Grocery bills get higher as food industry costs soar

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A staggering combination of labour shortages, poor harvests and congested ports is driving price increases and product shortages across the Canadian food industry, two of the country’s largest supermarket chains said Wednesday.

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Loblaw Cos. Ltd. and Metro Inc. both gave quarterly updates on Wednesday as Statistics Canada reported a  year-over-year increase of 4.7 per cent in the Consumer Price Index in October, the steepest rise since February 2003. The price of beef jumped 14 per cent and bacon rose 20.2 per cent, though food prices overall were up a more modest 3.8 per cent.

Loblaw — Canada’s largest food and drug chain — said its internal gauge on inflation is trending even higher than the CPI. Chief financial officer Richard Dufresne said suppliers have been trying to negotiate higher prices for their products since the summer to offset major cost increases at the manufacturing level.

“We work hard to negotiate those increases down so that we offer our customers the best value,” he said, adding that products in the centre aisles are where consumers are seeing the biggest hikes, since the steep rise in meat prices “stabilized” recently. “We are paying a lot of attention to cost inflation.”

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Food makers, as one lobbyist put it, say “everything” they do has become more expensive.

“We cannot absorb these significant incremental costs, so we’re having to pass those on to the retailer, who is then, in turn, passing them onto the consumer,” said Michael Graydon, chief executive at Food, Health and Consumer Products of Canada (FHCP), which represents manufacturers.

We cannot absorb these significant incremental costs, so we’re having to pass those on to the retailer, who is then, in turn, passing them onto the consumer

Michael Graydon

Factories are being forced to offer higher wages to combat an industry-wide labour shortage, while drought and wildfires across western North America this summer drove down crop yields. Meanwhile, tightened supplies drove up the cost of commodities, from canola to beef.

Suppliers are also struggling to get crucial inputs, including packaging, due to supply chain complications and congested ports, which have only been made worse by the recent flooding and mudslides in British Columbia.

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Both Loblaw and Metro said the problems mean certain products have been put “on allocation” — an industry term that means manufacturers allocate a portion of their dwindling supplies to each retailer, rather than filling full orders.

Many of the shortages are in what Loblaw referred to as “peripheral” product types, typically a brand’s secondary flavours or packaging sizes, something that was seen earlier in the pandemic. Manufacturers try to stay on top of demand surges by cutting back production on certain products, including Cool Ranch Doritos , in order to devote their limited resources to making more of their most popular products.

“What consumers will be frustrated to see is something’s in stock for a week, and then it’s out of stock for four or five weeks, then it comes in stock again and then it goes out. That’s really the consequence of this allocation approach,” Loblaw president Galen Weston said on a call with analysts. “We need to work hard to make sure we’re getting our share of the allocation, and I think we are.”

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Loblaw — which owns Real Canadian Superstore, Shoppers Drug Mart and No Frills, among other banners — booked quarterly net earnings of $488 million on revenues of $16.1 billion in the 16 weeks ended Oct. 9.

Its results were better than expected, RBC Capital Markets analyst Irene Nattel said in a note to clients, “with solid top-line performance and sustained gross margin gains.”

Loblaw’s same-store sales in food retail — a measurement of year-over-year performance in retail — were up 0.2 per cent, a considerable feat since public health restrictions on restaurants last year were driving more people to buy groceries and cook at home. Loblaw said the “higher industry inflation levels” in the latest quarter helped offset lower eat-at-home trends.

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Higher inflation also means the shoppers who stopped going to discount banners during the pandemic are likely to return, Weston said.

At the height of the pandemic, it made more sense for consumers to shop once a week at a full-service banner, such as Loblaws, rather than No Frills. Though not at pre-pandemic levels, discount is starting to make a comeback, Weston said, “a trend we expect to continue as inflation is showing up in many aspects of our lives.”

Metro chief executive Eric La Flèche said continued inflation means shoppers will start “trading down” — choosing the cheaper cut of meat, picking frozen over fresh, or the store brand over the name brand.

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“If inflation is the story for a long period of time, it can happen,” he said, adding that his teams haven’t been able to put specific cuts of meat on promotion because such sales wouldn’t be attractive. “We hope to keep our margin rates healthy and we do the best that we can, but there’s clearly inflation out there and we want to stay very competitive.”

Fourth-quarter sales at Metro, which also includes the Jean Coutu pharmacies, were $4.1 billion, a year-over-year decline of 1.2 per cent, which the company blamed on “exceptionally strong sales last year due to the pandemic.” Sales were up six per cent compared to the same quarter in 2019.

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