Finance Committee on Sept. 28th, 2022

[Daniel Blaikie, NDP, Elmwood—Transcona, MB]

Thank you very much, and thank you to all of our witnesses for being here today, in particular Mr. Littler, on behalf of Canada's grocery retailers.

It would have been nice to see some folks from those companies directly, just because some of the questions that members of the committee may have liked to ask would be best answered by folks who have a command of the details of the individual businesses. They have different business models, and are recording different profits against previous years. I hope maybe we'll be able to get into a little bit of that. Of course, it's always better to get it directly from the horse's mouth, so to speak.

The basic problem for many Canadians, as they try to understand the experience they're having at the grocery store.... They're going to buy their usual basket of goods, and some folks are having to put things back on the shelves. We've talked already today about the extent to which people are certainly looking at changing the composition of that basket in order to make their grocery shopping fit within their household budget in these difficult times.

As they're having that experience in the grocery store, we're often hearing reports in the news of higher profits by grocery chains, and higher dividends being paid out to their shareholders. Many large retailers are contemplating share buybacks now with the extra capital that they have on hand from the higher profits they've been making. I am using the word “profit” intentionally. It's not just that their revenues have gone up, as one would expect. If they have higher costs, and they have to pass that on to the customer, then you would expect them to have higher revenues, but not higher profits.

For Canadians who are trying to understand the news reports they're hearing about large grocery retailers posting record profits, and their shareholders enjoying record revenue from their shares, what is the explanation for that if not that some of these price increases are exceeding the increase in costs that grocery retailers are seeing?

[Karl Littler]

It's important first to put grocery profits in context. Grocers make less than 5%, typically, on their operations and 3% on average. That's a lower rate than just about any other industry. It's certainly lower than the big food manufacturers and big agriculture. Taking on the notion that this in any way represents an excess profit is a bit hard for me to absorb.

With respect to the profits specifically, it's really important to understand that the big driver on the profitability side—not the price side—over the last year has actually been the recovery of health, beauty, and pharmacy. That's in large measure because people have been coming back into the workforce. They've been going out again, and purchasing all manner of those goods. Those are typically higher-margin goods.

Recently, a number of commentators in the executive ranks of grocers have said that, frankly, the operating margin specifically in grocery is flat. A number of CEOs have even talked about the fact that they are absorbing some of the prices that are arising from vendors, and not fully passing them on to consumers.

[Daniel Blaikie, NDP, Elmwood—Transcona, MB]

Here's a question. You've said that historically grocery retail has lower profit margins than other industries. Do you think this is the time for grocery retailers to be trying to change that?

[Karl Littler]

I don't think they are changing it in a market way. They're all looking very closely at food costs and affordability. That does factor into their mix.

Again, you have to put it in perspective. You had $17.1 billion of sales in the two major grocers that have reported for the second quarter. The variability was upward of $22 million on that, and that was about one thousandth of the sales. That's an important context. Again, it's been driven primarily by health, beauty, and pharmacy. It's not actually coming from the food side of the grocery business.

[Daniel Blaikie, NDP, Elmwood—Transcona, MB]

Let me put the question this way. You've talked about the bounceback of some other aspects of grocery retailer business that isn't the core grocery amount. Was there any time since the beginning of the pandemic when these grocery retailers saw their profits plunge?

[Karl Littler]

Yes.

[Daniel Blaikie, NDP, Elmwood—Transcona, MB]

Even in the initial phase of the pandemic, we saw a lot of what people would spend at restaurants, and things like that, instead being spent at grocery stores.

Is that story of the bounceback of those other products the story of the 2021 profits as well as the profits that we're seeing already in 2022? When would you say that bounceback narrative begins to explain those extraordinary profits? It does seem to me that there was a time when we continued to see strong profit growth in the grocery retail industry even before some of those other products were bouncing back.

Could you speak to that context, please?

[Karl Littler]

I can. Certainly the numbers on profitability for 2021 and 2022, same quarter, year over year, are actually very comparable, at 3.4%.

I think people need to understand that the pandemic did not necessarily bring strong profit growth. It brought strong sales growth, because obviously the restaurant sector was closed and people were at home more. But it also brought massive cost increases, particularly on the compliance side, so it wasn't a case of grocers making out especially well during that period on a profitability basis.

[Daniel Blaikie, NDP, Elmwood—Transcona, MB]

Okay. Again, what's difficult to square here is that we do see reports of increased profit in grocery retail. I hear what you're saying, that the growth in profit could have been larger if there wasn't some corresponding growth in costs that was pandemic-related. But there is a pretty consistent story of profit growth through the last number of years.

I want to make sure we don't miss that point either. We are talking about an industry that has seen consistent and strong profit growth, and apparently believes that that growth in profit is going to continue or we wouldn't see large increases in dividend payments and plans for share buybacks. That's something a business does if it anticipates continuing to have strong growth.

I wonder how it is that we explain that strong posturing on the part of grocery retailers in a context where, if I understand you right, their gains in profitability may be more tenuous than news articles seem to report.

[Karl Littler]

Yes, I think if you look at—

[The Chair, Liberal, Peter Fonseca]

Be very quick. You have 15 seconds to answer, please.

[Karl Littler]

You need to look back to 2017. Actually, the numbers were comparable then. If anything, there was a dip in profits in the run-in period and into the pandemic, so you'll see that actually they're quite comparable to what they've been in the past, and of course now driven by non-food items, primarily.

[The Chair, Liberal, Peter Fonseca]

Thank you, MP Blaikie.

Members, it's the second round. We only have enough time for one question and an answer from the witnesses.

We're starting with the Conservatives. I have MP Albas for the question, and one answer.

[Dan Albas, Conservative, Central Okanagan—Similkameen—Nicola, BC]

Thank you, Mr. Chair.

Inflation is one of the most important issues facing Canadians. It's very serious. As the cost of government has been driving up the cost of living, half a trillion dollars of Liberal deficits have bid up the cost of the goods we buy and the interest we pay.

The new Conservative leader has said that he will put Canadians first: their paycheques, their savings, their home, and their country. It includes capping government spending and cutting waste to cut inflationary deficits and taxes, and removing gatekeepers so our farmers, businesses and workers can provide homes, food, energy and other essentials at an affordable price.

I would like to start by asking the Retail Council. Some politicians have stood up and said that “greedflation” is happening. Are you seeing that in grocery prices, and would you refute those claims?

[Karl Littler]

I would certainly refute those claims, based partly on the profit figures that we've just discussed. I think more responsible observers have said that recently. That's certainly true of Professor Mohanram at U of T. Perhaps I can quote directly from Sylvain Charlebois, whom you'll see shortly so you can ask him about it. They looked into the profits of major grocers over the past five years, and they found no evidence of profiteering. The quote is this: “If 'greedflation' exists, the available data suggests grocers are not responsible.”

Even the Canadian Centre for Policy Alternatives is now backpedalling somewhat and indicating they're getting some mixed signals now. The most recent financial results from the grocery retail industry do weaken the case that “greedflation” is taking place.

[The Chair, Liberal, Peter Fonseca]

Thank you, MP Albas.

Moving to the Liberals, we'll have one question and one answer, please.

MP Dzerowicz, go ahead.

[Julie Dzerowicz, Liberal, Davenport, ON]

Thank you so much, Mr. Chair.

I want to thank the presenters for being here today.

I have a two-part question, and maybe this is directed to Mr. Littler. What impact has Russia's illegal invasion of Ukraine had on food prices in Canada and around the world? That's part one.

Part two is another thing I'm a little worried about, and I think the question earlier went to our other guest, the Union des producteurs agricoles. What is the impact of labour shortages within the retail sector on food prices?

Thank you.

[Karl Littler]

That's a lot to chew on.

Obviously, on the Russia side, the Russian invasion of Ukraine, it's huge. Ukraine—and I'm going by memory here—is the fourth-largest exporter of wheat and the second-largest exporter of corn, but I might be off on that. Russia is definitely the world's largest exporter of wheat and fertilizer, and of course they've been playing tit-for-tat games around sanctions. That is now coming out, but it has colossal impacts on not only feed for animals but also the multitude of products that are made from grain—bread is the most obvious, but it's a very extensive list.

It's frankly impacting the broader macro picture and what's happening with regard to monetary support. It's happening with respect to petrochemicals and the price of fuels.

[The Chair, Liberal, Peter Fonseca]

Thank you, MP Dzerowicz.

Now from the Bloc, we have MP Ste-Marie for one question and one answer.

[Gabriel Ste-Marie, Bloc, Joliette, QC]

Thank you again to the witnesses for being here, for providing opening remarks and for answering our questions.

In your presentation, Mr. Caron, you listed policies the government could adopt to support farmers in the midst of this inflation crisis, thereby limiting the impact of rising food prices. Would you mind going over them again and providing a brief explanation?

Thank you for everything.

[Martin Caron]

Thank you.

One of the measures we talked about was a Canada emergency business account, one of the support measures that was used during the pandemic. A similar short-term loan would give farmers access to cash, and after three years, if they had repaid the loan on time, they would get a portion back.

Something like that would give farm businesses access to cash, and if they repaid the loan within a few years, they could be given a portion equivalent to 25% of the loan in credit. That would help businesses make investments. An investment in agriculture and agri-food is an investment in the pantries and fridges of Canadians.

[Gabriel Ste-Marie, Bloc, Joliette, QC]

Thank you.

[The Chair, Liberal, Peter Fonseca]

Thank you, Mr. Ste‑Marie.

Now we're going to MP Blaikie, and this will be our final question for this panel.

Mr. Blaikie, you have one question and one answer.

[Daniel Blaikie, NDP, Elmwood—Transcona, MB]

Thank you very much.

I'm just going to start with a brief statement that I hope will be of benefit to the committee, which is that the question of “greedflation” is not just a question about retailers and grocery. It is a question that applies to a much broader cross-section of the economy and other industries as well. There are those who would say that government largesse and financial support for Canadians is solely to blame for inflation.

Mr. Littler, is it the case that grocery prices have been going up because people, for instance, are getting a doubling of the GST rebate or some support with child care prices? Is that why grocers are raising their retail? Is it because there's so much demand that they're raising their prices, or do we actually have supply-driven inflation that's relatively insensitive to the extent of the demand?

[Karl Littler]

I wouldn't posit that income supports are the major driver here. I mean, there's a lot going on in the world that's driving this. It is climatic. It is, obviously, geopolitical. There are clearly some demand issues and supply problems with respect to agricultural capacity in the face of all these challenges, but I would not attribute it to the fact that there are income support programs.