One of Canada’s richest people has decided to join the inflation fight, almost two years after prices burst out of the central bank’s comfort zone.
“We are actively lowering prices in key categories,” multi-billionaire Galen Weston, president of Loblaw Cos. Ltd., the country’s biggest grocery chain, said on a call with analysts on Feb. 23. “However, we still have over 1,000 supplier requests on our desks for significant cost increases.”
Weston’s apparent willingness to risk Loblaw’s profit margin to compete on price is fairly new. The cost of food purchased at stores increased 11.4 per cent in January from a year earlier, the fifth consecutive month that food inflation exceeded 11 per cent, the first time that’s happened since the last great inflation scare in 1981.
It’s not just food. The cost of personal care items — the other type of goods Loblaw sells in abundance through its Shoppers Drug Mart pharmacies — increased 7.6 per cent from January 2022, down from a year-over-year increase of 8.1 per cent in December, but otherwise the fastest since the spring of 1983, according to Statistics Canada.
Both numbers — groceries and personal care — stand out because Canadian headline inflation is noticeably slowing: the all-items consumer price index increased 5.9 per cent last month, down from a peak of 8.1 per cent in June. If Weston struggles to convince the public that he’s now part of the solution to the cost-of-living crisis, it will be because the stuff he sells still costs considerably more than what his customers were used to paying.
Such a struggle seems likely. Weston’s credibility took a hit in December when he made a show of freezing prices ahead of the holidays, a practice that others in the grocery business said was routine. The Competition Bureau and the House agriculture committee are both investigating why food prices soared so much higher than prices for other goods.
Loblaw is now the subject of ridicule on social media, attacks it invited by deploying a let-them-eat-cake PR strategy that made the company look inauthentic and prickly. “We get it,” someone managing the company’s corporate Twitter account tweeted at the end of January. “It’s easy to blame grocers for higher grocery prices. But on a $100 grocery bill, our profit is less than $4.”
Missing from that tweet was Loblaw’s profit on a $100 cosmetics bill, or its margin on drugs and health services. The company, like its two smaller counterparts in the grocery oligopoly, Empire Co. Ltd. and Metro Inc., bulked up over the years to take advantage of economies of scale and diversification. The strategy was good for shareholders, but it’s less clear whether the decision of antitrust authorities to approve the creation of a set of grocery, cosmetics and drugs behemoths has been good for the economy.
Gross margins — the money left after a company subtracts the direct costs of producing what it sells — were little changed as inflation surged, suggesting the grocers simply let higher input costs pass directly through to retail prices.
Loblaw, Empire and Metro had margins big enough to absorb some of the price increases caused by an extraordinary period in history, but they chose not to sacrifice any of that cushion, probably because they felt no competitive pressure to do so. Those three companies, along with the Canadian operations of Walmart Inc. and Costco Wholesale Corp., control about 80 per cent of the market.
“I firmly believe that customers show their trust every day,” François Thibault, Metro’s chief financial officer, told the agriculture committee on Feb. 6. “We do hundreds of thousands of transactions every day.”
Industries in advanced economies have been getting increasingly concentrated for years, as consolidators managed to convince regulators and governments that the benefits of size outweighed the cost of having fewer players to compete on price and spur innovation.
The post-pandemic period is testing those assumptions. One of the reasons inflation has persisted in Canada is because the economy wasn’t productive enough to keep up with the sudden surge in demand. A lengthy period of lacklustre business investment is at least partially to blame; a foundation of complacent oligopolies in food, telecommunications and other industries might explain why such a relatively small share of corporate profits is used to buy productivity-enhancing equipment and to finance research.
Back in the spring of 2021, when many economists and policymakers thought the sudden burst of inflation would burn itself out in a matter of months, there was a notion that bigger companies would use their market power to absorb some of the upward cost pressures in order to either gain or protect market share. That didn’t happen in Canada.
Tiff Macklem, the Bank of Canada governor, said one of the things he learned is that when a broad array of prices is rising quickly, companies make little effort to compete on price. That’s in part because shoppers become overwhelmed: everything is more expensive, so they don’t bother to seek out better deals.
If people don’t believe they can find a better price by shopping around, firms have more leeway to increase markups
Paul Beaudry, deputy governor, Bank of Canada
“If people don’t believe they can find a better price by shopping around, firms have more leeway to increase markups, leading to distortions that make the economy less efficient and consumers worse off,” Bank of Canada deputy governor Paul Beaudry said in a speech on Feb. 16.
So, competitive impulses that were dulled by years of industry concentration were destroyed by rapid inflation. Macklem now argues that one of the reasons he’s bent on getting inflation back to the two-per-cent target is that he thinks a calmer backdrop will force companies to resume competing on price. If executives such as Weston start doing more to suppress cost pressures, then the central bank might be able to lower interest rates again.
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The Bank of Canada’s scenario might be starting to play out. Grocery store sales were $8.6 billion in October, almost as much as April 2020, when supermarkets were effectively the only places people could shop, according to Statistics Canada. (The record is $9.7 billion in March 2020.) Sales then slowed through the end of 2022, amid evidence that inflation was finally starting to hurt demand.
Loblaw’s data would be far more current than Statistics Canada’s lagging tallies of retail sales. If Weston is cutting prices, it’s probably because his previous strategy of passing most of his inflated costs onto consumers is finally meeting resistance.