Groceries are shown at a store in Toronto on Feb. 2.Frank Gunn/The Canadian Press
The federal NDP says corporate greed is driving up food prices as Big Grocery gouges consumers to swell its profits. Higher corporate taxes are the solution, Leader Jagmeet Singh says, echoing calls from left-leaning politicians in the United States.
“When the price of groceries skyrocket, it’s not you who benefits,” Mr. Singh wrote in a tweet in late April, commenting on increased second-quarter profit at Metro Inc. “It’s grocery corporations making record profits.”
That was one in a string of such messages from Mr. Singh and the NDP targeting supposed corporate greed in the grocery and petroleum sectors, culminating in a motion this week to cancel billions of dollars of what the party says are subsidies to the petroleum industry. The NDP has also pushed to broaden the Liberals’ corporate-profit windfall tax to include fossil-fuel companies and big-box retailers such as Loblaw Cos. Ltd. and Walmart. All of that cash would be used to boost payments under the Canada Child Benefit, and the low-income GST credit program.
But the NDP’s claim that big companies are responsible for inflation through predatory price increases has little basis in economic theory – or in the financial statements of Canada’s public grocery chains.
University of Calgary economist Trevor Tombe says it is unlikely that grocery chains, even large ones, would be able to arbitrarily increase prices. Such a scenario would entail a significant and sudden decrease in the level of competition. Without such a shift, rivals would not follow price hikes, and simply steal customers – a process made simpler through grocery flyers.
Canada’s inflation rate hits new 31-year high in April as grocery prices soar
There’s no reason to suspect competition has diminished, Prof. Tombe said. It is theoretically possible that companies could use general inflation as a cover for price increases that would have otherwise attracted the ire of their customers. But it is at least as likely, he said, that companies are more reluctant to raise prices at a time when consumers are hypersensitized to inflation.
Michael Smart, an economics professor at the University of Toronto, says economists have paid increasing attention to the use, and misuse, of market power in setting prices, particularly for large technology companies such as Amazon Inc. He said Canada’s grocery industry is not all that competitive, and that it is “not impossible” that some companies have used the uncertainty created by general inflation to increase prices more than was justified by their rising costs.
“But it doesn’t rise to the level of a general phenomenon,” Prof. Smart said, adding that rising profits at grocery stores are not out of line with inflation.
The recent history of the food industry makes accusations of price gouging plausible, said University of Waterloo economics professor Anindya Sen. The Competition Bureau has a continuing investigation of price-fixing, which came into public view in 2017. That year, Loblaw and its parent George Weston Ltd., also the owner of bread maker Weston Foods, said they had reached a deal with the bureau for their role in an alleged conspiracy by several companies in the food industry to fix bread prices between 2001 and 2015. No other food company has made such an admission, and several have issued strong statements of denial.
Prof. Sen agreed there is at least the possibility that companies might “over shift” costs by increasing prices beyond their own increase in expenses. If that were the case, he said, margins would increase in the grocery industry.
So far, there’s scant evidence of such an increase, with the gross margins at grocers staying relatively stable, particularly after shifts in their sales mix are taken into account. (The gross margin measures the difference between revenue and the costs associated with selling goods, but doesn’t include other expenses such as selling or administrative costs.)
At Empire Co. Ltd., which operates the Sobeys and Longo’s chains, the gross margin in the third quarter, ended Jan. 29, was 25.7 per cent. That was unchanged from the third quarter of 2021, and not much higher than in the summer of 2020, when deflation was a much bigger economic worry than inflation. In its first quarter ended Aug. 1, 2020, Empire reported a gross margin of 25.1 per cent.
The story is much the same at Metro, where gross margins have barely budged during the pandemic. In its most recent quarter, ended March 12, the gross margin was 20.1 per cent, down slightly from its gross margin of 20.2 per cent in the second quarter of 2021. And the most recent results were only fractionally higher than in the company’s third quarter of 2020, from early April to early July, when the gross margin sat at 20 per cent.
At Loblaw, gross margins have increased over the past two years, although there are factors other than price-gouging that can explain that rise. In its first quarter ended March 26, the company reported a gross margin from its retail operations of 31.1 per cent, up from the year-ago retail gross margin of 30.3 per cent. In the early months of the pandemic, corresponding to Loblaw’s second quarter of 2020, the company’s retail gross margin was 29.6 per cent.
However in a statement, the grocer pointed to changes in its sales mix, writing that the “the recent narrative that corporate profits are driving food inflation is completely false and misleading to customers.”
The company said that its retail-pharmacy sales have grown faster than grocery sales. Much of the increased profit results from the sale of higher margin items such as cosmetics, Loblaw said, although it did not provide a breakdown in margins between its pharmacy and grocery arms. According to its most recent quarterly report, pharmacy sales jumped 6.8 per cent in the quarter, three times as much as the 2.1-per-cent increase in grocery sales. However, in that same report, the company said that its internal measure of inflation rose “slightly” more in the quarter than Statistics Canada’s inflation measure for food purchased from stores.
Still, there is little indication in any of those financial results that grocery chains are reaping outsized profits at the expense of consumers.
Prof. Smart said the NDP’s proposal to impose higher corporate taxes on the sector would act to increase, not decrease, prices since it would discourage new entrants and reduce competition. Helping out struggling low-income households is a legitimate concern, he said, but such expenditures should be funded through broad-based taxes, such as the GST/HST.
Prof. Tombe raised a wider concern, saying the NDP’s assertion of rampant price gouging takes aim at trust in free markets in much the same way that Conservative MP and leadership contender Pierre Poilievre has taken aim at the Bank of Canada. “They are playing on distrust of institutions.”
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