.

But prices and profits are contested, between firms, consumers, and workers. Those with more power (economic and political) end up with a bigger slice of the cake. What changes to our institutions and industrial policy do we need to shape markets that generate more profit from productive investments, and to ensure that consumers and workers have more economic power?

Asking these questions and proposing structural solutions are key to building the multi-racial working class coalition Jen Hassum of the Broadbent Institute keeps talking about.