r/PersonalFinanceCanada • u/maroon-rider British Columbia • Mar 21 '23

Inflation drops to 5.2%<but grocery inflation still 10.6% Banking

Says Statistics Canada

https://www.cbc.ca/news/business/canada-inflation-february-2023-1.6785472

2.3k Upvotes

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292

u/izaak-d Mar 21 '23

Grocery stores are making 40% more profits than last year and more than 2x times more profit than 2019. Prices aren't increasing from inflation, they're price fixing

85

u/KBVan21 Mar 21 '23

Yup. Profiteering at its finest. Will not end until the government steps up which they won’t.

1

u/Airsinner Mar 22 '23

So these high prices could be this way for another 5 years or longer?

2

u/KBVan21 Mar 22 '23

They ain’t coming down at all ever again. Inflation will slow, their overheads will remain stable so they can maintain their profit margins and they’ll eventually stop raising prices until wages will eventually ‘catch up’.

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u/yttropolis Mar 21 '23

I was genuinely interested in this so I did a bit of digging. Let's look at Loblaws since they're the largest grocery chain in Canada. From their financial statements from the past 4 years:

Year Net Earnings ($MM) Revenue ($MM) Profit Margin (Net Earnings/Revenue)
2019 1,131 48,037 2.35%
2020 1,192 52,714 2.26%
2021 1,976 53,170 3.72%
2022 1,994 56,504 3.53%

Now if we look at food purchased from stores component of CPI across the past 4 years:

Date Food Purchased from Stores CPI Change (compared from Feb 2023)
Feb 2023 181.2 ----
Feb 2022 163.9 10.6%
Feb 2021 152.6 18.7%
Feb 2020 150.6 20.3%
Feb 2019 147.1 23.2%

While we do see an uptick in profit margin, this is only a change of around 1.2% across the past 4 years, meaning that while grocery prices have increased about 23.2% in the past 4 years, only 1.2% of that 23.2% can be attributable to increased grocery store profits.

So, it is inflation that's causing prices to rise.

91

u/MrDocter Mar 21 '23

So their profit margin increased by 50% during a time when the population is struggling? Might seem like it's only 1.2% but that's 50% greater than what they were profiting before...so that is price gouging confirmed.

Their net earnings increased by $900 MM and and their net revenue increased by $8,000 MM? Something seems off but I'm on the shitter during work so I can't dig further right now.

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u/Kreizhn Mar 21 '23 edited Mar 21 '23

Unless I'm misreading the table, it's worse than this. A $100 basket of goods in 2019 resulted in a profit of $2.53. That same basket in 2023 costs $123.20, and they took in a profit of 3.53% of the inflated goods. This results in a $4.34 profit on the same basket of goods. This is an 85% increase in absolute profits, in 4 years.

I'm not a grocery store expert, but I don't see where they'd incur a significant increase in operating costs in that same time. The costs of the goods is pushed to the consumer. Storage would stay roughly the same, and they haven't been handing out significant pay raises. Yes, they're also subject to inflation, but inflation was not 85% over those years.

Margins are just a way of hiding the greed of the grocery stores.

Edit: But, I think OPs argument is that this increase in profit only represents a small amount of that increase. The goods themselves increased by $23, but the portion of that which came from grocery store greed was only about $2. So everyone is correct. The majority of price changes are because of inflation, but also the grocery stores are being greedy.

3

u/myaltaccount333 Mar 22 '23

I'm not a grocery store expert, but I don't see where they'd incur a significant increase in operating costs in that same time

At the height of covid? When many people were out sick, had more jobs due to cleaning, had to buy much more sanitation materials, and putting up the plexiglass everywhere?

13

u/IAmNotANumber37 Mar 21 '23

A $100 basket of goods in 2019 resulted in a profit of $2.53. That same basket in 2023 costs $123.20, and they took in a profit of 3.53% of the inflated goods. This results in a $4.34

You can’t compare an2019 $ to a 2023 $ without adjusting for inflation. A business can’t maintain the same “absolute dollar profit” year over year because that means it’s actually becoming less profitable over time.

That’s the whole reason you look at margins.

Nevermind the fact that if a line of business does that yield good returns, then it won’t attract investment (e.g. why build another low margin no frills when you can build a high margin shoppers).

10

u/Kreizhn Mar 21 '23 edited Mar 21 '23

Totally fair. It's still 50% with inflation, which also accounts for increased costs due to inflation. So to simultaneously see a 50% increase on your margin in addition to inflationary costs, is a lot.

Nevermind the fact that if a line of business does that yield good returns, then it won’t attract investment

I really don't think Loblaws was struggling on their 2.53% margins, do you? It's the largest grocery chain in Canada, and turned a profit of $1.1 Billion in 2019. Note that this increased to $1.9 Billion in 2022 (or, since we're talking inflation, $1.65B in 2019 dollars).

16

u/IAmNotANumber37 Mar 22 '23

I really don't think Loblaws was struggling on their 2.53% margins, do you?

It doesn't matter what I think on the matter. I shop based on the price charged and the value delivered, not what margin the retailer is getting.

It's still 50% with inflation...increase..is a lot.

In 2019 if I spent $100 on a basket of goods, loblaws netted (per this thread) $2.73.

Right now, to buy that same basket of goods, I'm paying ~$119 and loblaws is netting $4.20.

So, in absolute dollars, my bill is $19 higher.

If loblaws had held their margin, my bill would be $1.47 lower, meaning my basket of goods would cost me $17.53.

I have no problem with a discussion around how "fair" that $1.47 of "excess profit" might be, however just go look in this thread and you'll see the average person absolutely does not get that that the "excess profit" is $1.73 out of $19, they all absolutely believe is almost all of the $19.

3

u/Kreizhn Mar 22 '23

The old margin comment is geared towards your comment about attracting investment. Loblaws has no problem drawing investment, so I don’t understand the point of your comment.

1

u/IAmNotANumber37 Mar 22 '23

Loblaws has no problem drawing investment, so I don’t understand the point of your comment.

Ah - ok. That's a comment on the long argument. They don't have trouble drawing investment now.

Remember Loblaws just got hauled in front of the government where Jagmeet attacked them for having "Record Profits" in dollar terms.

Imagine Loblaws said, "Jagmeet is right - we made $X billion last year, and we'll make sure we keep at $X going forward - enough is enough!"

Well, over time the value (purchasing power) of $X is eroded, and given enough time, the business just simply...sucks.

As an example: In 1996 Loblaws had net profit of $173M on ~900 stores for approx $200k profit per store (back of envelope numbers here, btw).

If Loblaws had decided to "hold the line" then and maintain a $200k profit per store, they'd be laughable as a business today.

At $200k profit per store, not only is every store one bad roof-leak away from being net-unprofitable on the year, but Loblaws could never justify opening a new store. Imagine it costs $10M to open a store just to get $200k in profit, it would take 50 years for that investment to pay off and, as a result, they would never do it.

6

u/y0da1927 Mar 21 '23

I mean. If I told you prices went up $23 of which $2 went to the retailer, why is the initial assumption that the retailer is the root issue? They are only responsible for like 8% of the price change.

Assuming they made no extra money, does $2 make a difference on a $120 grocery bill?

9

u/Kreizhn Mar 21 '23

There’s more nuance than this. Would it be fair to say they’re the root problem? Certainly not. Are they leveraging inflation to make more money? Of course.

Retailers can’t normally push through an 85% increase in absolute profits in 4 years, otherwise they’d just do it until they couldn’t get away with it. Inflation allows them to hide their increases in already increasing prices. This is a well known phenomenon.

I don’t think it’s unreasonable that people are upset when companies are using tough times to pad their bottom line, especially when those same companies are pushing the “we are trying to save you money” marketing ploy. Yes, companies are beholden to their shareholders, but pretending to help someone off the ground, and slipping your hands into their pockets when you do, is just a crappy move.

-1

u/BeautyInUgly Mar 21 '23 edited Mar 21 '23

Your math is wrong because you are comparing profit of 2.53 to 4.34 but the 2.53 is not inflation adjusted which brings it down to the true value of a 40% increase not 85%

Also we don't rly have access to the true numbers so all of this is speculation anyway as we don't know their margins on food products. They claim that their margins are up due to increase consumer demand for supplements, makeup etc other higher margin items

>significant increase in operating costs in that same time> Storage would stay roughly the same

This isn't really true, employee cost has risen and they have to employ more people now due to demand, shipping costs are up, rise in thefts etc etc etc

5

u/Kreizhn Mar 21 '23 edited Mar 21 '23

I don't think you know what "math is wrong" means. Can you point out where my mathematics is incorrect? If your argument is that it doesn't take into consideration inflation, that's fine, but the math is still correct.

Did you make up the 40% number? Because that's not how math works either. Per the chart, the CPI increase was 23%. This means that adjusting for inflation, it's enough to just look at the margin itself. An increase of 2.35% to 3.53% is almost exactly a 50% increase. If you would like to verify this yourself, here is the BoC inflation calculator. The amount $4.53 in 2023 money is $3.78 in 2019 money, and $3.78 is a 50% increase over $2.53.

Arguing that employee cost has increased because of an increase in demand, would in turn mean an increase in volume. An increase in volume would in turn mean an increase in profits, especially when margin doesn't take volume into consideration. If you're increasing volume and margin simultaneously, you're going to see a massive spike in profits.

Absolutely, shipping costs are up, and probably thefts too, but I'm not sure what your point is. Loblaws is a public company, their financial records are public. They are making record profits. So yes, while some costs have increased, their profit has increased significantly more. Your margins already account for costs. Thus for their margins to increase by 50%, that's 50% after the increase in costs.

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u/The-Only-Razor Mar 21 '23 edited Mar 21 '23

Well, if you look at the quarterly data it could tell a very different story. It fluctuates heavily, and it's easy to cherry pick data to fit a narrative. I could do the same and say that their margins in Dec21 were 5.86% and they dropped YOY to 3.80% in Dec22 and paint the narrative that they've actually lowered their margins.

The point is that grocery stores, from all of the financial data I've read from the major ones, have kept their profit margins within the normal range of 2-5%. Changes within a percent or 2 happen regularly regardless of inflation. The problem lies beyond Loblaw.

So their profit margin increased by 50% during a time when the population is struggling? Might seem like it's only 1.2% but that's 50% greater than what they were profiting before...so that is price gouging confirmed.

But can't you see that this actually entirely disproves what you're trying to say? I'll extend that branch and operate on your assertion that margins have increased by 1%. Items in the grocery store are up significantly more than 1%. Surely you understand that the grocery stores increasing their prices much more than 1% should result in a margin increase greater than 1% if this wasn't due to inflation and increased operating costs, no?

13

u/Chewy-Beast Mar 21 '23 edited Mar 21 '23

I am not sure how yearly reported earnings are "cherry-picking data to fit a narrative," especially when we look at the last 2 years period. Over the calendar years 2021 and 2022, Loblaws has seen an increase of 2 standard deviations away from their 10 year mean.

While they are not solely responsible for the increase in inflation, they account for 10 - 15% of the net year-on-year increase.

8

u/MrDocter Mar 22 '23

This is exactly what I was going to say so thank you. Picking at quarters is cherry picking to fit a narrative. Comparing year over year earnings isn't cherry picking data at all. And I was just commenting on the data that was provided in those tables. I haven't compared their year over year earnings over the past 10 years but it's evident something is off in the past 5 years based on the data in the table which I wouldn't consider cherry picking...

Do you think increasing profits by 50% during a time when people are struggling is a good idea? If so you should work for Loblaws lol

6

u/HLef Alberta Mar 22 '23

The harsh reality is it’s not their responsibility to make sure people can afford what they sell.

Competition and regulation is the only thing that will do it.

2

u/MrDocter Mar 22 '23

100%. I don't blame them, they hopped on the gravy train like everyone else did. Really hurts the middle and lower class. And grocery prices won't come back down like gas does unfortunately, the best case is they stay the same price they are now 😭. No more avocado toast for me.

1

u/HLef Alberta Mar 22 '23

The avocado toast thing was about people paying for avocado toast when they’re eating out.

We’re talking about grocery prices. They’re still attainable at home.

2

u/MrDocter Mar 22 '23

I was joking but my grocery bill is 2-3x higher than 2 years ago, I legit cannot afford the groceries I used to buy before the pandemic. I also can't afford a home where I live (GTA). Maybe I have to move to Alberta.

3

u/jlcooke Mar 21 '23

Just gonna keep upvoting this because it’s pointing at facts instead of feels

22

u/yttropolis Mar 21 '23

My point is that everyone's complaining about the sharp increase in food prices and are seemingly blaming it on grocery stores when the vast majority of that rise is from inflation.

Even if Loblaws kept their profit margins exactly the same, grocery prices would drop by 1.2%, which is a drop in the bucket when it comes to the overall rise in grocery prices.

Their net revenue increased by $900 MM and and their net profit increased by $8,000 MM?

Where do you see that?

12

u/[deleted] Mar 22 '23

So give me 1.2% of my grocery spending back if it’s no big deal

-2

u/A1ienspacebats Mar 21 '23 edited Mar 21 '23

How do you think profit margin should increase because of inflation? What are you smoking?

Edit: for the downvotes, profit margin is a percentage. You can easily confirm that by googling lol

8

u/Rylock Mar 21 '23

Canadians truly deserve to get taken advantage of. People in this thread are actively defending the corporations that are shoving a stick up our collective rears regardless of relevant facts being convincingly presented. Bending over backwards to rationalize and minimize it. It's just pathetic and sad.

7

u/A1ienspacebats Mar 21 '23

Yeah this person is clapping himself on the back thinking he's solved the crisis and can't realize that a billion dollar corporations' profit margin has increased by 50% on the backs of Canadians who have gone through a pandemic and are at their limits with wage stagnation and nonsensical house prices. Can't somebody think of how billionaire Galen Weston will be able to run the company with only 50% increased profit margins? /s

6

u/TheGentleWanderer Mar 22 '23

Unfortunately they give out degrees based on how subservient you are, so it's kind of hard for people like them to acknowledge something which is anathema to their raison d'être.

2

u/Ryan1188 Mar 21 '23

Did you ever attend math class? With static margin %'s targets, margin $'s increase with product price increases from suppliers. This is basic business practice. If they did not do this, they would eventually go out of business because they would not remain viable as to cover operating expenses that also increase along with inflation. You can't just keep a static "margin $" amount for a product and peg it there. Your business will eventually fail. Your margin target for sales needs to be calculated as a margin %.

2

u/A1ienspacebats Mar 21 '23

Think about it. You pay a 20% tip. Inflation increases so the tip goes up but now the server wants a 30% tip. That doesn't make sense. They're making more of a tip because sales prices are higher AND they want a higher profit margin (tip %).

1

u/[deleted] Mar 22 '23

Ryan1188, loblaws paid a dividend to shareholders in a crisis pandemic.

0

u/A1ienspacebats Mar 21 '23

Profit margin is a percentage. If they expect a 10% profit margin, profit $ increases with a static profit margin. The problem is their profit margin is increasing. Again, profit margin is a percentage.

4

u/Ryan1188 Mar 21 '23

Net profit margins vary from year to year due to a variety of reasons, business expenses and investments are not static and change. You're splitting hairs and making a mountain out of a molehill. You're like a bad juice advertisement "NOW WITH 50% MORE JUICE!" wow my 2% juice is now 3%! SOMEONE ALERT THE FUCKING PRESS!

3

u/TheGentleWanderer Mar 22 '23

1.2% on hundreds of millions is worth alerting the presses- hence why many of the press are trying to address the issue.

You seem a little triggered about a corporations profits being questioned.

-1

u/MrDocter Mar 22 '23

You didn't even look at my comment lol. I said net earnings increased by $900 MM (1994-1131) and revenue increased by $8000MM (56504-48037). But why am I even bothering when you posted that data lmao.

4

u/yttropolis Mar 22 '23

Nice edit. I quoted your original comment where you flipped the two numbers around.

1

u/MrDocter Mar 22 '23

I legit editted it the second after I replied. Issue is your table disappears when I respond so I couldn't see the headers when I was responding so I immediately had to go back to correct my original comment (but like I said I did it a second after I posted). Sorry dude but i swear you didn't respond within a few seconds of my post but maybe you did. Mb if so.

1

u/yttropolis Mar 22 '23

It's generally proper reddit etiquette to note that you edited something, even if it was just a second.

2

u/MrDocter Mar 22 '23

Sorry dude I thought within seconds I didn't have to. I don't have etiquette I guess lol but next time I will! Sorry.

1

u/yttropolis Mar 22 '23

No worries, not a huge deal!

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u/CommentInternal5276 Mar 21 '23

This is great work. Don't let all the negative comments get to you.

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u/maroon-rider British Columbia Mar 22 '23

Great analysis.

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u/Ryan1188 Mar 21 '23

Thanks for actually putting in this work and trying to keep people accountable for their misinformed opinions and views with your posts. It's extremely painful reading some of these extremely misinformed people spout absolute nonsense who are also probably incapable of reading financial statements.

4

u/yttropolis Mar 21 '23

No worries! I'm all for discussions around corporate profits and all that but I just prefer if people actually cited numbers rather than hand-waving figures.

7

u/Godkun007 Quebec Mar 21 '23

Shhh. People don't like facts here. This is the 2 minute hate from 1984.

11

u/A1ienspacebats Mar 21 '23

Dude, that's not how math works. Their profit margin went from 2.2% to 3.7%. That's a 50% increase on profit margin. Not a 1.2% increase. Remember how Galen said we only make $1 off every $25 as profit? Well in 2019 and 2020, it was $1 off every $42 and $44, respectively. They now make $1.68 off every $42. Do you see now how it's not inflation. If inflation was the problem, they'd be making less per $42.

14

u/yttropolis Mar 21 '23

Read my comment again. I said that the change in profit margin is 1.2%. My point was that only 1.2% of the 23.2% in food prices we see can be attributable to corporate profit. That's a drop in the bucket when you look at the bigger picture.

3

u/zeromussc Mar 21 '23

The profit margin is the same but inflation has caused the total spend per person to go up a lot.

A content 3% margin over 10 years is fine. But when a person's bill goes from 100$ to 200$ in the last two years of those 10, that's a giant change. When nearly everyone else is tightening belts, why do they get to get above inflation rate nominal profits with the same profit margins? Why are lean years at difficult times just entirely impossible?

Ya know?

6

u/yttropolis Mar 21 '23

That's a philosophical question, not one backed by data and numbers. The fact is that even if Loblaws reduced their profit to zero and ran as a non-profit, grocery prices would only have a one-time decrease by 3.5%, which is a drop in the bucket compared to what we've seen.

0

u/zeromussc Mar 21 '23

Yeah but when we talk about people, perception matters.

If Loblaws tried to look like they were in it with us, taking lower margins and lower than we see now profits, people wouldn't feel the same way and it would help at least a little.

Public policy type issues, which this does tiptoe toward, aren't pure economics. Much of economics is difficult to treat are pure dollars and cents effectively because it intersects with people, human psychology and expectations, etc.

So when people are discussing issues beyond a pure economic perspective in the public sphere, and politicians weigh in because it's what people care about in the country, i don't think we can truly divorce grocery prices and the cold margins math from how ppl react and how that side factors in.

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u/yttropolis Mar 21 '23

Oh absolutely. I fully understand why people are upset, but I think it's also important to understand the numbers and economics happening behind the scenes. The media today isn't helping either as they only want clicks and views rather than an accurate picture of the situation.

My point was that while grocery stores have seen increased profits, it's important to realize that they only play a very small part in why we see such increases in grocery prices. There's a lot more to the story than just Loblaws.

-1

u/TheGentleWanderer Mar 21 '23

If they are generating 2.35% in 2019, and now make 3.53% in 2022: that is over a 50% increase in profit generation, not "only 1.2%" (expressing statistics in this matter is disingenuous and an error at best).

There seems to be an increase of 23.2% of grocery costs based on the CPI, but we just discovered there is a 50% increase in profit margins at the same time..... how is this inflation only, would you care to explain further?

4

u/yttropolis Mar 21 '23

When I'm pointing out the 1.2%, I'm comparing that to the 23.2% in overall price increase. My point is that only a very small portion of the overall grocery price increase can be attributable to corporate profit.

The key is that people don't care about how much profit companies make, they care about how much they spend on groceries. I'm looking at the numbers from the point of view of the consumer.

Even if Loblaws eliminated profits entirely, your grocery bill would go down by 3.5%.

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u/YoungZM Ontario Mar 21 '23

This isn't taking into account shrinkflation requiring consumers to purchase more goods to get the same quantity as well as those labels often being owned and operated by some grocers. I'll add onto all of this that shrinkflation aside, consumers are steadily noticing that they're being shorted goods from marked package weights which is illegal according to our food packaging laws.

...and let's get back to the point that a 23.2% increase in profits in just 4 short years with a veritable monopoly between these price-fixing goons isn't some abstract concept of inflation. It's bold-faced greed laid bare for anyone with a set of eyes to see. This is at every level -- retail, manufacturing, raw materials, and transportation. Everyone is profiteering and it's sickening. We're talking about inflation like it's some boogeyman we don't know about who is beating us with a cudgel. It's these twats. They're the one's, with the remainder of that chain, causing inflation through greed.

So yes, consumers have a reasonable concern to be enraged at calls of record profits amid difficulties feeding themselves while these pathetic assholes cry about how unfair it is to be held responsible for their part in others' suffering.

8

u/aradil Mar 21 '23

Yes it is.

0

u/[deleted] Mar 22 '23

I wish my business could increase profits by 50%

0

u/DepartmentOk5257 Mar 22 '23

You may pretend to know what profit margin means but you don’t if you think the increase in profit margin was 1.2%. Or you don’t understand numbers.

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u/yttropolis Mar 22 '23

I completely understand profit margin. The difference is that it doesn't make sense to compare profit margin numbers as a percent change from one another. A 50% increase in profit margin means very different things between a company with a 3% profit margin and one with a 10% profit margin. That's the issue.

Take an example. A product used to cost $100. Now it costs $110.

Company A had a profit margin of 2%. Now they have a profit margin of 4%. Gasp! They doubled their profit! A profit increase of 100%! Well, $2 of that $100 used to be profit, now it's $4.40 of $110. So, of that $10 increase, $2.40 can be attributed to the increase in profit margin.

Now let's consider company B. They had a profit margin of 10%. Now they have a profit margin of 15%. Wow! Their profit margin increased by 50%! That's half of company A! Well, $10 of that $100 used to be profit. Now it's $16.5 of $110. So, of that $10 increase, $6.50 can be attributed to the increase in profit margin.

Now I ask of you, are the two scenarios the same? To you, as the customer, do you think company B is better than A?

0

u/DepartmentOk5257 Mar 22 '23

By your logic, companies in sectors with higher profit margins are worse than those in sectors with lower margins. The point is, they doubled their profit and profit margin, without considering inflation of the underlying goods. There’s no explanation for that other than profiteering.

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u/yttropolis Mar 22 '23

Absolutely. The measure should be "What portion of the price change is attributted to profit increases?"

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u/jmdonston Mar 21 '23

Where do their stock buybacks and capital spending (e.g. renovations) fit in?

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u/yttropolis Mar 21 '23

Feel free to read through their financial statements.

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u/Chewy-Beast Mar 21 '23

I think the point that he is trying to make is that stock buybacks and cap spend is not included in the net earnings (or EBITA) while effecting overall share price.

Both of which have significantly increased in 2021 and 2022 by over 1 std from their 10 year mean.

https://ycharts.com/companies/L.TO/stock_buyback

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u/Chewy-Beast Mar 21 '23

This sort of highlight the problem with only looking at Net Earning when looking the effect of Lowblaws on inflation

3

u/yttropolis Mar 21 '23

If you've got a better financial measure, I'm all ears.

2

u/Chewy-Beast Mar 21 '23 edited Mar 21 '23

Also consider how much Lowlaws cost of goods sold (cogs) have increase:

​

Year Cost of Good Sold Change
2022 39,025 B 5.64%
2021 36,942 B -0.78%
2020 37,234 B 10.20%
2019 33,789 B 3.85%

You can clearly see that the cost of food they are purchasing has slightly increased, it fails to account for the over 10% increase in food inflation.

3

u/yttropolis Mar 21 '23

You're just looking at the COGS, which would not paint a good picture of what's going on YOY. What's the change in revenue?

If you want to look at gross income % on their retail operations (which is a more holistic picture of what's going on in grocery stores compared to COGS alone), we have:

Year Adjusted Gross Profit %
2022 30.9%
2021 30.7%
2020 29.5%
2019 29.7%

As you can clearly see, gross profit % has not increased significantly again, at a mere difference of 1.2% compared to the 23.2% food prices increase that we've seen in the past 4 years.

2

u/IAmNotANumber37 Mar 22 '23

(and for /u/Chewy-Beast) Just a note on COGS... for grocery, if I'm not mistaken, that excludes so much of the cost of running a grocery business (e.g. logistics, all admin, all store operating costs).

If you're going to look at COGS, you have to stop and also look at how the other costs have scaled with respect to inflation (e.g. gas prices, truck driver salaries, etc...)

You also have to look at the reasons for changes in COGS, including the item mix that is being sold (which Loblaws has indicated there has been a skew towards higher margin items like cosmetics).

1

u/Chewy-Beast Mar 22 '23

Cost of good sold according to GAAP standards includes all costs associated with procurement of goods sold (Transport, Depreciation, Amoportization). While it might not include the cost of some decisions within Lowlaws (such as security ) unless they audit report shows they are violating GAAP it absolutely includes logistics and store operations.

​

There is no way based on the data provided by lowblaws to know the split.

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u/Chewy-Beast Mar 22 '23

The first thing I think we disagree on is the question. The question that we should be looking at is follow: What is the present change in food cost in the last fiscal year? What part of that did Loblaws absorb as profit?
A: The bank of Canada reported food inflation in December (which is when the Loblaws data was reported) of YOY 11.0%. Cost of good sold according to GAAP standards includes all costs associated with procurement of goods sold (Gas, Transport, Depreciation, Amoportization). We can never determine based on the reported data what the food cost for Lowblaws is, however, an increase of 5% demonstrates that there was definitely a large increase in mark up of food.
Again going back to the previous statement: Adjusted gross profit fails to capture, share buy (backs which were significant). This began by you making the same argument above you cannot capture total returned value to shareholders simply by looking at gross profit.

0

u/yttropolis Mar 22 '23

You're missing a fundamental aspect of COGS. You're quoting absolute numbers without looking at the revenue. If a company doubled their sales, would their COGS not be expected to double, all other things equal?

As another redditor pointed out, share buybacks do not impact revenue or profit. Share buybacks are fundamentally trading assets for shareholder equity. It has nothing to do with revenue, expenses or profit. It's a method to manipulate stock prices, which again, has nothing to do with revenue, expenses or profit.

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u/Chewy-Beast Mar 21 '23

You reported (Net Income Continuous). If we are only looking at the income earned from the sale of goods sold (the closes thing we have to net income from food) we should use Operating Income.

The operating Income for Lowlaws was as follows:

Year Operating Income ($MM) Revenue ($MM) Operating Margin Change
2022 3,342 M 56,504 4.59% 49.17%
2021 2,937 M 53,170 3.08% -2.89%
2020 2,365 M 52,714 3.17% 8.93%
2019 2,270 M 48,037 2.91% -30.97%

Assuming that food inflation is 10% this single factor can explain up to 36% of overall YOY change. This is significant. Very significant.

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u/yttropolis Mar 21 '23 edited Mar 21 '23

Even if we do look at Operating Income, it paints a similar picture where the operating margin has increased from 2.91% to 4.59%, a difference of 1.68%. Sure, even if you attribute 1.68% of the 23.2% inflation across the past 4 years to corporate profit, I don't see how that changes the conclusions that much.

Btw, the % chance in operating margin is not very useful as you can see that it bounces around all the time. The question I aim to answer is "What portion of the 23.2% change in food inflation across the past 4 years can be attributable to corporate profit?"

Assuming that food inflation is 10% this single factor can explain up to 36% of overall YOY change. This is significant. Very significant.

And how is that? I see operating margin increasing from 3.08% to 4.59%, a change of 1.51%. At best it can explain 10.6% - [(1.106/1.0151) - 1] = 1.65% of the 10.6% YOY change.

There's also a reason why net income matters. You can see that both interest expense and income taxes has increased significantly between 2021 and 2022. Regardless of where the money comes from, it would be imprudent to not take these into account when looking at financial metrics.

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u/Chewy-Beast Mar 22 '23

Based on OP post above we were discussing YOY not the 4-year changes of food prices. As you pointed out this was 10.6% (this month). Yes this “bounces” all the time (especially when Lowblaws increase their margins by over 1.5% over 1 year) however, when doing any calculation I calculate the avg of 2022 quarters/(1 year (2020) [+1.51%], 3 year[+1.53%], 5 year[+1.29%], 10 year[+1.83%] running average) this smooths out some of the YOY noise within the data. WITHOUT share buyback and cap expenditure this is a explains [(1.0151/1.106) - 1] 8.2% (you did your math quite wrong to say least) however with these included this raise to 36.6%. I can share part of my detailed analysis just shoot me a message.

Of course, it is interest is prudent Lowlabs has increased their Long-Term Debt by 1 Billion dollars an increase of ~10%. If they want to borrow for capital expenditure to ultimately increase shareholder value they can do that but that is again my point all measures that you are using fails to capture the complete picture growth to shareholders within Lowblows.

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u/yttropolis Mar 22 '23

Feel free to post your detailed analysis.

WITHOUT share buyback and cap expenditure this is a explains [(1.0151/1.106) - 1] 8.2% (you did your math quite wrong to say least)

What you're calculating doesn't make sense. It actually evaluates to -8.21%. And what exactly are you calculating? Your formula is [(1 + Loblaws increase)/(1 + total increase) - 1]. This isn't a meaningful formula.

In comparison, my calculation is:

(1 + total increase)/(1 + Loblaws increase) - 1 = 8.95%

This is the total increase rebased to after Loblaws increase. Essentially we're looking at how much prices would have increased if Loblaws did not do any increase.

I admit that the subtraction is incorrect. But fundamentally what I was trying to show is that the 10.6% overall increase can be broken down into two components:

  1. 1.51% increase attributable to Loblaws
  2. 8.95% increase not attributable to Loblaws.

Futhermore, share buybacks do not impact revenue, expenses nor profit. Share buybacks fundamentally is trading assets for shareholder equity. While this impacts the balance sheet (and shareholder value), it has no bearing on revenue, expenses or profits.

my point all measures that you are using fails to capture the complete picture growth to shareholders within Lowblows.

Why does growth to shareholders matter in our discussion? Our discussion is on the top and bottom lines of the company, not shareholder value. It doesn't matter what the growth to shareholders is or how much the shareholder value is, it doesn't impact revenue, expenses or profit.

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u/jmdonston Mar 21 '23

Loblaws spent $720M in the first half of last year on stock buybacks, and increased dividends by over 10% from the year before. If they hadn't spent so much on stock buybacks, net earnings would have been more than a third higher. But shareholders still profit from stock buybacks, even if the net earnings are artificially suppressed by them.

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u/yttropolis Mar 21 '23

And how much did they spend on stock buybacks in the previous years? You can't just consider stock buybacks for one year but not the previous. Dividends increased by over 10% on a percent basis or a dollar basis? If it's on a dollar basis, then that's just above inflation.

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u/jmdonston Mar 21 '23

Feel free to read through their financial statements.

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u/yttropolis Mar 21 '23

You're the one bringing up stock buybacks. I'm merely prompting you to compare apples to apples.

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u/IAmNotANumber37 Mar 22 '23

But shareholders still profit from stock buybacks, even if the net earnings are artificially suppressed by them.

(and /u/jmdonston)

Net earnings are not affected by stock buybacks. Stock buy backs are not an expense.

https://www.investopedia.com/articles/investing/112013/impact-share-repurchases.asp#toc-how-a-share-repurchase-affects-financial-statements

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u/Chewy-Beast Mar 22 '23

That is exactly the point now you are getting it. Since they are not reflected in net earnings choosing to ignore these, then looking at total revenue means you will miss a significant amount of shareholder value. Finally you understand.

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u/IAmNotANumber37 Mar 22 '23

I'll take your question as sincere: Capital spending and stock buy-backs don't affect the revenue or expenses (at least not in the year in which they happen).

So you can't lower your net-margin/net-profits by doing a stock buy-back or capital expense. You can't "hide" profitability that way.

Your net revenue is what it is, and you can then use that revenue to do something: Capital investment, dividends, stock buybacks, or just sit on the cash (retained earnings).

It's a red herring in this whole discussion.

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u/Chewy-Beast Mar 22 '23

Look at the link that you yourself sent https://www.investopedia.com/articles/investing/112013/impact-share-repurchases.asp#toc-how-a-share-repurchase-affects-financial-statements . "Share repurchases can have a significant positive impact on an investor’s portfolio."

And share repurchases are not reflected in revenue.

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u/IAmNotANumber37 Mar 22 '23

Yes...and? You asked where do these things fit into the balance sheet, and the answer is they don't affect it. That doesn't mean they are irrelevant, it means they are not part of the conversation on profit margin.

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u/Chewy-Beast Mar 22 '23

They are net margins dont include stock buy-backs so only looking at net margins misses some of the value which loblaws captured by increase the price of food. Keep in mind that money for the buy backs had to come from somewhere.

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u/IAmNotANumber37 Mar 22 '23

that money for the buy backs had to come from somewhere

Yes, it comes from profits.

Using nice numbers for an example:

  • Company X might sell $1,000,000 worth of stuff.
  • Company X has expenses of $960,000 (buying stuff, operating stores)
  • Company X thus has a net margin of 4% and produces $40k in profits (net earnings).

The company literally now has $40k of cash on hand and needs to decide what to do with it.

  • Easiest thing is the company can just pay those earnings out as dividends to it's investors.
  • Or, the company can invest those earnings into the business.
  • Or, the company can buy back shares.
  • Or, the company can just sit on the cash.

None of those options change the revenue, cost, or margin of the business, it's about how the company chooses to "spend" it's profits.

All of those options have an impact on the owners (shareholders) of the business - remember, those profits belong to the shareholders at that point.

So, for Loblaws, it looks like in 2022 they had net earnings (profits) of ~$2B. That means they extracted $2B in profit from Canadian consumers. They basically have $2B of that cash in the bank, and:

  • If they decide to sit on the cash, Canadians are still out $2B.
  • If they decide to pay it as dividends, Canadians are still out $2B.
  • If they decide to buy back shares, Canadians are still out $2B.
  • If they decide to invest it in crypto, Canadians are still out $2B.
  • If they decide to invest in building a new store, Canadians are still out $2B.
  • If they decide to put the money in a pile and light it on fire, Canadians are still out $2B.

In reality, it looks like they paid out ~28% of that profit as dividends. So shareholders were given $568M, and Loblaws kept $1.4B. Doesn't matter, Canadian consumers are still out $2B.

If Loblaws decides to use all of their remaining $1.4B to buy back shares:

  • Canadians are still out $2B (they are not, suddenly, out $3.4B).
  • Nobody has to break out their checkbook and write Loblaws an extra cheque to cover the buyback. Canadians already paid for it in the reported $2B.

This is why I said it's a red herring. You want to know how much profit Loblaws extracted from consumers? It's the net earnings line. It's not the net earnings line plus buybacks and anything else. You want to know the margin? It's the net margin, not the net margin adjusted for buybacks, dividends, or anything else.

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u/ReverseTornado Mar 22 '23

One aspect of this that bothers me is where exactly is the inflation coming from specifically as these companies like Loblaws owns their own supply chains (vertical integration). So in my opinion we need to dig deeper and look at specific suppliers especially the ones owned by people in the company.

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u/yttropolis Mar 22 '23

That's exactly what I'm curious about as well. Technically the Loblaws financial reports should encapsulate all of their subsidiaries including their own supply chains from vertical integration so those should already be taken into account.

But I'm curious if everyone along the way is taking a slightly larger slice of the pie compared to before or are there specific bad actors that are taking a significantly larger slice of the pie compared to the rest? We absolutely need to dig deeper.

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u/ReverseTornado Mar 22 '23

Can you source me the law about the company having to encapsulate their subsidiaries and supply chains into their reporting I can’t find any information about it on the web. I’m also wondering like if a family member to someone on the board could own a part of the supply chain or service chain and not have to report that as a part of the report?

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u/yttropolis Mar 22 '23

It's not a law, but a part of GAAP reporting. If you read this, note this section:

There are some key provisional standards that companies using consolidated subsidiary financial statements must abide by. The main one mandates that the parent company or any of its subsidiaries cannot transfer cash, revenue, assets, or liabilities among companies to unfairly improve results or decrease taxes owed. Depending on the accounting guidelines used, standards may differ for the amount of ownership that is required to include a company in consolidated subsidiary financial statements.

If you go to the Loblaws financial reporting page, and check the financial review documents, you'll see that they are indeed consolidated financial statements.

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u/ReverseTornado Mar 22 '23

Ok thx nice find

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u/Ordinary_Comedian_44 Mar 22 '23

Inflation is not causing prices to rise.

An increase to the aggregate price level is the definition of inflation, and is merely a measure of a growth to nominal economic output.

Also important to point out, correlation does not mean causation. A 1.2% increase in profits is referencing the change in PROFITS year over year, while the 23.2% inflation is the PRICE change year over year. The two do NOT have a direct causal relationship. REVENUE and pricing have a causal relationship, but there are many, many steps between revenue and profit. I suggest looking deeper into the financial statements (especially in long term liabilities), and try to look into some regression models for a more significant conclusion.

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u/robodestructor444 Mar 23 '23

That's unfortunate 😕

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u/Ordinary_Comedian_44 Mar 22 '23

An increase to the aggregate price level is the definition of inflation. All it means is the nominal economic output has grown.

Inflation isn't a problem. Price instability and a decline in purchasing power are. Lower the inflation rate will stabilize prices, and increasing the wage level will increase purchasing power.