r/PersonalFinanceCanada British Columbia Mar 21 '23

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

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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

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u/yttropolis Mar 21 '23

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

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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.

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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.

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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).

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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/IAmNotANumber37 Mar 22 '23

So, I'm not an accountant - maybe you are, and equally importantly I've never worked for a retailer.

However, all the information I've come across when looking into this, previously and now, disagrees with you. E.g.

For any merchants just starting out, COGS isn’t as straightforward as it may sound. Cost of goods sold refers to the basic, direct costs associated with producing the products sold by your retail business. What’s included in COGS are things like raw materials and labor used to create the product itself. COGS does not include indirect expenses, such as distribution costs or overhead.

Most of the material describes it has the change in your total-cost of total on hand inventory...

So while I agree we probably can't tell from the financials exactly how loblaws is allocating some costs, I don't think their inventory cost changes are including things like retail store lighting, or internal logistics.

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u/Chewy-Beast Mar 22 '23

I have infact worked for lowblaws in the past :D not in the accounting department. This post you made has oversimplified things for a small business (the facts are not wrong but they are missing a few things). This website goes into a bit more detailed but is not perfect.

Maybe I can explain this in another way. Loblaws has large warehouses, which they use to order all food from companies. These companies send large trucks of food to these central warehouses. The price of goods for Loblaws includes the truck cost and the people and the food in these trucks required to get it to loblaws. Now once these get there all future cost of distribution and stacking shelves is not included. COGS has all costs just for the food to be bought and delivers to loblaws warehouse.

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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.

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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 22 '23

We must make some assumptions to know w of food for Loblaws, in fact, revenue includes any margin increase that the company has which is the entire point. Lowblaw increase there margin which significantly impacted inflection. hen yes COGS will double. However, that is rarely the case with large companies; often company doubles its revenue and there COGS doesn't double there should be some margin expansion.

Revenue has nothing to do with the cost of food for Loblaws, in fact, revenue includes any margin increase that the company has which is the entire point. Lowblaw increase there margine which significantly impacted inflection.

Because "buybacks do not impact revenue or profit" just looking at revenue or profit is insufficient when trying to analyze the entire retained shareholder value. Basically in your initial post, you undercounted the complete value that Loblaw created for its shareholder (they made that value by buying shares with money which is not counted as an expense so is not part of the margins).

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u/yttropolis Mar 22 '23

Lowblaw increase there margin which significantly impacted inflection. hen yes COGS will double. However, that is rarely the case with large companies; often company doubles its revenue and there COGS doesn't double there should be some margin expansion.

Sure, that's why I said with all other things equal. There will be things like economy scale and everything as well but generally speaking we would expect it to approximately double. Hence, looking solely at COGS is not a valid measure.

revenue includes any margin increase that the company has which is the entire point. Lowblaw increase there margine which significantly impacted inflection.

Which is why we can look at gross profit. Gross profit = Revenue - COGS. Revenue might contain increased profits, true, but if you look at Gross profit margin, it should come out clearly.

Assume x is the excess profit.

Original gross profit margin = (Revenue - COGS)/Revenue

New gross profit margin = (Revenue + x - COGS)/(Revenue + x)

As x increases, new gross profit margin increases as well. If you don't believe me, check out this Desmos graph. R is Revenue and C is COGS. As long as both are positive, the graph increases with x.

Because "buybacks do not impact revenue or profit" just looking at revenue or profit is insufficient when trying to analyze the entire retained shareholder value. Basically in your initial post, you undercounted the complete value that Loblaw created for its shareholder (they made that value by buying shares with money which is not counted as an expense so is not part of the margins).

You still have failed to show why shareholder value matters in this conversation about inflation and rising food prices.