Podcast: What causes grocery prices to rise?

Clinton: (00:07)
From Canadian Food Focus, this is Ask a Farmer. I’m your host Clinton Monchuk, a Saskatchewan farmer. In this podcast, we talk to food experts to answer your questions about your food.

Clinton Monchuk: (00:27)
Today we’re going to be talking a little bit about food inflation and how it affects your grocery bill. When we go to the grocery store, what we’re paying for food has increased over the past few years, especially in a post covid type of an environment. When we look at food inflation, it’s topped up over 10% and it’s slowly coming down. But like I mentioned, I think every family is kind of feeling a little bit of a pinch when they go to the grocery store. John Scott is with us today. He’s going to talk a little bit about why some of these price increases exist, some of the changes in grocery stores and consumer trends that are happening within the grocery sector. Do you want to give the listeners just a little bit of an overview of your background in your experience within the grocery retail sector?

John F.T. Scott: (01:16)
Sure Clinton, no problem. I’m one of those strange people who studied food distribution while, uh, working in economics at university. So I’ve been looking at food distribution my entire career. Everything from how grocery stores operate to how, uh, distribution patterns emerge between manufacturers, distributors and stores over the years. You tend to get reasonably good at something. And I was invited to be the CEO of Canadian Federation of Independent Grocers. I held that role for a very long time, for almost 25 years. Really enjoyed it. Retired a few years ago, and now I sit on some boards in this sector. I don’t consult, but I will go and into stores and give people a perspective on what I think is going on. I love to analyze trends, particularly consumer trends, and people are very good at giving me data, both our own stores and elsewhere. And so we’re able to take that data and look at what’s going on in the stores and see what’s happening. So that’s kind of what I do. It’s partly a career and partly a labor of love, a hobby, if you will.

Clinton Monchuk: (02:27)
I always view you, John Scott as the guru of grocery retail, that if there is something to learn around this, it is from you.

John F.T. Scott: (02:37)
Well, thank you for that. The key is to, you know, for everything just to keep on top of what’s going on, because the sector, Clinton really is devoted to one thing, and that’s satisfying or delighting the consumer, and people often miss that. But that really is, everybody that’s in the business has to do that. And, it’s not an easy thing to do, but for example, a grocery store that opened this morning has to look exactly the same or better tomorrow. Think about that, every day. And now they’re open seven days a week In most places, they have to look exactly or better than they were today, and the consumer expects that to happen. I mean, the reality is I need to insert new consumer trends as I am changing the protocols for my store tomorrow. And that store still has to look great, even though I’ve integrated new offerings to go with the trends that are apparent. People think it’s a sleepy industry because it’s always there, but it’s the most fast-paced industry you could possibly imagine.

Clinton Monchuk: (03:48)
Consumers are feeling a little bit more of this pinch when it comes to the grocery store, and I do about half of the grocery shopping in our family, and we have a family of four. I’m feeling that it’s probably in that range of a 15 to 20% increase. And I’m kind of curious, do we know why this increase has happened and like what are some of the factors that are affecting the higher price of, of grocery items, whether it’s food, uh, well, predominantly food that we’re buying in the, in the grocery stores?

John F.T. Scott: (04:19)
Yeah. Okay, so it’s, it’s a very multifaceted answer. I mean, there’s a quick answer. It’s, uh, that, you know, just like on your farm, Clinton, input costs have gone up significantly in the last few years, particularly post-Covid. And it’s no different in grocery retail. You know, the cost of delivering product from the farm gate to the processor or distributor, the cost to go from the processor to distributor or from the distributor directly to the retailer and the retailer handling the product at the store. Those costs are just simply there. Let me back up and give you a more wholesome or more fulsome answer. From my perspective, when Covid started, the grocery industry was actually losing market share to what we call like the restaurants–basically, food service. And the grocery industry was working very hard to mitigate that trend. And you may have noticed at that time there were a lot of places within a store that offered meals and meals to go, meals to take home, or even restaurants within the stores.

John F.T. Scott: (05:26)
And that’s where we were going when Covid hit. The expectation of the consumer was that all grocery stores would have all products, but every time you take a store and you move it into a a restaurant type of factory, you add that in, you’re taking away space. So when a consumer came in during Covid to get basic groceries, they found that there weren’t as many basic groceries to be had. And so the result of that was that the stores had to take out all of that space and bring in product that the consumer was ready to cook at home. Well, you’ll recall at that time that consumers, particularly the young people, really didn’t have a clue how to cook. And, so when they came to the stores to clean us out, they cleaned out frozen pastas, canned goods, basic meats like hamburgers and chicken and stuff that they could cook easily.

John F.T. Scott: (06:29)
And so the manufacturers started to do something and that was retooled. And the retooling was against the easiest, fastest product to get out of the manufacturer to the store and get it out. So you will see a lot of exotic products. Good example is ketchup. The ketchups, the different varieties they had, the spicy and that kind of thing all went away during Covid. And so all the lines were changed and they were producing against a specific base product. Well, coming out of Covid, of course, people have gone back to the stores and looked for those products and they’re not there. The other thing people did during Covid was they learned how to cook and they learned certain things about ingredients, which again, they’ve gone to the stores and they found perhaps the ingredients they’re looking for aren’t there. And so when the retailer has gone back to the manufacturer looking for those items, the manufacturers had to retool again, that’s a cost factor.

John F.T. Scott: (07:33)
And they’ve also had to develop, again, small lines to handle that different type of product. The variety of products that we carried in the stores during Covid would be about 30,000 items, at the peak of Covid. Today in a store, you’d be at 45,000 items. That’s the difference. That’s what you’re adding basically in categories. But each time you do that, you’re adding a cost to the manufacturer end because they’re not manufacturing as much of any one product and then you’re adding the additional, uh, costs that everybody’s used to. So those things have been incredibly huge factors. The secondary factor of course, is that, and you know this being in agriculture, is that if you’re a processor, you’re signing contracts a long way out for your product, whether it’s grains or pulse crops or whatever. You’re signing it a long way out.

John F.T. Scott: (08:31)
And so you as a farmer and I as the, as a manufacturer, are betting on that price is going to be fair six to eight months out, and it may or may not be, but whatever it is, that’s going to dictate the price at retail that I’ve got to sell to the retailer at that time. And of course the retailer gets the product and they have to put the price up. And so that’s been a significant issue and people can look at it this year and say, well, it was a 9% increase overall last year and we’re getting a six to 9% increase this year. And the reason you’re getting that primarily this year, because the retooling took place last year. The reason you’re getting that increase this year is because the lag time–they’ve signed the contracts, they’re manufacturing the product, they’re coming to market. Now, when I get that product at retail, I have to look at that product and say, can I add in the same amount of margin?

John F.T. Scott: (09:25)
Can I get the same markup that I could in the past? And the answer is, I can’t. I can’t do it. I can’t make as much money on anything as I did in 2021 during Covid, which was the highest margin. That was when we peaked in the industry North America wide. I can’t get it. And the reason I can’t get it is because of the competition in the marketplace. Regardless of who you are, you’re up against somebody big. You’re up against somebody big. Their job is to get that price as low as they can. So I’ve got to make sure that my margins give me an ability to be profitable, but at the same time, they have to be competitive. So for example, anybody who is out of a competitive price on eggs, butter, milk flour, peanut butter and bananas is out of business.

John F.T. Scott: (10:22)
You need to be roughly within that competitive price range. So I’ve taken a bath at retail on all of those products. A big guy, because he is getting a bigger, you know, a larger volume, is not taking the same bath that I am. So I’ve ended up as a retailer taking a lower margin as a result of that. So that’s just some of the areas where the cost increases have come. And the reason why Canada’s inflation rate and food is below most of the others in the western world is simply because of that. Those big guys are making sure that the prices are as low as they possibly can be.

Clinton Monchuk: (11:01)
So John, what’s the impact of consumer buying behavior on small stores and some of the specialty products that are out there?

John F.T. Scott: (11:09)
Every store, particularly the smaller stores, need to be different. They need a point of differentiation. So you need to go to X butcher shop for a certain product or you know, a smaller store. And if they don’t have that point of differentiation, they can’t be in business. And so the impact of this has been, it depends on this store you’re speaking about, but by and large, the smaller operations have had to come back and reduce the amount of space for packaged goods. Basically saying packaged goods have basically gone to discount and emphasize, –so you’d always get the number one packaged good, you might pay a little bit more for it–but emphasize their point of differentiation, which primarily is in fresh. A lot of them are moving into whole meal replacement. Uh, most of it at this point in time comes into deli’s, cheeses, bakery and that kind of thing. By the way, baked goods, for whatever reason are going through the charts. If I have any more of them, I’m going to be a blimp! But it’s one of those trends that’s really gone well. But that’s what stores have had to do.

Clinton Monchuk: (12:20)
What are some of those things that grocery stores are doing to ease that purchase or the sticker price on some of the products that they’re buying?

John F.T. Scott: (12:28)
If I look at some stores and I, and you could go to school on, uh, stores called Trader Joe’s in the US, which I’m sure you’ve been to.

Clinton Monchuk: (12:37)
You bet.

John F.T. Scott: (12:38)
Wegmans, Farmboy is primarily in Ontario. All of those stores have done something significantly different than anybody else. That’s they carry very little national brand or even secondary national brand product. All of their product is labeled as their own label on it. And so you really can’t compare. But what you, one thing you can guarantee is that their personal label product is superb. And so they’ve maintained their customer base, but their overall count is down. This is, I don’t want to get too technical on this, but one of the ways we evaluate stores is we take the number of customers in a week, say 26,000 in a week and what the average transaction is. Now, an average transaction has to be everybody from somebody buying a stick of gum to somebody getting a $400 or $500 order in an average transaction. We were running average transactions prior to Covid, I don’t know, around $23.

John F.T. Scott: (13:39)
And last year in the height of Covid, we were running $75 last year. Now we’re running what, $32. So it has kind of moved around a little bit. And so what these stores have been able to do, and their goal is to keep the customers, but they’re losing the dollar value of the transaction. You with me? So they’re losing the packaged goods, they’re losing, if I can get a regular produce somewhere else cheaper, I’m going to do that. But they’re maintaining the customer base. If they keep their point of differentiation, that’s what they’re doing differently. Everybody else, you know, normal stores to cope with inflation and stay competitive are doing all the things you think they’re doing. Changing the packaging manufacturers are, maybe there’s not as much Gatorade in that bottle as there used to be. Certainly aren’t as many chips in that bag. Chip bags are probably a little bit smaller, but oops, same price.

John F.T. Scott: (14:35)
I talked about private label. One of the things we don’t want to see, but we are seeing even in small stores is service reductions, service reductions, man hours against, particularly in departments like meat. And you’ll see a lot of traditional supermarkets going to, meat cut in the, in the manufacturing facility rather than at the store. And that, and that’s been a point of differentiation for other stores to say, no, we’re continuing to cut here. So service reductions. But the best way to determine service reductions is .. and you must notice it yourself. You see the number of self-checkouts that are coming in and how easy they are to operate. Once you put that capital cost in and get it paid for, you can imagine the labor hours you’re getting rid of. And finally, frankly, we’re taking lower profitability. We’re not getting the same net margins that we got. Mid Covid, like I would say 2021 was a banner year for net income in grocery stores. And I would say this year it’s going to be a major league, uh, struggle. So if you’ve got your senior management team on a bonus structure against, uh, a better return this year, they’re probably a little bit worried right now. Not going to happen.

Clinton Monchuk: (15:56)
We’re hearing in the news that people are thinking grocery retailers must be gouging consumers because of the higher prices that they’re seeing in the grocery bills. Is this really true or, or what’s going on here?

John F.T. Scott: (16:10)
Not in my experience. It’s certainly not true. And I can certainly see it in the results because I analyze results all the time and I see them from, some people trust me with them and others are public companies. And the net result we’re seeing is, is a normal shift. What you’re actually seeing is a lower net at the, at the retail store. But people, there are so many other factors that come into it now that people see it, you know, Loblaws shooting a 9% increase quarter over quarter when most of that increase came from non-food, from elsewhere. Right? You need to understand a little bit more than that. So no, I don’t see gouging, but I see misunderstanding in the marketplace. And if I was to criticize the grocery industry, there are poor communicators of what’s really going on. They’ve done a very terrible job of telling consumers what’s really going on.

Clinton Monchuk: (16:59)
I made the comment, and I want to say it was about a year, year and a half ago that I could see the prices on the commodity markets going up. I follow Chicago and, and all the mercantile exchanges when it comes to commodities. And I could see that upward trend with a lot of these different commodities. We had the war going over in Ukraine. But we had some of those retooling like you had mentioned and some of the manufacturing that was causing some, some sticking points. But it was pretty obvious for me as a farmer that the prices of all these ingredients were going up and there was no way that consumers could not feel this in the future. I’m seeing there’s now an upward tick in the commodity prices again. So it kind of went back down after the, the main harvest in North America and the European Union last year. But because of some of those issues in Ukraine, some of the drought situation here in North America, it appears like we could be destined for more inflation. Is that what you’re kind of looking at going forward in the future too? Or is or is some of that retooling already done?

John F.T. Scott: (18:10)
No, no. I agree with that. No, no. I mean, Russia just recently said we’re not going to honor the Odessa agreement again, that had an immediate uptick in commodities. So buying that day, buying a commodity for six months out, uh, I might wait a day or two and see if it settles out. The climate change issues and how that’s affecting agriculture, I should have touched on that. That’s another big one. But especially as we’re our globalization, that’s been a huge, huge impact. Will this continue to go up? We saw prices starting to increase in declining rate. I was just, as I said, I was in Vancouver two weeks ago and we spent a lot of time looking at our pricing structure and some of them were increasing at a declining rate last year. They were increasing at an increasing rate at this time.

John F.T. Scott: (18:59)
Just to give you an idea, with 40,000 items in a supermarket last year, we changed prices on 26,000 of them, and 25,000 were upward. Just to give you a comparison, in 2020, we changed prices on 2000 items. That’s all. So that’s the difference. So I asked our group, are we continuing to see adjustments? And they said, yes, we’re seeing adjustments, but at a declining rate. But the factors you’ve just mentioned are very real and could lend lend a hand to it. It continued to increase. But it’s been a…you know, the consumer’s pretty smart, like very smart. And they’ve made some significant changes with their feet and basically showed us where they’re going to go if these prices are going to go up. And we in turn have turned around and said, well, here’s what we can do. So that’s, that’s kind of where we’ve been at the last little while.

Clinton Monchuk: (19:57)
And you’ve mentioned a little bit about the margin and how tight of a business this is for those of us listening to, uh, the media in the last six months, it seems like there’s been this consolidated effort, and particularly by politicians to hold these grocery retailers accountable for the higher prices. But I think it’s kind of obvious that, you know, when you do a comparison to other countries, even though our prices of food have increased, you know, pretty substantially, it’s still not like it is in say, the United States. And I’ve traveled down there a few times in the last couple years and it feels like the price of food down there is quite a bit higher than here. So what are your comments on, on that? Is it more shock and awe that we see in the media when it comes to the grocery retailers?

John F.T. Scott: (20:51)
I don’t want to take shots of the media, but it’s shock and awe . It’s now there’s abject naivety there. And you certainly–and no disrespect to the government, but you certainly don’t want government starting to interfere in the marketplace. Or you may have something you may not have wished for as a consequence of that. Okay, so let’s talk about that, about overall margins and who’s making lots of money. Let’s look at the big bad Loblaws who just announced their earnings again and they were up some 9%. People say, oh my God, you know, they’ve, they’ve really taken it to us this time. Except for a couple things. One is Loblaws is a huge company and they have a lot of facets and some of their increases are non-food, some of their drugs, some of their financial services and that kind of thing, which again, have had price increases of their own in a different venue. So if you look at the actual food, they’re only up 6%, that’s below the rate of inflation. Wow. Say, well, gee, that puts it a little different spin on it. So they’re not even with their food keeping pace with the inflationary trends that I just discussed. And I can flip over to Empire who own Sobeys, who just had their annual meeting two months ago and they did okay, but again, their results did not keep up with food inflation. And so you say, well, what are they going to do about it? Well, it was very clear that the CEO said they’re going to move to more discount and they’re going to go to more value private label. Those are two weapons that both Loblaws and Sobeys and Metro are using to mitigate some of the costs on consumers.

John F.T. Scott: (22:41)
And again, it’s where consumers are going with their feet. The fact that Empire, Sobeys stood up and said that so definitively at the annual meeting said to me, they’re hurting and they need to know where to go for the long term. What was interesting, Clinton in both of those was in Loblaw’s case where they said they’re going to increase their emphasis on No Name and they already have 65% in discount and Empire increasing their discount and going to value private label. What it said to me was, this isn’t going to be over early. They’re seeing this is going to be a trend out for a period of time. So if I was a smaller operator, I’d be looking at this totally differently in terms of my offering because what they’re saying is, you’ve got to go discount in order to keep yourself level in the marketplace. You’ve got to go discount just to keep yourself level, just to keep that 6% when the actual inflation’s 9% and they’re looking at it for a longer term. So that says to me that the big boys at least think that the inflationary trend may continue for some time.

Clinton Monchuk: (23:56)
So touching on that and the discount kind of, whether it’s the brands or, or more of an emphasis around discount, I’ve seen the rise of the dollar stores, right? So you see them, it seems like every suburb now has, you can throw a stone and hit three of them, right? So are they slowly starting to take some of that market share away from like that? There seems to be always a lot of people when I go into to buy the odd thing here and there is, is that a new trend that’s coming where consumers are saying, you know what? Whether it’s real or perceived, I want to go in there to buy some discounted stuff.

John F.T. Scott: (24:33)
Well, you know, it is great value in certain areas. I mean, they don’t have a full offering, although I’ll tell you the COO of Dollar Stores is one of the most accomplished merchandisers we have in this country. She’s amazing. Everybody would love to have her on board. So I’m not surprised at their growth. I look more at the Costcos and the Walmarts Clinton, that’s where I think they had a formula that tended to work. And it was fueled by Covid because a lot of people went to Costco, got a ton of stuff, threw it down in the basement, and were able to live for several months. We were all locked down and they didn’t have to go out and catch the dreaded bug in the supermarket. And so they learned all about Costco and what you get at Costco.

John F.T. Scott: (25:18)
So, you know, big change there. And that, that was a huge change. And if I look at the growth of Costco or what I call adventure discount. I call it adventure discount because when you walk in, right? I’m sure you go there the odd time, you walk in there, you see on the wall, you see this stuff and you say, gee, I should pick that up. But if you don’t do it, it’s not going to be there next time. So it is kind of an adventure. And then you, you know, you, you do know where you’re going to pick stuff up, but they have benefited greatly from offering. But I would say fair prices, they’re not all discount prices, but fair discount and fair prices have gotten away with that. The same with Walmart. They’ve tried to stick with their discount formula.

John F.T. Scott: (26:04)
Again, they’re more than competitive. I’m not going to comment on the quality that anybody carries, but they’re more than competitive and they’re offering something that consumers are going to embrace. So when people are going to go there, uh, that we call those, we call, by the way, the Walmarts and the Real Canadian Superstores a soft discount, where you can get more than just grocery. You can get other things there. And then you go to the hard discount where there’s no service and everything is rock bottom. You look at… I wish I could take you back two years and take you through a no frills and show you what their mix was there. The mix of President’s Choice against No Name and take you there today and show you the mix and No Name. And you can see that, you know, that’s been a dramatic change. And that’s, remember I said that off the top, is a change in merchandising.

John F.T. Scott: (27:00)
Every day they’ve changed that merchandising from that more sophisticated President’s Choice to No Name, because that’s where the consumer’s going. You know, one thing the consumer learned during Covid, which is a riot, and that was, they learned how to ingredient cook and some of them became great cooks, right? And that’s why we’re not, so we’re not really fighting off the restaurants right now because people really like to cook. They like to eat at home. But one of the things that consumers learned was that it really doesn’t matter about the ingredient. You can buy it at discount or you can buy it at high end. It comes down to basically the cost. You know, a chili pepper is a chili, pepper is a chili pepper, and consumers became very wise on that. So why wouldn’t you go where there’s lowest prices available? So discount is driving a lot of that stuff now. So discount and floor space discount in the private label product available.

Clinton Monchuk: (27:53)
Do you see there’s a little bit of a trend that if people are starting to cook their own food, are they starting to possibly grow some of those, you know, chili peppers or lettuce on their rooftop patio or, or something like that? Or is that not really something that’s happening?

John F.T. Scott: (28:11)
Yeah, it’s, it’s there, but it’s, let’s say it’s inconsequential, but it’s, it’s peripheral to, you know, the central part of our business. But not everybody is. Yeah. But they do, you know this, you know this because you’re a farmer–they do trust you Clinton, they trust you and they trust grocery. Yeah. And neither one of us can abrogate that trust. Yeah. They trust us to have that chili pepper sitting in there and it’s going to be safe and nutritious for them and their family. It’s not a trust to be abrogated. That’s very important. So I don’t, I don’t know if it’s a trend. I think it’s great if people are doing it. Yeah. But I don’t know if it’s a trend. You know, one thing we hear all the time in Canada and people do like the local thing. Yeah. Like big. I live in Niagara On The Lake and you know, right now we’re doing corn and tomatoes and potatoes and you know, it’s, it’s wonderful, right? It’s great stuff. But it’s a harsh winter and you know, we don’t grow stuff in the winter , so we need to be confident of the products we’re getting through the winter from elsewhere around the world. And we trust our grocers to bring them in.

Clinton Monchuk: (29:15)
At this point we can talk about our fun farm fact. And did you know that in 2020, food related charities outnumbered grocery stores by a portion of 4 to 1 and distributed roughly $33 billion worth of food according to an article on the Globe and Mail in October 11, 2021. And it struck me as interesting, first of all, one of the bigger contributors to the food banks and a lot of these charities is the grocery retail sector. But second of all that there is that much need in our country for food.

John F.T. Scott: (29:58)
Tragic, isn’t it? Yeah.

Clinton Monchuk: (29:59)
It is. Yeah. Yeah. It’s, it’s something that, you know, is there and, and I think we have to acknowledge it, but uh, at the same extent, kind of a little sad to indicate that we need to have that, right?

John F.T. Scott: (30:11)
Yeah. It’s quite sobering. And that you don’t know which of your neighbors is needing that support and it might surprise all of us. Yeah. I don’t, I don’t know if there’s a solution to that. I think there’s a lot of tragic societal issues going on right now, but that in particular it’s sad in a country that has so much to offer. And our food products are so amazing. So I’m very pleased that our industry supports it the way they do. I truly am. But it’s unfortunate we have to do that.

Clinton Monchuk: (30:50)
So John, we, we know you’ve been in the grocery retail for decades now and you have the experience of working with the different grocery retailers. What’s one trend that you feel has kind of stuck on for the longest time over all these years?

John F.T. Scott: (31:07)
We have trends in fads and, you know, somebody said that the other day, trying to figure out a fad versus a trend is really a problem. I’ll tell you the trend that has been constant and that is the continued interest in better food. It’s phenomenal. It’s never changed. And the consumer has been driving for that. They’ve driven the industry, they’ve driven the industry to change. Do you remember when Kraft had to change all their processes? Remember? To get the color out of Kraft dinner and all of that of stuff? The consumer has driven all of that. So the consumer driving for better food has been a dominating factor in this country and in Europe it has been phenomenal. They question absolutely everything and you’ve got to be on your toes Clinton, but so do we in the retail sector, you’ve got to know it. So I would say that’s it. And I think it’s great how our agriculture communities responded to it. And I think it’s great our retail communities responded to it.

Clinton Monchuk: (32:13)
So we want to take this time to say thank you very much, John, for being part of the podcast. We could talk for hours and hours about some of this stuff.

John F.T. Scott: (32:20)
Well, you know, it’s been a pleasure and doubly so because you, you do what half the grocery shopping for your family? I do 90% of ours, because I love wandering around stores and seeing what’s new. So, you know, speaking to another person who observes in a supermarket is, in my opinion, rare and appreciated.

Clinton Monchuk: (32:47)
I want to thank you for taking the time to listen to our Ask A Farmer podcast. We at Canadian Food Focus value the input from our listeners and ask that you share this podcast with your friends and family. Remember, this is a two-way street, so we seek your input for future segments that are of interest to you about food and farming. To do this, please click on the ‘Ask Us’ icon at the top of our website, canadianfoodfocus.org. While you’re there, feel free to follow our numerous social media links and sign up for our newsletter. This segment was produced and edited by Angela Larson, research and writing by Dorothy Long and Penny Eaton. Music by Andy Elson. I’m your host Clinton Monchuk. And from all of us here at Canadian Food Focus, we wish you good health and great eats.

Episode Credits

Research and writing by Dorothy Long and Penny Eaton, Produced and edited by Angela Larson, Music by Andy Ellison-Track title: Gravel Road