Grocery chain profits only a minor factor in high cost of food

Steve Ambler

Troy Media

Justin Trudeau has summoned Canada’s top grocers to Ottawa to come up with a plan to solve surging food prices, saying, “It does not make sense in a country like Canada that our largest grocery chains should be making record profits while Canadians are struggling to put food on the table.” He then added that if the grocers do not come up with a credible plan, “we will take further action and we are not ruling anything out, including tax measures.”

This sounds like a threat to punish supermarket chains by taxing them if they don’t lower their prices.

The Trudeau government should get an F in basic economics on at least three counts.

The first count is the idea that imposing a tax on grocery chains would lower food prices. This is patently absurd. Taxes would raise their costs, and some of the increased costs would be passed on to consumers.

The second count is blaming grocery chains’ profits for food price increases.

Grocery chains have been enjoying record profits in absolute dollar terms, but of course, record dollar profits don’t look quite as high when adjusted for the increase in the consumer price index (CPI) since inflation began to surge in early 2021. Also, their volume of sales is huge, translating into pretty small markups over costs.

Economist Jim Stanford of the Centre for Future Work calculated that the net profit margin in food retailing increased from 1.62 percent in early 2020 to 2.85 percent in early 2023, an increase of 1.23 percentage points in three years. Food has a weight of about 17 percent in the CPI, so the increase in profit margins can explain about a 0.21 percent increase in the CPI. Spread out over three years, this means that grocery chain profits may have added about 0.07 percent to Canada’s headline inflation rates. Not much more than a rounding error.

Much of the blame for increased profit margins can also be laid at the doorstep of the federal government itself. The pandemic lockdowns led to many smaller grocery stores shutting down temporarily, and the temporary closures, in many cases, turned into permanent closures. This had the effect of reducing competition in the food sector, and it’s a well-known fact of economic life that markups in an industry are inversely related to the degree of competition in that industry.

The third count: the impact of the federal government’s carbon taxes on food prices has been considerably higher than grocery chain profits.

Troy Media contributor and Dalhousie University professor Sylvain Charlebois, one of Canada’s top experts on food and food distribution policy, noted in 2019 that it is hard to estimate the exact impact because energy is required at all stages of food production from planting the seeds to refrigerating the produce on store shelves. He does cite a study from 2012 suggesting that a carbon tax of $50 per tonne would increase food prices by about three percent.

Since Apr. 1, we have had a carbon tax of $65 per tonne, up from $20 in early 2020, which will have increased food prices by about 2.7 percent. Once again, spreading this over three years and multiplying by the weight of food in the CPI, this works out to juicing food price inflation by 0.153 percent, over twice the impact of grocery chain profit margins. And this, of course, neglects the impact of carbon taxes on prices in other sectors, which also use energy at all stages of the production process.

Finally, we know that CO2 diffuses throughout the atmosphere. To the extent that CO2 emissions are a problem, they are a worldwide problem. Completely eliminating Canada’s emissions would have little or no effect on the world’s climate, and would be more than offset within a year by the increase in emissions from China, which is building six times more coal-fired power plants than the rest of the world combined – a fourth reason for an F in Econ101.

Steve Ambler is a professor emeritus of economics in the École des sciences de la gestion, Université du Québec à Montréal.