There has been much discussion about inflation, especially the rapid rise in the price of groceries. Many people suspect that grocery stores in Canada are using inflation as an excuse to price gouge.
However, the Bank of Canada found, in early August, that food inflation has not been driven by grocery stores’ profit gouging: the stores’ profit margins have remained fairly constant.
On the other hand, there is little doubt that grocery store profits are surging…
So it is disingenuous for grocery stores to claim that they are not profiting, somewhat unjustly, from inflation… yet the stores are correct in saying that their margins have not moved much.
What is happening?
How can we make sense of the fact that margins are stable, yet grocery profits are rising fast?
Quite easily, actually.
Assume that, in 2022, Grocery Store ‘A’ purchased 1000 loaves of at $4.00 a loaf. It then sold the loaves at $4.20, making 5% profit. Overall, Grocery A makes $200 profit on these 1000 loaves.
Assume that, in 2023, Grocey Store ‘A’ purchases 1000 loaves of bread at $5.00 per loaf (after all, the price of grain is higher because of the war in Ukraine, of climate change, of the rise in transport costs…). It then sells the loaves at $5.25, making 5% profit. Overall, Grocery A makes $250 profit on these thousand loaves.
A constant 5% markup on items whose supply cost is rising leads to higher profits. In the example given, although the markup is constant, at 5%, the amount of profit earned by the store rises at 20% (i.e. the same rate as the underlying supply cost).
Conclusion: should grocery store profits be linked to their suppliers’ costs?
Large grocery stores are correct (at least according to the Bank of Canada) that their margins have not risen.
However, the rapid increase in the cost of producing food is driving up the profits of those who sell it. A constant markup allows grocery to reap far higher profits simply because the cost of supplies is rising fast.
But the risks associated with running a grocery store (profit is what is left after all costs are accounted for) have not risen.
Groceries are indeed benefitting from windfall profits despite their margins remaining the same. Grocery store profits are currently driven by the cost of producing groceries, which is unrelated to the risk of running a grocery store.
Richard Shearmur 