Consumers are feeling the high inflation in their pocketbooks, particularly as prices of daily necessities – such as food,increase. For example, in Canada, the price of food increased by almost 11% last month, year-over-year.
Meanwhile, politicians, think tanks, and the media are looking for scapegoats and blame grocery stores for both causing inflation and profiting from it. One Canadian think tank economist claimed that excess profits and grocers’ fatter margins drive up inflation. Politicians and the media have been accusing food businesses of profiting from inflation.
The grocery companies get blamed because they have done well during and after the pandemic. Their sales and gross margins grew because they were one of the few businesses that were not ordered to shut down, restaurants were closed in most places, and people still needed to eat. However, grocers’ net margins – the rate of profit after all expenses – have not increased. They still average only 2.2%, or 2 cents of a dollar of sales. Grocery companies don’t earn their profits from high prices but by selling a high volume of goods and operating efficiently.
Yet, the critics are calling for taxing grocers’ “excess” profits or demand that they forgo profits altogether by lowering prices and increasing wages, to be “fair” to customers and employees.
Instead of apologizing for profits and appeasing critics like many business leaders do, one Canadian grocery chain CEO, Michael Medline of Empire Company, pushed back. In a shareholder meeting he refused to “apologize for our success.” Empire (the owner of Safeway in Canada and other supermarket brands, such as Sobeys) has been particularly successful after Medline joined as the CEO almost six years ago and quickly turned the company from colossal losses to steadily increasing profitability. He did it by findings efficiencies, opening new discount food stores, and starting a food delivery service at the start of the pandemic.
Medline is right to push back against the criticisms of the grocers’ profits because he and other grocery CEOs who have operated profitable businesses in challenging conditions do not deserve blame and scorn but praise and gratitude for doing what they do.
Grocery stores managed to stay open and sell food while governments hampered their operations. Governments caused supply chain disruptions by economic lockdowns and other restrictions, contributed to the energy crisis and inflation through carbon taxes and by not permitting oil and natural gas developments (including LNG terminals for shipping natural gas to Europe that desperately needs it) and further raised inflation by increasing the money supply and government debt.
Yes, grocery stores have profited, with the slimmest of margins, because they must, both during inflations and in healthy economic conditions. If they didn’t, they could not exist – and we would not have easy access to food, even at high prices.
Profits build the capital companies need for their operations (to buy and maintain real estate, equipment, and inventory, for example) and to provide a return to their shareholders to keep them invested. Without profits, companies would deteriorate, shrink, and go out of business. Where would we get food without profit-seeking grocery stores? Perhaps from government stores, like in North Korea?
Therefore, companies must strive to maximize profits by creating value (products with an optimal price-quality combination) for their customers, which requires motivating employee productivity and investing in productivity-enhancing logistics and technology.
Unless companies initiate physical force or fraud, their profits cannot be “excessive” or “unfair,” because they can be earned only through voluntary, mutually beneficial trade. (Such free trade also requires that the government does not restrict it by force, such as regulations and inflation-creating measures, and protects the individual rights of trading partners against the initiation of force or fraud by others).
If a customer does not like a company’s prices, she can go to a lower-priced competitor, buy a substitute, or go without. If an employee doesn’t like his wages, he can improve his performance and ask for a raise or seek employment elsewhere. If a supplier doesn’t get the price he wants, he can work to lower his costs, or find other buyers. And if shareholders don’t like the return they get, they can take their investment elsewhere.
Such voluntary trade leads to win-win outcomes to all parties: affordable, high-quality food to customers, paying jobs to employees, profits to suppliers, and returns to shareholders. To get that, we should celebrate, not resent, the grocers’ profits and demand that the government stops driving up inflation, lets us trade freely, and protects our rights.
Photo by Kenny Eliason on Unsplash