Canada's largest grocer says its product costs have risen by nearly $1 billion so far this year — double the historic norm — as it continues to see "outsized" price increases from big multinational food brands.
But the head of one of Canada's biggest food supplier industry groups says manufacturing costs are continuing to rise, and the opportunity to make a fair margin "should not be only in the domain of the retailers."
Michael Graydon, CEO of Food, Health & Consumer Products of Canada, said on Wednesday that labour, packaging, distribution and regulatory requirements all add to the cost inflation in food manufacturing.
Moreover, many of the commodities in use now come from inventory or supply contracts negotiated when prices were higher and are still being passed through the supply chain, he said.
His comments come after Loblaw Companies Ltd. said cost hikes from suppliers appear out of sync with the commodity cost environment, and are contributing to elevated food inflation in Canada.
While small- and medium-sized Canadian food suppliers appear to be "catching up on costs," the price increases passed on by large food companies are "more concerning," said Loblaw chief financial officer Richard Dufresne.
"We are still seeing outsized cost increases rolling in from large, global consumer goods companies, exceeding what we expected at this point," he said during a call with analysts.
Loblaw reported a profit of $418 million in its first quarter, down from $437 million last year when the company saw a one-time gain from a court ruling. Revenue for the 12-week period totalled nearly $13 billion, up from nearly $12.3 billion a year earlier.
The grocer made the decision to highlight the ongoing oversized price increases as it's "one of the big drivers of cost inflation that we are seeing," Loblaw chairman and president Galen Weston said.
"We are definitely seeing more inflationary cost pressure from the large multinational (consumer packaged goods companies) than we would have expected at this time based what's happening in the commodity cost environment," Weston said during the analyst call.
"We did not pass the full amount of cost inflation to customers, leading to food gross margin declines yet again this quarter."
He noted that sales of Loblaw's in-house brands, President's Choice and No Name, grew at more than twice the pace of the big national brands in the quarter.
Many big food makers with headquarters outside of Canada are continuing to pass along significant price increases to retailers.
PepsiCo Inc., the company behind products like Tropicana orange juice and Lay’s chips, increased prices 16 per cent in its latest quarter, helping boost its profit by 18 per cent, it said last month.
Unilever, which makes Dove soap and Hellmann’s mayonnaise, reported a 10.7 per cent increase in prices in the most recent quarter, while Nestlé raised prices by 9.8 per cent on products, which include Smarties and Perrier water.
Meanwhile, Statistics Canada reported last month that grocery prices were up 9.7 per cent on a year-over-year basis in March, down from 10.6 per cent in February.
The deceleration was driven by lower prices for fruits and vegetables, the agency said.
Economists have been expecting the rate of food price increases to gradually slow this spring as the rising cost for key inputs moderates through the supply chain.
Loblaw raised its dividend 10 per cent as it reported its first quarter earnings, saying it will now pay a quarterly dividend of 44.6 cents per share, up from 40.5 cents per share.
The increase for shareholders came as Loblaw reported its profit amounted to $1.29 per diluted share for the quarter ended March 25, down from $1.30 per diluted share in the same quarter last year.
Food retail same-stores sales were up 3.1 per cent, while drug retail same-store sales increased by 7.4 per cent.
On adjusted basis, Loblaw said it earned $1.55 per diluted share in its latest quarter, up from an adjusted profit of $1.36 per diluted share a year ago.
Analysts on average had expected an adjusted profit of $1.55 per share and $13.2 billion in revenue, according to estimates compiled by financial markets data firm Refinitiv.
This report by The Canadian Press was first published May 3, 2023.
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Brett Bundale, The Canadian Press
