The prices consumers see in grocery stores have been increasing. The best, most objective measurement of the changes is the consumer price index published by Statistics Canada each month. To calculate the consumer price index for food a weighted average basket of goods is used. This ensures consistency in the calculation from year to year.
The consumer price index provides three important data points. The first is the index from the base period. If you were to check the consumer price index for food, recently released for September 2023, you would find food purchased from stores is 183.1. This means the basket of goods used by Statistics Canada has increased 83.1% from the base year, which is 2002. The more useful data point is the month compared to the previous month and the same month last year. From this data we are able to determine the food inflation which is the percentage change of pricing in the weighted average basket of goods. In September 2023 food purchased from stores was .1% lower than the previous month and 5.8% higher than the same month last year. Overall this is good news as the prices are starting to level and the increases are getting lower, year over year. It is important to note some categories are still higher and some are lower to provide the overall number of 5.8% higher than the same month last year.
Recently the leaders of the five largest companies selling food and beverage in Canada were summoned to Ottawa by our federal politicians. The purpose of the meeting was to find opportunities to make food more affordable for Canadians. My first reaction was this is a waste of time, but full disclosure I did work for one of these companies, so I decided to focus on some numbers and then come to a fact-based conclusion.
My second reaction was we should be celebrating so much of our Canadian food and beverage industry. We have just been through a challenging time and the entire value chain worked to get food to stores and to Canadians. It is not perfect and there is always work to be done. We need leaders in Ottawa and others to celebrate and promote a robust, sustainable food production and processing industry. Not focus on pitting one member of the value chain against another.
Food is a global discussion
It is true food inflation in Canada has increased and Canadian consumers are experiencing higher grocery bills every week at the store. Hopefully the peak was reached in the summer of 2023, and we will begin to see the year over year increases subside. According to Statistics Canada, food purchased from stores was up 5.8% in September, 2023 from the previous year, which is a drop from the August number of 6.9%.
To jump to the conclusion this is a Canadian issue is a major mistake. The first place our leaders should look is how do we measure up against other nations. Food inflation has been a challenge everywhere due to supply chain issues, geo-political issues and a challenging climate to produce food. To compare Canadian food inflation, we were able to explore the monthly food inflation in a number of countries.
It is apparent food inflation is an issue in almost every country in the world. Overall, Canada has followed a similar trend to our major trading partners. The United States has been able to reduce their food inflation faster than other countries but to understand that we should take a look at currency.
Over the past two years the U.S. dollar has gained considerable strength against the Canadian dollar. Retailers and others in the Canadian food and beverage value chain must buy products or ingredients from U.S. based companies.
When compared to other countries, it does not appear retailers selling food and beverage in Canada are treating consumers differently than other countries.
Lower food prices requires work throughout the value chain
Another obvious clue our leaders do not understand the food and beverage industry is they focus only on retailers. Yes, they are the largest and easy targets, but it doesn’t make it right. Retailer gross margin is one indicator of the profit they are making, relative to the prices they are paying. The following chart illustrated retailer margin as reported in their respective financial statements:
It is true retail margins increased in 2021. Canadians were home most of the year due to the pandemic and bought more food online. They did not compare prices as much and shopped fewer stores to reduce their time outside their home. They also bought a different mix as food service was reduced significantly. The difference in margins from one retailer to another is based on mix. For example, Loblaw would include Joe Fresh clothing and more pharmacy margins with Shoppers Drug Mart.
Food inflation is one number that requires a huge amount of data to calculate. If our leaders were serious about reducing food inflation, they should find the categories with the biggest increases and focus there. According to statistics Canada the largest changes in year over year prices were in breakfast cereals, pasta, edible fats and oils, sugar and confectionary and beef. A true analysis would focus on these categories to understand what is driving up prices in these parts of the store.
It was also interesting to note only food retailers were being called to the meeting. Our food industry in Canada is split between food retail and food service. No doubt food service was impacted during the pandemic but according to FCC, the split between retail and food service is now back to pre-pandemic levels. In Canada, we are close to a 60-40 split with retail making up the larger portion. If our leaders in Ottawa were serious about food inflation, they probably should have included some food service operators. According to Statistics Canada the inflation in food service was the following:
A more thorough analysis would also include the cost of operating in Canada relative to our major trading partners. Regulatory costs, taxes, carbon taxes and other expenses need to be compared by category to really understand the issue in depth.
Waste of time or legitimate concern?
Waste of time.
Relative to our major trading partners, our food inflation issue was no worse and in many cases consumers here are better off. The United States has improved faster however part of Canada’s challenge could be currency.
Our leaders should focus on true change.
Prices are not just a retailer issue. By forcing retailers to ‘come to the table’ the suppliers will be forced into change. Retailer’s bottom lines are big dollars but low percentages. They will not reduce their bottom line so lower prices will come out of suppliers or with reduced costs in the retailer’s business. I know where my bet is.
Our leaders should explore Canadian content in categories. This will increase volume and provide more opportunities for Canadian businesses and Canadian workers.
Consolidation in Canada is an issue, especially when compared to markets like the United States. This needs to be addressed and it will take time. We should be finding incentives for Canadian based retailers to start. Enticing an international retailer to come to Canada will just make it more difficult for suppliers. We need Canadian based solutions, not international discounters.
It would be refreshing to see a value chain focused approach with the facts applied. We should celebrate the people who produce and distribute food with focus on change to improve the system. Photo ops are a waste of time and they illustrate our leaders do not understand the sector.
Consumers are more aware of package size changes
With the focus on food pricing and the increases at the check out, consumers are more aware of package size changes. We know one solution to increased costs for ingredients, packaging, labour and logistics is to reduce the size of the product and keep the pricing the same. In some categories this is probably the right strategy. Consumers do not always like it but in the end, keeping the retail below a certain level will be the best decision. It is interesting to see products like cake mix reduced in size. This consumers will notice more because the finished cake will be smaller. That is a tougher decision to make. The taller, slimmer box of honeycomb with less actual product is probably better long term, once the other shorter box sells through. Not always what consumers want to hear but costs are rising and the economic model needs to deliver a return.
Regardless of your category, you need to watch what your competition are doing and determine the right strategy for your products.
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