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Toronto Retail: Managing inflation, grocery code of conduct

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Canada’s inflation rate is less than in the United States or most of the G7 countries. But Canadians remain wary and price conscious.

Euromonitor found that 53 percent of Canadians named low price as a key factor in their purchasing decisions on food and drinks, much higher than other countries.

And, in a PwC Canada survey conducted last summer, more than two-thirds of participants told surveyors they have frequently or nearly always encountered rising grocery prices while shopping.

Even as food prices have been rising fast, the leading grocery retailers have been reporting strong financial results and have had to defend themselves against a consumer backlash and increased government scrutiny.

Sobeys owner Empire reported an increase in sales of 4.4 percent and an increase in net earnings of 8.3 percent for the second quarter of fiscal 2023 ending November 5, 2022, as well as a 4.3-percent increase in sales and 3.7-percent increase in net earnings year-to-date.

Meanwhile, Loblaws’ results for the quarter ending December 31, 2022, saw revenues up 9.8 percent, with net earnings down 28.9 percent (driven by a prior year gain connected to a court ruling) and adjusted net earnings up 11.7 percent.

For the year, revenue was up 6.3 percent, net earnings up 2.5 percent, and adjusted net earnings up 18.4 percent.

A Dalhousie University study revealed all of the Big Three retailers had profits in 2022 that exceeded their five-year averages.

Consumer pains = retail gains?

The combination of high inflation and strong corporate profits has led to accusations of “greedflation,” with critics arguing retailers are not being transparent about their results and profiting as shoppers struggle.

There has even been a debate in the press and online about whether shoplifting—of which some consumers have boasted on social media—is justified.

The current blowback follows allegations over the past several years of grocery retailers “bullying” suppliers, as well as scandals like the bread price-fixing scheme involving the national chains under investigation by the Competition Bureau of Canada for more than five years.

These incidents, not surprisingly, led to reduced consumer trust.

According to Sylvain Charlebois, senior director of the Agri-Food Analytics Lab and professor in food distribution and policy at Dalhousie University in Halifax, NS, almost 80 percent of Canadian consumers believe there is abuse in the grocery retailing system.

These conversations have led to a number of investigations of grocery retailers by the media and the government.

The Toronto Star published an investigation into grocery inflation in mid-2021, vetted by economists, which concluded that grocers have indeed been profiting from inflation.

And Ottawa’s Parliamentary Standing Committee on Agriculture and Agri-Food began an investigation into food prices in the fall of 2022. The study, which is ongoing, includes the entire food chain and not just retailers.

The Competition Bureau launched a study in October 2022 to examine competition in the grocery industry, with a goal of creating recommendations to foster more grocery competition.

The report, which does not address manufacturers or their relationship with retailers, is expected to be published in June 2023. In a rare instance of bipartisanship, the Parliament of Canada voted 327 to 0 to have the Competition Bureau investigate.

Retailers respond

Retailers challenged the allegations, saying their margins are lower than most other industries and have not changed.

They say higher prices are due to elevated costs from vendors, which typically have higher margins than they do, and point out the investigations examine their businesses only, without looking at others’ pricing policies.

The grocers also cite increased efficiencies, improvements in higher-margin business such as pharmacy and beauty, and acquisitions of new businesses as contributors to their strong results.

Finally, they note that inflation is a global issue over which they have no control, caused by factors such as higher input costs, temporary supply chain stresses from the war in Ukraine, and weather issues.

Grocery Code of Conduct

Despite these arguments, complaints about greedflation and other issues have spurred the government to demand the industry create a Grocery Code of Conduct, which is on track for implementation by the end of 2023.

The groundwork for this program began in 2020 when the Federal, Provincial, and Territorial Agriculture ministers directed Agriculture and Agri-Food Canada to look into grocery fees and fines.

After six months, they issued a report finding the five most powerful grocery operators were able to charge $1,000 penalties for late deliveries and $100,000-plus to list a new product.

Agriculture and Agri-Food Canada gave the industry a deadline to fix the problems. After some delays, inflation and the threat of more government involvement hastened the process.

Industry groups representing the big national chains, independent grocers, food processors, and farmers, along with a government mediator, have been in negotiations about what should be included in the code.

In January 2023, Agriculture and Agri-Food Canada announced substantial progress had been made and urged stakeholders to participate in the final stage of commenting and revising, and to voluntarily adopt the final version.

“We do recognize that a Grocery Code of Conduct will not address all pressures facing the food supply chain,” said Marie-Claude Bibeau, federal minister of Agriculture and Agri-Food Canada, and André Lamontagne, Quebec’s minister of agriculture, fisheries, and food, in a joint statement. “The issues at stake are very complex and need to consider a variety of conditions and perspectives.”

This is an excerpt from the May/June 2023 issue of Produce Blueprints Magazine’s Ontario Supplement. Click here to read the whole supplement.