greetings everyone welcome to the Plane Bagel. I'm your host Richard Coffin. I don't need to tell you that ever since the onset of the COVID-19 pandemic grocery prices have gotten too damn high. From July of 2019 to July 2024 food at home prices rose 28% in the United States. Well the price for food purchased from stores rose 25.9% in Canada. Rates that were well above the broader inflation figures especially in 2022 where at one point food at home prices rose nearly 14% year-over-year in the United States. And that's just at the aggregate level when it comes to individual items price swings could get even wilder. I'm sure we can all think of an important food staple that we saw surge in price over the pandemic whether it be eggs or sweet chili heat Doritos to pick a totally random example. And while we're all of course familiar by now with the common explanations for why prices are higher whether it be supply chain

Kinks or higher labor costs. Some are concerned that there's a more nefarious reason behind the growing grocery bill: corporate greed, more specifically price gouging from Big Chain grocery stores. Something that's even led to the popularization of a new term: greedflation, the idea that companies are taking advantage and exacerbating the situation of inflation by expanding profit margins. With a recent survey from the AGR Food Analytics Lab at Dhose University finding that one in three Canadians believe grocery store price gouging is the main cause of rising food prices. Now, the idea of greedflation is, of course, nothing new, but specifically around groceries, it's an issue that's gone a lot of attention recently, especially from politicians and regulators. In her campaign for presidency, Harris recently proposed the first-ever federal ban on corporate price gouging within the food and grocery industry after herself accusing grocery stores of greedflation. And here in Canada, company executives were summoned to Parliament in 2023 to

testify on rising prices, with many provinces themselves taking action to try and ban grocery price gouging. But are higher grocery prices really being driven by the corporate greed of retailers, or are grocery chains simply being scapegoated by politics as a distraction from a more systemic issue? Well, that naturally political question does depend a bit on who you ask and the stats you look at. In the US, the Federal Trade Commission recently released a report that found that food and beverage retail revenues did increase more than 6% over total costs in 2021 and 7% in the first 3 quarters of 2023, well above the previous peak of 5.6% in 2015. While a report put together by the Competition Bureau in Canada likewise highlighted that grocery stores have seen a modest but meaningful margin expansion of 1 to 2 percentage points since 2017, which in a high inflation environment still translates to meaningful increases in profits. But company executives have pushed back on the idea that grocery

stores are taking advantage of inflation, with some in Canada arguing that they actually took losses selling some of their products like milk and chicken to keep customers in stores, with some further arguing that the profit margin expansion they have seen has been primarily driven by other product categories including Beauty, Pharmaceutical, and apparel. Meanwhile, Executives in the US have argued that because of the intense competition in the space, price gouging isn't really all that possible, with some fearing that any regulation on pricing in the space might actually make the situation worse, uh, by pushing away the important Investments needed to improve Supply chains in both countries. And in today's video, I wanted to dive into the stats for some of the largest grocery store chains in the US and Canada to try and get to the bottom of it. And before you say anything, I know what you're thinking, Here Comes Richard to spread more corporate propaganda, but the point of this video is not to defend the galin West ends of the world, uh, which for my non-Canadian viewers is the

much-beloved now ex-president of Canada's largest grocery chain. La laws today. My goal is simply to bring more data to the table to help better inform the conversation, to be descriptive rather than prescriptive, uh, because as you'll see, I do think we face a much more complex issue than some others might be presenting. And to be clear, the scrutiny of prices coming from grocery chains is well-deserved, especially here in Canada, where not too long ago we actually had a bread price-fixing scandal, whereby grocery stores allegedly colluded to keep prices higher. But in this situation, things are much muddier, and I'll try to offer as best I can a nuanced perspective on things to highlight, uh, the real issues that we do have with grocery store chains without oversimplifying the overall situation. But let's start off by looking at some of the higher-level stats of these publicly traded grocery store companies. Uh, now naturally, because we're only looking at publicly traded stocks, this doesn't include the entire universe of important grocery stores to look at.

and as you probably know, there are some companies here like Walmart or Costco that sell more than just groceries. So, when looking at their financials, it's naturally going to be a little altered by these other product categories. So, I will throw up some data on screen to show the general sales breakdown of each of these companies to try and put their figures into perspective. But just keep that in mind as we're looking at their growth rates and margins that there are some other product categories outside of food and beverage here. But that aside, at a high level, it's no secret that during the pandemic, many grocery stores in the US and Canada did experience record sales and profit numbers, with people both stocking up on supplies and switching from eating out to eating at home and thereby purchasing more groceries. And since 2019 for both countries, revenue, operating income, and net income for these companies have grown pretty consistently faster than in the four years leading up to 2019, with many cases companies seeing their operating income growing faster than

Revenue, which definitely does highlight that grocery stores did benefit from the surge in demand. We saw the companies did also see improvements in their return on invested capital, return on equity, and return on assets, which are all slightly different measures of capital efficiency, effectively how much the company is able to make per dollar invested in the company or its assets. But this alone doesn't really demonstrate price gouging for most companies. Even if they kept their prices flat, you would expect their profits to grow faster than revenue because of something called operating leverage. Basically, as sales grow, the fixed costs that they pay don't necessarily rise in step, so more of those revenues go towards the bottom line or their profits rather than fueling their expenses. To see if this profit growth is being driven by higher prices, it's worth looking into the company's gross margin, which represents how much these companies are charging above the cost of the products that they're selling. And you would expect that if we are seeing price gouging, we'd see a noticeable surge in

this gross margin around the pandemic. So did we see gross margin spike over the pandemic as we might expect? Well, starting with the US side, not really. If you look at the market share weighted average gross margin for these companies, shown with the dotted line, you can see that for the most part, the margins seen during the pandemic weren't all that different from prior years. Margins did expand in 2020, but we're actually at the lowest point in the period analyzed during 2022, the year of peak inflation. Now switching gears to Canada, you might notice a bit more of a trend, to say the least, with gross margins pretty consistently rising over time. And don't worry, we'll touch on that, but specifically when looking again at the 2020 and 2022 period, there's not again much of a notable deviation. In fact, gross margin expanded more in the four years leading up to 2019 than from 2019 to 2023. Now gross margin is just part of the picture here. It's also worth

considering the company's operating margin, which considers the cost of labor and keeping the lights on, as well as their net income margin, which factors in all the expenses for the company to see if there's other costs that are dramatically swinging margins higher or lower during the period. And here the picture is a bit more mixed but still sort of points to some of the same conclusions. For many companies in the US, operating margins did somewhat peak in 2021, which is in line with the argument around operating leverage, but just one year later in 2022, the margins fell back down to a near-decade low, something that we see a similar trend for when looking at net income margin, which could line up with the arguments that labor costs did in fact weigh on profitability during that year. Now in Canada, again we see a similar trend as with gross margin, with a general expansion over time, but when it comes specifically to that time period, there's no notable swings, which for some

might be enough evidence to call it a day, take the grocery chains off of the witness stand. But so far, all the figures we've looked at are importantly accounting figures, and because revenues and costs presented on accounting statements are sometimes smooth or otherwise adjusted according to accounting rules, they don't always reflect reality. So before calling the case closed, I wanted to look at one other metric here, the free cash flow margin, which roughly represents how much cash the companies are actually bringing in relative to the sales they're reporting. And here we do see a more questionable bump, with the weighted average free cash flow margin jumping 1.7 percentage points between 2019 and 2020 before normalizing downwards, something that's even more pronounced in Canada with the margin jumping 3.8 percentage points in 2020 and remaining well above its historical range thereafter. Which finally brings us back to the question that I promised to get to earlier: why is there seemingly more greed flation in Canada than the United States? Well, I don't have the

answer to that could deserve its own investigation and miniseries, but one possible explanation is that Canada's National Grocery industry is more concentrated than many other countries, especially the United States. After all, these three companies that we're looking at here, BL, Blas, Metro, and Empire, who own so, have roughly the same market share in Canada as the six companies have in the United States. Which, even though on an absolute basis they are smaller, could mean that they have more pricing power within the country of Canada than their counterparts in the United States. So, it seems that we found it, the price gouging, the gation hidden in the fine print, right? Well, maybe uh, but it's really hard to say for sure. For one, deviations between net income and free cash flow don't necessarily reflect an intent to hide profits. Usually, deviations occur when there's a difference in timing around Revenue recognition and cost recognition. For example, if a company agrees to pay for service uh, a year from now but benefits from that service today, that expense will show up in the net

income margin but not the free cash flow margin, even though regardless, eventually they're going to pay this expense. And even if we took the free cash flow margin to be more reflective of reality, for the most part, the margins are back down to where they started in the United States and remain up just one percentage point in Canada, which doesn't really explain the over 20% food price inflation we've seen in both countries. It's also near impossible to know with 100% certainty whether we should attribute the expansion in margins to Greedflation or simply to product mix, if the company is again selling more Pharmaceuticals or beauty products, or if they're just getting more efficient and becoming more profitable because they've invested in improving operations. And even if the margin expansion in Canada versus the United States was strictly driven by Greedflation, food price inflation has actually been worse in the United States. So, if grocery stores alone don't explain most of the food price inflation we've seen, what does? While according to the Federal Reserve Bank of Kansas City and

the New York Fed, one of the bigger contributors, has been labor costs. Labor is estimated to account for 40% of the total input cost for food, and during the pandemic, labor costs in food manufacturing rose in line with food price inflation, while labor costs for retail grocery stores actually rose faster than grocery prices. Now, Canada wage inflation has not seemingly been as strong of a force across the two industries, but another factor highlighted by the Fed Banks, which would be more material for Canada, is rising commodity prices, with the S&P Goldman Sachs index for agriculture and livestock commodities surging from 2021 to 2022, around the same time period that inflation peaked, with supply chain backlogs, the war in Ukraine, drought, wildfires in Canada, and fuel prices all playing a role in impacting the price of important food commodities. But while these institutions highlight higher labor and commodity costs, the New York Fed explicitly pointed out that profit margins for both food manufacturers and grocery stores were not a significant

contributor to price inflation, arguing that profit margins were actually flat for the former and up just 1.5% for grocery stores relative to the 25% increase in prices over the same time period for the United States. Something that we've similarly seen in Canada with, again, even the free cash flow margin only remaining up around 1% through the pandemic. Now, this isn't to say that we haven't seen any sort of price SC Gene. Again, we are dealing with pretty broad and limited data here. That's not really as granular as you would hope for to really analyze the impact of grocery store prices and at an individual level. Of course, grocery stores and different companies might be more or less aggressive with their price hikes. And if certain companies are taking losses selling milk and chicken, they might be making that up by unreasonably hiking prices for other product categories like my classical spaghetti sauce, which is crazy these days. And in dollar trims, even with flat margins, grocery stores still benefit from inflation and higher

sales, uh, because of things like, uh, operating leverage, or again with margins flat, they just earn a higher dollar amount. I do also think there are valid concerns around grocery stores cementing their market power, an issue that's highlighted in both the FDC report and the Competition Bureau of Canada report cited earlier. It is something that we could perhaps attribute some of the concerning practices we've seen in Canada to, but clearly grocery store margins are just one of many contributors and likely far from one of the biggest contributors to rising food prices. In fact, even if grocery stores decided tomorrow that they would all operate as not-for-profits and would simply break even on their operations, we would only see grocery prices drop 2 to 4%, which represents a roughly $3 savings for every $100 spent at the store, which is not nothing, but it doesn't explain the $25 jump we've seen in grocery bills, and it's pretty unreasonable to expect grocery stores to operate unprofitably. So, should there be rules on price

gouging. And should the grocery store space be perhaps more regulated, similar to the utility sector, where you have caps on profits for given companies? Well, that all depends on the specific wording of the policy and, again, falls outside the scope of this video. I do think most people are fine with general guardrails to prevent unreasonable exploitation of product shortages and malicious practices that reduce price competition, but the devil's in the detail. And with grocery stores being a notoriously low-margin business, one of the least profitable areas to operate within, there isn't tremendous wiggle room here. And if regulations overstep and make grocery stores unprofitable or just generally unattractive for investment, it could hamper the situation rather than helping it. In the 1970s, during a bout of high inflation, the US actually tried implementing price caps to very little success, with prices still increasing quite meaningfully during the period. So, while I don't really comment on policies on this channel, it does highlight why there is concern here and why caution is

warranted that being said. The good news with all this is that as commodity prices have normalized downwards and labor markets have eased, food prices should see lower inflation moving forward. Rates have dropped dramatically over the last 12 months. But if anything, I hope this video helps to demonstrate that the issue is a lot more complex than simply grocery stores are price gouging. And that's not to belittle the real issues people are facing with higher grocery bills. It's simply to say that any policy that's truly targeting food affordability needs to consider a lot more than just the profit margins of grocery stores. Well, that might lead to a small win and is certainly politically easier to achieve. It's not going to get to the root because of a lot of the price increases we've seen anyway. That's a video. Thanks for joining me today. I know this isn't really a popular approach for tackling the subject, but again, just trying to be descriptive rather than prescriptive here and just bring more data to the table to help.

better inform the conversation, uh, but feel free to let me know your thoughts, whether you agree or disagree, uh. If you like the video, make sure to like, subscribe, all that good stuff. It does help the channel tremendously. Thanks for joining me today, and as always, be safe out there.

Grocery Store Greedflation - Is Price Gouging Behind Higher Food Prices?

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I'm a CFA and CFP professional working as an analyst for an investment management company in Ottawa. I'm a huge finance nerd and am passionate about the field - I think people lack the resources they need to make educated financial decisions, and hopefully this channel helps with that!

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The videos on this channel are for education purposes only and do not constitute financial advice. Richard Coffin does not provide recommendations on The Plain Bagel - those looking for investment advice should seek out a registered professional. Richard is not responsible for investment actions taken by viewers and his content should not be used as a basis for investment trades.

Grocery Store Greedflation - Is Price Gouging Behind Higher Food Prices?

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