The weak suffer what they must

The quote, in full, from the Crawley translation of Thucydides’ History of the Peloponnesian Wars:

“the strong do what they can, and the weak suffer what they must”

And what is that we, the weak, suffer? Well, to summarize the following several thousand words of text; an eyewatering transfer of wealth from consumers to our not so benevolent food retailers. However, the extent of this wealth transfer depends on the comparison benchmark. In this case the when and the where.

Such attempts at documenting “greedflation” since 2021 are of course in vogue. But, the central point, which I believe is overly neglected, is that the food retail market (depending on the country) has probably been dysfunctional for a while. This point will be revisited later. I moved to Canada from Ireland in 2015. Though, there hasn’t been much of culture shock in this move, one aspect of Canadian life I am at pains to accept is the exorbitant cost of life. Well, until I show relevant comparisons and data, let’s call this the perceived cost of living.

It simply feels more expensive to live here than in Ireland. Particularly, it feels extortionately expensive to buy food. And it’s always felt relatively more expensive. On my most recent trip home to Ireland, I could find a head of broccoli for significantly less than a euro (let’s say around 35c). On returning to Canada, I’m met with a special offer of two heads of broccoli for $6. Am I meant to pretend this feels like a steal of a special offer? Something feels off.

Even factoring in the favourable € to $CAD exchange rate, prices are in general higher in Canada. But of course, my perception of ridiculous food prices may not be accurate. Maybe differences in take-home income offset these price disparities.

Maybe… maybe not.

But this is just one kind of relative comparison one can make. Another type of relative comparison occupies a much large space in the present consciousness: then vs now. And how we harken back to the “good old pre-covid” times.

Relative to the pre-covid times, prices feel exorbitantly higher. Like most people, and as the data would suggest, my wages have not increased commensurately to offset these price increases. I feel on net, worse off than I did several years ago.

Thus, fingers have rightly been pointed at grocers. Greedflation, the idea that grocery retailers profits are the primary driver of inflation. It’s a catchy term, though I’m not sure (though I am no economist) if it’s accurate, as inflation for many mainstream economists is a typically a phenomenon describing an increase the supply of money, not prices of goods. Regardless, questions have been asked of them; why have prices increased so much? Is it possible grocers are profiteering? If costs have increased, are they increasing prices above and beyond this increase in cost, pocketing the difference?

Grocery executives have been dragged before a rather flaccid Canadian parliamentary committee to answer to the people. And their answer to us, “we are not price gouging”. No surprises there.

“Focusing on grocers will not solve the problem of food inflation because we are not causing it and we’re not benefiting from it.”

This quote paints grocers as passive market participants. They don’t set prices. They are the weak and they must accept the meagre prices imposed on the ever-strong consumer.

We should accept a statement like this for what it is. Pure and utter bullshit. Of course they set prices! It’s not like we can go into the shop and barter for a pound of beef.

In fact, grocers clearly maintain the ability to set prices. Two examples should sufficiently evidence the point:

1. Imagine a bunch of grocery companies colluding to keep bread prices artificially high. Bread, the ever important food staple. There’s no need to imagine, as the Canadian Bureau of Competition uncovered a very real collusion of this nature. Yes, colluding to set a particular price of bread.

2. More recently, under public and political pressure, Tesco Ireland has vowed to drop prices. Just like that, at the drop of a hat, they can drop prices. But even normal retail behaviours, such as loss leader pricing, show the obvious, that grocers actively set prices.

Comparisons across time, and between regions of operations might offer some insight into our current crisis of food prices. Returning to the cross-country comparison, it seems likely that pricing will be related to the competition in a given market. In general, there are three large players in the Canadian market controlling most of the market share. These companies tend to buy up independent grocers, increasing retail market share, giving suppliers fewer overall sellers, and increasing the size of the corporate behemoths. A few large players might then engage in oligopolistic price fixing. This could be explicit collusion, like fixing bread prices. Or it could be completely non-collusory, and often is. In such a market scenario, virtually everyone but the shareholders lose. Producers get short-changed and have no choice but to sell at a less-than-ideal price. Workers lose, as companies do not compete with wages and benefits to attract labour. Consumers lose because companies do not need to compete with prices to attract buyers.

By some estimates, lack of competition in key US industries costs every household approximately, US$5000. Some see this as a natural feature of capitalism. But alternatively, it’s indicative of a lack of capitalism, as competition in open markets tends to bring prices down. It has been suggested that the entry of the discount German supermarkets (Aldi and Lidl) into the Irish market in the 2000s added much needed competition to the Irish market. At the end of day, it’s nothing more than a policy choice to allow companies to gain sufficient market share to engage in non-competitive pricing practices.

What I am explicitly stating here is that the degree of competition in a given retail market is related to a company’s ability to collect disproportionally large profits. The logic is straightforward, if someone is making out like an absolute bandit in some industry, competitors will enter that industry to get a share of those excess profits.

Obviously, supply chains and inputs that contribute to the retail price will change depending on location. Retail markets are not the same etc etc etc. As I mentioned before, though I am not an economist, I am trained as a scientist, I will say upfront that making causal statements suggesting that grocers thirst for profit caused price increases, will be beyond the scope of this analysis. These data are purely descriptive and I am not showing any causal relation, but simply describing changes and trends over time.

So, without dwelling on all the proverbial throat-clearing one needs to do when using limited data and a small sample of countries, as well as the innumerable factors that influence such cross-national comparisons, let’s continue this exploration.

How much have food prices risen?

Let’s have a look at how much food prices have risen in Canada, Ireland, the US, and the UK, with 1976 as the benchmark year. What you see directly below is the cumulative percentage increase in the food and non-alcohol drink prices. So basically, relative to 1976 how much more expensive are food and drink items in each subsequent year. Why 1976? Well, this was simply the furthest back in time I could get Food CPI data from the Central Statistics Office in Ireland. Much of the data presented here will include cumulative changes like you see below, with any relevant comparison made to the benchmark year (0% change and 1976 in this particular graph).

Figure 1

Figure 2

Clearly, food prices have increased for everyone. What I find particularly interesting is that food prices have been deflationary in Ireland for the period around and following the financial crisis of 2008. Meaning, for a good few years prices actually came down in Ireland. This could be related to increased competition in the grocery retail market and better price competition. But I imagine, given the gravity of the financial crisis in Ireland, it also reflects such severe contraction in the money supply (i.e., a deflationary effect), and as a result reduced disposable income and household access to credit.

Things don’t seem too bad in the US either. Except for the pandemic-related price increases, its relatively better at maintaining stable food prices than Canada and UK. Relative comparisons like this are always fraught. While a slap to the face might be better than a punch, neither are typically desirable. But one is still better. So, while price pressures eased or decreased in Ireland and the US in the mid-to-late 2000’s, they shot up in the UK and Canada. One can easily blame Brexit for the price woes of the UK. Though, I struggle to see what scapegoat Canada can call upon (though I have some ideas).

Figure 3

Interestingly, price pressures for the full basket of goods in the CPI (including food) reveal a different pattern to the Food and Non-alcoholic drinks basket. Altogether, the key highlights for me from these are:

1. In Canada, food prices have increased a great deal more relative to the average increase in all consumer prices (approximately 450% food cpi vs 380% full basket).
2. The opposite pattern holds in Ireland and the UK. In general, the increase in food prices is much less than seen for all items. However, the overall increase in both has been greater in the UK.
3. The US shows a remarkable consistency between the increases in food prices and all good prices.

Sometime in the 90’s central banks decided that a 2% increase ought to be the CPI target. Evidently, they seem to hit their own target, like a swaying drunk hitting the wall around a urinal.

Now, I see the unfairness in blaming central bankers for not achieving a relatively constant CPI 2% target for the years prior to each bank establishing its own targets. But indulge me for a sentence or two, even if their mandate was price stability (not solely 2% CPI targets) we haven’t really gotten that either.

Figure 4

Market Structure and Competition

Let’s now examine the competitive structure of the grocery retail market in our four countries. The data shown here are for the last 12 weeks of 2022 (2021 in the case of the Canadian market).

I’ve been wracking my mind trying to think of how I might be able to quantify competition in each of these markets. By all means, if you have any insight or suggestions please let me know.

Part of the issue is do with the granularity of the data for each country’s market. I’m not sure how many different companies make up the “Other” categories. A metric like number of separate retailers per capita might be interesting to look at, but impossible without knowing the full make-up of the “Other” category.

Consequently, in lieu of any calculable metric, I will simply refer back to certain company’s market share when I discuss their revenue and profitability later.

Global Commodity Prices Have Little To Do With Food CPI

Before we get to the question of whether grocers are taking us for a ride, we have to rule out whether the increase in food prices comes from the price of the raw commodity itself. So have the prices of commodities that make up a significant proportion of the raw inputs to food items increased over time? Using data from macrotrends.net we can see the spot prices per unit of commodity below.

Figure 5

As you can see in the raw prices, wheat and corn have trended upwards over the years. But let’s see if the overall increase since 1976 tracks the Food and Non-alcoholic Beverage CPI I showed you earlier. So let’s use 1976 as our benchmark year again and see the cumulative percentage change in commodity prices.

Figure 6

Looking at the change in commodity prices we see cyclical price action. There are large swings to the upside and the downside. Unlike the Food CPI figure, there is not a wholly consistent and gradual linear increase over time. The market prices of the raw food stuff used to create the end food products we buy do not necessarily increase year over year. But the prices you pay for them at the supermarket almost always do.

Commodity prices tend to bounce around. Increasing and decreasing depending on the economic cycle. I cannot see a clear relation between commodity and retail food prices. In many ways this may remind you of the relation between oil prices (commodity) and the price you pay at the petrol station, or to heat your home. It’s a tortured relation between spot commodity and retail prices.

I do have some ideas about why there is such a chasm between the two, which I will show later. But finally, I want to address the prices of commodities in relation to the “greedflation” years.

As you see from the percentage increase in commodities, oil, a major input to everything has seen some wild rises (and wild falls; remember negative oil prices). This might affect the cost of some inputs for grocers, like energy costs. But let’s take pre-covid period as a relative point of comparison to 1976, so we can omit the supply constraints that have come with covid and the invasion of Ukraine. Here are the relative changes in price in %:

Commodity	% Increase (1976-2019)	Price 1976 ($US)	Price 2019 ($US)	Price 2022 ($US)	2019-2022 % Increase
Corn (Bushel)	41.3%	$2.73	$3.85	$6.94	80.1%
Wheat (Bushel)	48.5%	$3.33	$4.94	$9.52	92.7%
Soybean oil (LBS)	53.4%	$0.19	$0.29	NA	NA
Sugar (LBS)	4%	$0.118	$0.123	$.18	52.2%
Crude oil* (Barrel)	450.6%	$12.64	$56.9	$94.78	66.3%

*Crude oil = WTI

Bumper Earnings, Bumper Dividends, and Bumper Buybacks

What a fantastic few years it has been for grocery retails. Record profits. And you may have read, much to your bemusement headline after headline about record earnings for grocery companies (unless of course you are collecting these sweet dividends; yes I am a huge proponent of owning capital instead of being exploited by it¹).

I also can’t be satisfied not knowing the truth regarding this intuitive discontent I have with these companies. I want to explore this idea of greedflation. Are profits related to increased prices?

Are supermarkets experiencing supranormal profits because they have raised prices? This is a somewhat difficult question to answer, as the CPI is clearly dependent on the prices charged, as are metrics of gross and net profits. Profits are not independent of the prices included in the CPI which makes it difficult to disentangle.

So, I went through the earnings reports for 6 supermarket companies. Now of course, some of these corporations deal with more than groceries but in all cases and markets their incomes are primarily from grocery retailing. Loblaws (1997-2022) and Empire Sobey’s (1997-2022), both of which are large players in the Canadian market. Walmart (1997-2022), a global grocery behemoth known for attracting some of America’s most intruiging characters. Tesco (1997-2022), a large player in the UK and Irish markets, Aldi UK (1997-2021; market region should be self-explanatory), and Musgrave Group (2002-2021), who operate Supervalu and Centra (to name a few) in Ireland. Once again, there’s nothing particularly special about 1997 for this pseudo-analysis. This choice of year was primarily due to the logistical difficulty of getting some historic annual financial statements. In addition, I got quite tired of reading through these tedious reports.

How profitable are grocers?

Below, you can see the growth in revenue, gross profits (revenue - the cost of goods), and the net post-tax (and post-dividend) profits. Allowing us to see how these companies have performed since and relative to 1997, but also relative to other grocer companies in our four market regions. As you can see below revenue has grown steadily since 1997. So all our companies have been good (in differing degrees) at expanding and increasing sales. These data are not adjusted for inflation but I’ll display it with each country’s Food CPI (from 1997 onwards) below.

Figure 7

Now what about the growth in gross profits since 1997?

6000% growth. 3000% growth.

Wow. They are almost too good to be true. Interesting, that both our top performers are out of the Canadian market. This means that for Empire Sobey’s, imagine they earned $1 gross profit in 1997. In 2022, they raked in $6000.

But even all the companies I have shown, demonstrate remarkable increases in profit relative to 1997.

Figure 8

Gross Profit for Musgrave Group is from 2002 onward

The data in the graph below may be the most remarkable of all this work I can show you. The question these data answer is, how much of all the revenue generate by each company is profit (pre-tax and other deductions). Hold the costs constant and increase the rise is one way to an increase. Whereas, decreasing costs while the price stays the same, also increases gross profit.

This is important because the greater the ability for a seller to keep a greater positive difference between the price they get, and the cost to sell the item, the less direct competition in the market. This can be from having a large enough market price you can set the prices. Such a market share might be from geographical impositions. Canada and the US are huge countries, with a lot isolated, hard to get to communities.

Figure 9

Based on this as a post-hoc measure of competition and the actual market share, I’m going to propose that the UK market is the highly competitive. Grocers keep a tight spread between the price and the cost. You can see that since 1997, we see a general trend towards a decrease in tesco’s profit margin. This co-occurs with a slight decline in market share over the last several years. You can see this change over time here.

Aldi UK holds it relatively steady with between 1%-5% profit each year. All in all, there is little room to maneouve with either increasing prices or decreasing costs.

Ireland, seems to occupy a mid-way point on this competitiveness continuum. And it makes intuitive sense to me. There are three large players with 20-25% of the market each. That’s enough of a market share between all three (Tesco, SuperValu, and Dunnes) to potentially engage in oligopoly-like pricing. Price-matching each other while commanding a strong profit margins. But they still need to compete with the cheaper Aldi and Lidl, who each command respectable shares of the market. Both who forgoe wider profit margins to attract feet through the door (if Aldi Uk is an indicator of Aldi Ireland’s performance).

Here’s a question for you? What do you get what two companies control 50% of a market? At least 20% profit every year for 12 years. The much higher profitability in our North American examples co-occurs with large market shares. Walmart is montrously large with almost a quarter of the US grocery market. Unfanthomy large. And they are wracking it in!

Now, let’s not beat around the bush here. They are notorious for having a very low cost structure, possibly related to labour costs.

I hope sarcasm travels well over the internet.

But with that market share, you can definitely play around with prices provided it doesn’t overly reduce the volume of sales.

Something interesting happened in the late 2000’s in the Canadian grocery market. Profitability exploded! Some of this large shift and increase since might be related to acquistions of other subsidiary brands. Why a grocery chain needs to start a REIT, is beyond my comprehension. There’s been some diversification into the pharmacy industry for Loblaws, which they have claimed to be the most profitable part of the business. And this might well be true, but they all might be high and the pharamcy profitability is the highest. At the end of the day, food sales make up most of their total revenue.

On average, we have a 30% difference between the price an item was sold at andthe amount it cost to sell that item. That’s a big gap. That’s a good that could close (with competition and lower prices) and still be remarkably profitable.

What is also very suspicious is that once each company pays its tax and makes all the other relavent deductions, the net profit margin is almost identical for every company, regardless of country (Figure 10 below).

Figure 10

So how do we get from 20%+ gross profitability to 2.5%. Where did all the money flow? I don’t have an obvious answer, but I’ll leave you with a graph showing at how much nominal dividends paid and stock buybacks (as a percentage of each company’s annual revenue) have grown over the same time frame. For your enjoyment, of course. 😄

Time and Place, Relativity.

You can see how grocers performed by country side-by-side with changes in Food CPI, wages (in 2021 US$ adjusted for purchasing parity). Do wages keep up with food prices? Nope. Of course not. Except for Ireland. Ireland is the one country in which wage growth exceeded the increase in Food prices. Though the data for Ireland are shown with the 2002 as a benchmark year. This is not ideal, but it was hard to get the annual statements for Musgrave Group before 2002, so I used the first year of profit data as a bench mark. I won’t discuss these in detail.

Canada

Ireland

UK

US

Greedflation: Is it even real?

Let’s get back to our current problem. The cost of living crisis. I can’t say for sure whether profits have driven prices, but the growth of both in general seem to be linked. But it depends where. Our Canadian duo are once again showing how it’s done. Obscenely large growth in profits. All culminating in the biggest payout of dividends yet.

As you can see from the graph below, the nominal amount of gross profit has grown over the ‘greedflation’ years.

That being said, gross profit margins during this period have remained virtually identical over this period.

I’ve brought you all the way to this point. And I haven’t given you a direct answer to the greedflation question. I don’t have the data I’d like to have in order to answer this question. And there are many possible ways of tackling this problem. It would be interesting to compare the change in Food and Non-Alcoholic Beverages Producer Price Index to the changes in Food CPI. Granted the earnings data I have shown you is not complete for the year 2022 for each company. Once these are realized I’ll make an edit to this post with the updated data.

Regardless, I’ll leave some thoughts, instead of leaving you wanting with no conclusion.

I see worrying trends here. Working doesn’t pay. Wages are stagnant, but the cost of consumption has really ballooned over the same period. Prices have pretty much increased linearly in all the time frames I’ve shown today. There’s a phenonmenon in cognitive psychology known as change blindness. The idea is that small relative differences below a certain threshold are almost unperceptible, particular relative to large sudden changes. So you can have lots of small sequential changes, that on the whole make up a large shift (especially large with it compounding each year). This has probably been the case until recently with smaller increases in prices, and then we had the big increases that put the large shift on display. This has all been compounded with the retail energy prices (pf which the spot prices are a fraction of the high last year), stagnant wages, and silly rents and housing costs. Maybe we feel it more at the grocers because everyone has their hands in our pockets simultaneously.

My main point is that we’ve been getting the proverbial shit end of the stick for years. Not just since 2020 onwards.

Nothing I’ve shown here gives me much optimism for Canada in particular. If these long-term trends continue, the growing difference between prices and wage growth goes on with little GPD growth². If the trend breaks. Well, if it breaks and we get deflationary prices, we’ll have a whole other set of miserable problems to deal with. These are wider systemic issues in all the countries discussed today. We’ve cultivated these growing problems for years, and now we can enjoy the rotten fruits of “our” labour.

“I suggest you panic”

Hugh Hendry (2010)

It’s never too late to start. Sound the alarm. Panic!

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1. You may think the word “exploited” is a bit over the top. But the salient point here, relative to the price of other goods (and return on capital), the price of labour has not seen similar upward pressure. Consequently, as the prices of the things you want to buy increase at a higher rate than wages, you are taking home less! See the graph on overall wage ($US Adjusted for Purchasing Power) increase since 1990 below. ↩︎

2. Canada’s GDP is no higher than it was almost 10 years ago. ↩︎