Profit gains amid inflation: unsavoury price gouging or brilliant brand management?

While investors are happy with Loblaw, Empire and Metro's recent earnings, customers and suppliers are paying the price. Literally.

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By Will Novosedlik

This year’s Q1 results have come in, and for Canada’s big retailers and their shareholders, the news is nothing but good.

Canadian Tire Corp. reported a revenue bump of 15.66% year-over-year. Sales specifically at CT stores were up 4.5%, Mark’s was up 17%, and SportChek saw a gain of 10.2%. As a result, the company raised its quarterly dividend by 25%.

Over in the grocery aisle, Metro delivered a 5.3% rise in net earnings while Empire Co. saw a 15.4% increase. But the biggest jump came out of Loblaws, which blew the doors off its 2021 first quarter results with a 40% bump in Q1 2022 profitability.

While investors are happy, customers and suppliers are paying the price. Literally.

According to Toronto Star, the big elephant in the room during Loblaws’ quarterly analysts call was price gouging. No one said it out loud during the call, but the article noted that Canadians for Tax Fairness (CTF) called Loblaws’ profit gains “just one more piece of evidence that one of the major drivers of inflation is corporations raising prices.”

As a result, both the CTF and the Canadian Centre for Policy Alternatives have been pushing for tougher regulatory rules on grocery pricing, as well as taxes on “excess profits.”

The bump in sales is partly attributed to the relaxation of pandemic mandates. People have built up savings over the last two years so now there is a desire/pressure to spend. There is pent-up demand for getting out of the house to do some real bricks-and-mortar shopping, now that mask mandates have been lifted. But that doesn’t explain the dramatic lift in Loblaws’ profits.

When asked what could have driven profit so high, Loblaws attributed it to gains in its pharmacy division, where sales were up 5.4% and where the margins are much higher than at its grocery banners. But that hardly explains 40%.

Doug Stephens, CEO of consultancy Retail Prophet, considers the problem: “There are only so many levers that a business has at its disposal to deliver profit. We saw a 2% increase in topline sales at Loblaws and a 5.4% jump at Shoppers. Those two numbers alone are not enough to drive a 40% lift, so we need to look at the nature of those sales,” he says.

“One [factor driving the lift] might be the shift to private label, which has higher margins than the national brands. Another might be the shift to cheaper banners like No Frills and Maxi (accountable for 60% of grocery sales at Loblaws), where you can buy many of the same products in a selling environment that has much lower operating costs,” adds Stephens. “Then there are the services provided by Shoppers, which also contribute to higher margins. For example, Covid vaccinations alone would probably have delivered almost pure profit, given how much Shoppers would have been able to recoup in OHIP reimbursements. And going to Shoppers for a shot would drive greater foot traffic through the rest of the store.”

Stephens also considers the cost of goods: “I’m not sure Loblaws can honestly say that price increases were a necessary result of higher prices from its vendors. Look at the standoff they just had with Frito-Lay. They’re pushing back hard. And given their size and prominence, they can get away with it.”

The consultant goes on to say that there have also been less expenses. Take the shift from online sales back to bricks and mortar. “When you buy things online at Loblaws, you’re basically being charged the same amount that you would be charged if you were to go into the store,” says Stephens. “The difference is that every single one of those online orders needed to be handpicked and packaged. You need staff to do that. Now that people are returning to the store, you don’t need the extra hands so you can squeeze out a little more profit.”

Peter Rodriguez, founder of consultancy Brand Igniter, commends retailers for their recent gains, saying that “the main driver for price setting and inflation is not cost. The driver is how much people are willing to pay. If people believe that my brand is better, for any reason, either as a discount banner or a premium banner, then I will charge more. I don’t see anything wrong with that. On the contrary, I applaud it as a business strategy.”

Stephens agrees: “If you are a marketer at Loblaws you’d be crazy if you weren’t trying to capitalize on some of the brand recognition and equity you have in the marketplace.”

Perceived value may also explain the difference between Loblaws’ higher results and those of its competitors. David Kincaid, founder of Level5 Strategy believes that “Loblaws has built a very strong house brand with PC. It’s highly regarded by customers. That brand strength creates more of an opportunity for price elasticity. That needs to be underlined.”

These comments point to the importance of brand perception. On one hand, higher perceived value affords the brand owner greater leverage over both pricing and costs. People are willing to pay more and the brand can demand lower prices from its suppliers, driving up profit. Both Rodriguez and Kincaid would call this good brand and operational management.

On the other hand, consumer perception is also driven by inflation. They’re seeing it everywhere, at the gas pump as well as the grocery store, and when they’re surrounded by it, it’s natural to feel like they’re being taken to the cleaners. All of the operational levers mentioned above are below their radar.

“It’s not a problem that marketing communications can solve,” says Stephens. “But it will keep your PR team up at night.”