Agriculture Committee on Dec. 5th, 2022

[The Chair, Liberal, Kody Blois]

I call this meeting to order.

Welcome to meeting No. 42 of the House of Commons Standing Committee on Agriculture and Agri-food.

I will start with a few reminders. Today's meeting is taking place in a hybrid format. The proceedings will be made available via the House of Commons website. Just so you are aware, the webcast will always show the person speaking, rather than the entirety of the committee.

Taking screenshots or photos of your screen is not permitted.

To our witnesses, as we have a couple joining us online.... Please direct your answers and the questions through the chair. Of course, for those who need translation, there's an ability to toggle between English and French.

Mr. Charlebois, I know you're bilingual, but you can also use this if you need it.

Colleagues, pursuant to Standing Order 108(2) and the motion adopted by the committee on Monday, November 21, 2022, the committee is resuming its study of food price inflation.

I would now like to welcome our witnesses for this first one-hour panel. With us today we have Sylvain Charlebois, director of the Agri-Food Analytics Lab and professor at Dalhousie University. From Loblaw Companies Limited, we have Jodat Hussain, senior vice president, retail finance. Joining us virtually, we have, from the Retail Council of Canada, Karl Littler, senior vice-president, public affairs.

Colleagues, you know the drill. We'll have five minutes for opening remarks, and then we will turn to questions. I'm going to start with Mr. Charlebois, who is in the room.

You have up to five minutes, sir. The floor is yours.

[Dr. Sylvain Charlebois, Director, Agri-Food Analytics and Professor, Dalhousie University, Agri-Food Analytics Lab]

Thank you, Mr. Chair and committee members. I would like to thank you for inviting me again for this important discussion on food affordability.

As food prices rise, many are quick to blame grocers for profiteering and taking advantage of consumers. The notion of profiteering has emerged as one of the most talked-about issues in the last few months.

In one of our recent reports, we used publicly available data to look at the gross profit for each of the three big Canadian grocers: Empire/Sobeys, Metro, and Loblaws. We calculated their respective “best” and “average” performances for the last six years. We failed to see any evidence of profiteering on all accounts.

This doesn’t mean that changes are unnecessary. Grocers are incredibly diversified and sell cosmetics, drugs and clothing. Margins are different for these verticals, and of course, the ethics and social responsibilities of selling bananas or eggs are quite different from when selling lipstick. Grocers have started to report their food sales separately from their non-food operations. Unlike selling T-shirts or perfume, selling food, a necessity of life, is inherently ethical, and the stakes are very different. That needs to continue.

Still, some higher prices remain difficult to explain as we remain concerned about certain verticals. Meat and bakery items are good examples.

The Competition Bureau has constantly failed the Canadian public by not providing forceful support to lawmakers in Canada when it simply endorses acquisitions and oversees investigations with little or no vigour.

The bread price scandal is a good example. After seven years, the investigation is still ongoing. We’ve also seen investigations into meat and salmon, neither of which has provided definitive results. Our nation has seen consumer trust being compromised, which is spilling over into our relationship with grocers due to the Competition Bureau’s baggage—that is, the awkward unfinished business it has with many files. Canadian consumers feel grossly unprotected.

In the U.S., things are very different. Kroger is currently trying to acquire Albertsons for almost $25 billion, which would make Kroger the second-largest grocer in America. Kroger could be asked to let go of almost 400 stores, creating a rival to the new grocer. This would never happen in Canada. When Provigo was acquired by Loblaws in 1998, or when Metro acquired A&P in 2005, or even when Sobeys bought Safeway out west in 2013, barely anyone raised an eyebrow during the proceedings. Over the years, we have seen many independent grocers disappear as a result. Consumers everywhere deserve more retail options.

The code of conduct is necessary. Many Canadians are unaware of the fact that in the grocery industry, suppliers have to pay grocers to do business. The charges are justified by the costs of merchandising and shelf space, which everyone expects.

However, things have changed in recent years. Companies like Loblaw, Walmart and Metro are going too far, and some fees have been imposed quickly and also randomly and unilaterally. In Canada, it is now more difficult for processors and independent grocers to be competitive.

This code is meant to change the culture of an industry in which vertical coordination and collaboration barely exists. It is also about dealing with a broken economic model. A code could neutralize the balance of power in the chain, stabilize retail prices, put the emphasis on value and innovation for consumers, improve the security of the country's food supply, and encourage investment in the agri-food sector.

Thank you, Mr. Chair.

[The Chair, Liberal, Kody Blois]

Thank you, Mr. Charlebois.

Mr. Hussain, you have the floor for five minutes.

[Jodat Hussain, Senior Vice President, Retail Finance, Loblaw Companies Limited]

Bonjour. Good afternoon. I am Jodat Hussain, senior vice president of retail finance at Loblaw. I want to thank the honourable members for your invitation.

Inflation has affected all countries and sectors, particularly food. While Canada has some of the lowest food inflation in the G7, we know that is little comfort to customers paying 10% more for essentials.

I’m pleased to shed light on Loblaw’s actions to reduce the impact of food inflation and to ensure that our prices do not rise faster than our supplier costs.

Like all grocers, Loblaw is essentially a food distributor. We buy goods from suppliers and then sell them to customers. We are dependent on what suppliers charge us when we set our retail prices. Fundamentally, grocery prices are up because the costs of products that grocers buy from suppliers have gone up.

In a normal year, many suppliers ask us to pay more for their products, but as the pandemic and inflation set in, supplier cost requests skyrocketed. In 2020, they were at a record high. In 2021, they were higher, and 2022 hit unprecedented levels.

Our experts review these cost requests to evaluate if they are justified in light of market conditions. We negotiate the best supplier costs, because that allows our stores to have the best prices. Through these negotiations, we pushed back about half a billon dollars of added costs this year.

As worldwide costs of key inputs of like sugar, flour, oil, labour and fuel have risen substantially, our suppliers have faced real pressures. Therefore, many cost increases have been substantiated, approved and reflected in our shelf prices.

Some negotiations, however, are tougher. For example, when we couldn’t agree to a fair cost increase on potato chips, our supplier stopped shipping products to us and our millions of customers. For weeks, most of our chip aisle was empty, interrupting our business and impacting our customers, but that shows we take our job seriously and do what’s necessary to keep prices fair.

It is important to point out that grocers operate at very low profit margins. It's less than four cents for every dollar we sell. This is dramatically less than other Canadian sectors, including the suppliers of the products we sell. When the costs we pay go up, generally our prices to customers have to go up too, but we have worked hard to protect food prices.

The best way to judge us is to look at our food gross margin. That's the gap between what suppliers charge us and what we charge customers. Since inflation took off last year, that margin has not increased. This gives us the confidence to say that Loblaw’s prices are not growing faster than costs and that we are not taking advantage of inflation to drive profit.

We operate in a very competitive industry. It includes strong national and regional grocers, global giants like Walmart, Costco and Amazon—which represent one-third of the market—and smaller independents that are now growing three times faster than corporate chains. If the experience, variety and prices we offer aren’t top-notch, customers have hundreds of options to shop elsewhere.

We’re proud of the value we offer Canadians. We continue to push back on undue costs. We have frozen prices on more than 1,500 No Name products. We’re giving out a record number of loyalty points—more than a billion dollars' worth—to help cut grocery bills. We won't stop in these efforts.

Around the world, political leaders are asking the same questions you are. Inflation and food prices are up everywhere, but grocery is a complicated industry with many players, so finding good answers will require you to look at retailers, suppliers and the full global value chain.

Here at home, we are doing our best to give our customers the best value possible, in spite of inflation.

Thank you.

[The Chair, Liberal, Kody Blois]

Thank you, Mr. Hussain.

We'll now turn it over to Mr. Littler.

[Karl Littler, Senior Vice-President, Public Affairs, Retail Council of Canada]

Thank you, Mr. Chair.

I want to first thank the committee for this opportunity today and to express our hope that this study will properly examine the root causes of inflation, its global context and its many contributing factors.

One problem with Canada's lack of modern experience with inflation is that some commentators are rushing to judgment when we would be best served by looking at the problem in all its complexities. When it comes to food price inflation, the issue needs to be understood from the ground up, both figuratively and literally.

The reason that prices have risen sharply on grocery shelves is straightforward: The manufacturers, processors and wholesalers of food have been raising rates repeatedly and almost across the board. Vendors’ own costs are soaring, primarily because prices from farmers, growers and importers have been increasing at unprecedented rates. Farmers in turn have faced massive cost increases for fertilizer, diesel fuel and feed, among others things.

We are experiencing a unique confluence of events—war, extreme weather, and soaring fuel prices—piling on top of supply chain disruptions and in some cases labour shortages. Some of these factors affect all Canadian industries, but others are quite specific to or more concentrated in food production and distribution than elsewhere.

The single biggest identifiable villain is Putin’s invasion, striking at the grain and fertilizer exports of two of the world’s largest producers—Ukraine and Russia—and driving up global prices for these commodities. Grain is critical for staples like bread, pasta, cereals and oils and for the majority of products in the core aisles of grocery stores. Of course, grain also serves as feed for most animals raised for meat or for producing eggs and dairy.

Drought and heat have hammered the fruit- and vegetable-producing regions on which Canada most relies, especially in California but also in the Canadian west. That impacts not only the fresh produce section but also canned, frozen and preserved vegetables and fruits, sauces, juices and anything in which these are ingredients.

You already know the story of dairy and eggs and how the supply management boards have identified rising fuel, feed and fertilizer costs as the basis for unprecedented price increases. I could also speak to the spiking cost of packaging and shipping, and the decline in the value of the Canadian dollar, which is of increasing importance.

This committee is to be commended for looking at some of these root causes, including the recent study on the impact of the Ukrainian invasion and further work on issues related to climate change, but there are those, in both politics and media, who have deliberately sought to link inflation in the public mind to grocers’ earnings, so let’s briefly touch on that.

Grocery is a high-volume, low-margin industry, the profits from which need to be looked at in percentage terms, not nominal dollars. Inevitably, in an inflationary environment and with a growing population, the dollars are going to increase over time, but it's the percentages that matter. Viewed in that light, grocery earnings of 2%, 3% and 4% are stable and within historic norms. They're also significantly lower than in most Canadian industries when compared with big food-processing companies, which typically earn profit percentages in the mid to high teens, and they're lower lower than the Canadian net farm income average of 5.4%.

On the grocer side, such profit growth as there has been mainly derives from pharma, health and beauty, not from food, and certainly not from food staples, in which profitability is flat. There are some folks for whom any level of profit is suspect ideologically, and I don’t suppose I'm going to dissuade them. I would suggest that anyone interested in investment and employment, or who will receive the Canada pension plan, or who has an RRSP, workplace pension or education savings plan, should be keenly interested that there be at least some profit from business activity and reject as absurd the notion that profits in the 2% to 5% range are in any way out of the ordinary.

Let's avoid the rush to judgment, look at the whole picture and factor that into any policies and commentary.

Thank you.

[The Chair, Liberal, Kody Blois]

Thank you very much, Mr. Littler.

We'll go to questions, and we'll begin with the Conservatives.

Ms. Rood and Mr. Barlow, I believe you will be splitting the time.

It's over to you, Ms. Rood.

[Lianne Rood, Conservative, Lambton—Kent—Middlesex, ON]

Thank you, Chair.

Thank you to our witnesses for being here today.

I know that we have seen prices on the grocery store shelves continue to climb higher and higher. From what I've been able to gather, produce farmers aren't get paid more for their produce. The competition in the market, because of grocery store chain dominance, is forcing farmers to sell their produce for either ridiculously low margins or even to take a loss just to have the privilege of continuing to sell their goods to grocery giants like Loblaws. Farmers take all the risks, and yet these grocery giants are the ones to take all of the rewards. I've been a strong advocate on a grocery code of conduct, and I do hope to see this come to fruition to tackle some of these issues that we see here today.

Mr. Hussain, I have a question for you. Your company has reported record-breaking profits, yet financial data is not available to the public to see if your profits are a product of diversity or part of an increased cost of food. I'm just wondering if Loblaws tracks its sales in separate categories.

[Jodat Hussain]

Yes. In our disclosures, we do provide the difference between what our food business is doing in sales and what our drug business is doing in sales.

We also provide qualitative disclosure around our segment margins. That was what I was referring to. Our food segment margins, which is the food gross margin, have been unchanged and have been flat since inflation took off.

[Lianne Rood, Conservative, Lambton—Kent—Middlesex, ON]

Thank you very much.

I'm just wondering if you can share with the committee the figures of the revenues generated by food alone. You can table that with the committee later. I don't need an answer to that right now.

Thank you very much.

I'll turn it over to my colleague, Mr. Barlow.

[John Barlow, Conservative, Foothills, AB]

Thank you very much.

Mr. Charlebois, you wrote in April that the government was deleting its food inflation database, which had maybe as many as 25 years of food data.

Can you tell me if the government followed through and did wipe out that data from their database?

[Dr. Sylvain Charlebois]

Yes, it did, actually.

As a lab, it's been extremely difficult and, frankly, frustrating to utilize StatsCan's data. Over the last several months, it's been very difficult to know exactly whether or not the food inflation data is actually accurate.

We have partners at the lab allowing us to better appreciate what is actually going on. We've had meetings with StatsCan, but the meetings have been challenging, to say the least.

[John Barlow, Conservative, Foothills, AB]

Could they not have maintained that database somehow? What reason was given? Was this is a political decision?

Obviously, we have record inflation. With today's technology, it just seems an odd decision to wipe out 25 years' worth of food inflation prices, which for you as a researcher would certainly be critical information to have available.

[Dr. Sylvain Charlebois]

It would.

There are lots of reporting practices at StatsCan that really are, I think, questionable. For example, if you just look right now at the data that came out for October, you will see that we still don't have the basket of goods for the month of October. We don't know if broccoli went up in October. We're still waiting for that data. We saw inflation data come out maybe two or three weeks ago.

There are these delays, and we wonder why these delays actually exist.

[John Barlow, Conservative, Foothills, AB]

You just released the 2023 food price report, "Canada's Food Price Report 2023". That's perfect timing. Thank you for that.

You mentioned that food prices are going to continue to increase over the next year by maybe 7%, which will cost a family of four an additional $1,065 more in groceries.

Do you believe that government policies like front-of-pack labelling and increasing carbon taxes are having an impact on the price of food and the cost of groceries on the grocery store shelves?

[Dr. Sylvain Charlebois]

Well, for the front-of-package labelling policy, it's too early to tell. We still don't have anything right now at the grocery store influencing behaviour.

As far as the carbon tax goes, it's actually mentioned in today's report that we're releasing along with the University of Guelph, the University of Saskatchewan and UBC. We are encouraging the government to look into how the carbon tax is impacting food affordability in Canada.

We're not taking a position for or against the tax, but I think it's important for the government to understand the impact of the tax itself on food affordability over the long term as it gets closer to the $170 per metric tonne mark.

[John Barlow, Conservative, Foothills, AB]

Thanks.

In a column you wrote a few years ago, you mentioned that the carbon tax will drive up the cost of groceries and you referenced in that column that at $50 per tonne, the tax could drive up food prices by as much as 3%.

We see food prices up more than 10% now. Have you done some research on what the impact on food prices would be at $170 per tonne?

[Dr. Sylvain Charlebois]

I wish I knew the answer. I think that's the coefficient we need to get to, at least for the government to better understand exactly what the impact is going to be.

We've seen some polices in recent years that are, honestly, unfairly penalizing farmers. Farmers are price-takers and they have to absorb the carbon tax.

I have actually testified before the finance committee, I believe, on Bill C-206. My position was very clear. I think it's important to recognize each and every node within the supply chain and how the carbon tax is impacting each and every one of them.

[John Barlow, Conservative, Foothills, AB]

I just have a couple of seconds left.

I think with this, it could be an exponential increase, obviously, at $50 or 3%. Farmers are that one group that pays that carbon tax over and over again for fuel, fertilizer, transportation and trucking.

Is that fair to say?

[Dr. Sylvain Charlebois]

That would be fair to say. It is an important hypothesis to recognize.

[John Barlow, Conservative, Foothills, AB]

Thank you.

[The Chair, Liberal, Kody Blois]

We'll leave it at that. Thank you, Mr. Barlow.

Thank you, Mr. Charlebois.

Now we have Mr. Turnbull for up to six minutes.

[Ryan Turnbull, Liberal, Whitby, ON]

Thanks, Chair.

Thanks to all the panellists for being here today. I'm definitely listening intently to your comments and taking all things into consideration.

To Mr. Littler's opening remarks, I think we all get that costs have increased across the agri-food supply chain and that there are good reasons for those globally. I guess the thing that struck me is to see Loblaw, Metro and the other large grocery chains claiming that these net earnings, which are quite sizable....

Mr. Hussain, I think you were giving us a rationale or an alternative explanation other than what one might assume, which is that there's some profiteering going on. I think it's interesting to dig a little deeper there and understand that better. Also, I should say that net earnings, as we all know, just to set it clear, are an entity's income minus all the costs of goods, expenses, depreciation, amortization, interest and taxes. We're really talking about net profit for Loblaw as a whole when we're talking about $266 million prior to the pandemic to I guess $387 million today. That's pretty sizable in terms of earnings, given that we've gone through a global pandemic and Canadians out there are struggling to pay for necessities as you said.

Mr. Hussain, maybe you can enlighten us. You mentioned health and beauty products as one of your verticals. Has that one been so successful in the last couple of years that it accounts for your whole net earnings increase?

[Jodat Hussain]

That's really an important point. I'm glad you highlighted that.

When you look at Loblaw, you see that Loblaw is not just a food business. Our statements are a composite of several different businesses that include a food segment, yes, but also include a bank, a large regulated pharmacy that has a big front shop, and the largest beauty retailer in Canada. As we spoke about in our Q3 disclosures, and as we spoke about in the earnings call, we've had a tailwind in terms of both beauty and our cough-and-cold over-the-counter business in that particular quarter.

[Ryan Turnbull, Liberal, Whitby, ON]

Thanks.

I know that you have produced quite a sizable corporate social responsibility report, which I've read. It's from 2020. It's quite impressive. I know that you pride yourself on being a good corporate citizen.

My question is, if in this context that we're in, if you're able to drive profits in some of your verticals in your business, couldn't you afford, then, to distribute some of those to hand down cost savings to the average Canadian citizens who are your patrons at your stores every day?