Sobeys and high food prices By: Natalie Guriel (Copyright 2023)…

rm157 Sobeys and high food prices By: Natalie Guriel (Copyright 2023)…Sobeys and high food prices By: Natalie Guriel (Copyright 2023) Sobeys, Canada’s second largest grocery chain, has been receiving criticism for high grocery prices and unreasonable profits. Some customers claim Sobeys is using the excuse of high inflation in the marketplace to justify raising food prices. Michael Medline, CEO of Empire Corporation which owns Sobeys and other grocery store brands, said this is “absolutely not true”.i Grocery experts argued there are many reasons for Sobeys’ success, including the growth of FreshCo, Sobeys’ discount chain, and an increase in demand for its house brands. Before the covid pandemic, Medline was credited with turning the company around after a $2.13 billion loss in 2016. Since then, he introduced new efficiencies to reduce costs, opened new stores, and began Sobeys’ delivery service. These changes helped to create new jobs, expand the company and generate above-average profits. ii Recently, rising input costs along the food supply chain have made it more expensive for Sobeys; therefore, additional costs had to be passed onto customers in the form of higher prices. But how much profits are too much? One customer who posted a photo online of Sobeys charging $42 for a party-size salad, left some people questioning Sobeys’ pricing tactics and accused the retailer of being too greedy.iii According to Statistics Canada, net profits earned by Canadian food and beverage stores has increased significantly from $570 million in Quarter 2 of 2019 to almost $1.4 billion in Quarter 2 of 2022. iv By 2023, Statistics Canada’s inflation report showed food prices having a 11.4% yearover-year increase.v Where are the additional costs coming from? Grocery experts argue that the food business is a complex industry with many factors. Since Canada is a northern country with a cold winter season, it must rely on the United States, Mexico and other countries overseas to supply fresh produce during these months. Annually, Canada imports $10 billion worth of fresh fruit and vegetables.vi So, any price increases due to extreme weather events, energy or transportation costs are going to have a negative impact on Canadian food prices. vii For example in 2023, the United States, Canada’s top agricultural trading partner, experienced the worst drought in years with heatwaves, extreme rainfall, flooding and snap freezing in its southern states. viii Subsequently, these weather events also can cost the government and taxpayers billions of dollars in clean-up costs. ix Government policy is another factor. In 2022, the Bank of Canada raised interest rates seven times increasing borrowing costs for businesses and consumers. x A carbon tax has also increased the cost of producing and shipping goods. Abroad, Russia’s invasion of Ukraine has also disrupted some supply chains, reducing the global supply of grain, fertilizers and fuels. xi Other challenges for suppliers include labour shortages and the weakening Canadian dollar.xii According to Raman Khangura, president of the trucking firm SRT Logistics, business is booming but so are costs. While gasoline prices have increased by a third, there is also the challenge of finding qualified truck drivers. xiii 5 | P a g e While higher food prices have been seen around the world including the United States and Great Britain, many consumers still remain skeptical about grocery retailers’ pricing and transparency. In 2017, for example, Sobeys, Metro, Walmart, and Loblaws were implicated in a bread price-fixing scandal, violating the Competition Act. While no formal charges were laid, it is alleged Sobeys colluded with other grocers to artificially increase the price of bread and baked goods over 16 years (limiting competition). xiv One report estimates that Canadian consumers were likely overcharged as much as $5 billion.xv While Loblaws admitted to the wrongdoing, the investigation is still ongoing in Ontario and Quebec where lawsuits were filed. xvi By 2023, Members of Parliament summoned the CEOs of Canada’s largest grocery store chains to answer questions at a special hearing about the issue of food inflation and record profits.xvii The Retail Council of Canada, an industry association that advocates for grocers, said the Committee should also investigate global brands, manufacturers, processors and wholesales since the food industry involves a complex supply chain that spans across the globe. Michelle Wasylyshen, a spokesperson for the Council, explained “Grocers are food distributors – they buy goods from suppliers and then sell them to customers. This means they are largely dependent on what suppliers ask them to pay for their products.”xviii Suppliers, who sometimes compete with grocers private label brands, typically do not wish to disclose data on where their costs are increasing, making it difficult for grocers to negotiate and to decide on whether or not to accept the price increase. If a grocer accepts a price increase, the grocer must decide whether or not to pass on the additional cost to customers or absorb the cost by accepting a lower profit margin on the sale of that good. In one pricing dispute, Pepsi Co Inc. decided to pull its Frito-Lay and Quaker products from Loblaws shelves when Loblaws refused the supplier price increase. xix Medline, who oversees Empire’s chain of 1,600 stores including Sobeys, FreschCo, Safeway, IGA, Foodland, Longos and Farm Boy, explained Empire has been in a similar situation. xx Metro, CEO Eric La Fleche, also expressed concerns about supplier demands for price increases, and explained that Metro received more than 27,000 supplier requests in 2022 to raise prices by more than 10%, which is three times the normal level.xxi In 2023, Statistics Canada reported food prices rose at the fastest pace since 1981, with higher prices in almost every food category. xxii The Canadian Federal Competition Bureau is also examining competition in the grocery industry and any evidence of anti-competitive practices such as deceptive marketing, price-fixing and even outright fraud that could push up prices for consumers.xxiii xxiv Over the last 10 years, an increase in acquisitions has also reduced competition. For example, Sobeys bought Farm Boy in 2018 and Longo’s in 2021. Other large players include Loblaws, Metro, Walmart and Costco; however, the expansion of global players like Amazon into the Canadian marketplace, who operates 42 of its own Amazon Fresh (‘just walk-out technology’) grocery stores in the United States, could further change the competitive landscape in the future.xxv Amazon’s ‘just walk-out technology’ eliminates the need for cashiers and reduces operational costs through technology automation and standardization.xxvi Gary Sands, a spokesperson for the Canadian Federation of Independent Grocers explained the nearly 7,000 small grocers the group represents is in no position to absorb these cost increases and supports the investigation. Smaller grocers already have limited financial 6 | P a g e resources and cannot compete the same way as big chains with weekly flyers and points programs. xxvii Accounting and auditing experts agree it is difficult to see exactly where costs are increasing because financial statements only provide summaries of revenues and expenses. The financial statements do not break down the entity’s revenues and expenses in every food category and the different business segments that these companies operate in. For example, Loblaws is now diversified into other areas like pharmaceuticals, beauty products, home goods and its Joe Fresh clothing line. Other non-traditional grocery stores like Walmart and Costco also sell hundreds of other non-grocery items. xxviii With food prices still rising, consumers are the ones impacted the most, paying more and getting less. According to an Angus Reid survey, almost 80% of respondents said they had changed their shopping habits due to the increase of food prices. This included switching to cheaper brands and buying less fruits and vegetables.xxix Seniors on a fixed income are one example. Restaurant owners, school cafeterias and food banks have also been impacted by food inflation. Daily Food Bank CEO Neil Hetherington explained that visits to the food bank have tripled in the last two years and they expect to serve two million people this year.xxx Some food banks that have partnered with Sobeys have criticized the company for its restrictive donation practices. While most grocery stores who collect money from customers for food banks give the cash freely to food banks; Sobeys instead issues gift cards forcing food banks to buy only from Sobeys, instead of being able to shop around to find the lowest price. Terra Paredes, one spokesperson from the Vancouver Food Bank, said pasta sauce at Sobeys costs $3, but it could be bought elsewhere for $1.15. The other issue is customers making a donation to a food bank, do not expect the store to be profiting off that donation as a revenue stream. “xxxi xxxii Paredes said, “People go to the grocery store and give cash at the register [to help those in need, but then] it goes back into Sobeys’ pocket. It’s a form of income.”xxxiii While grocery stores claim to have low profit margins of 2% to 3%,xxxiv some critics argue there is a lot of waste in the food industry that needs to be addressed to reduce costs and become more environmentally sustainable. “The Vancouver Island Green Business Collective (VIGBC)’s grocery certification, the first of its kind in Canada, provides grocers with a list of actions to reduce their environmental footprint, addressing common sources of waste and emission including food waste, refrigeration equipment, lighting and single-use plastic.”xxxv “On average, hydrofluorocarbon refrigerants – a major source of greenhouse gases – account for 65% of a food retailer’s direct greenhouse gas emissions. Similarly, food waste in BC grocery stores accounts for 4% of sales, or an estimated $516.5 million annually.” xxxvi Sobeys has committed to transition to “climate-friendly refrigerants for all new stores and renovation projects starting in 2024,” but not all stores will have these updates. xxxvii With grocery stores making record profits, some observers think this is the right time for grocery stores to invest in these available sustainable technologies and do their part to help the planet. 7 |  P a g e Case Questions: (Total: 30 marks) Question 1 (20 marks) Explain how the six (6) external environmental factors have impacted or are impacting Sobeys. Explain your answer using examples from this case.  Question 2 (10 marks) Explain which management philosophy (the classical school or the behavioural school) may be better suited for Sobeys and why? Explain your answer using examples from this case. Please note: No outside research is required. However, a complete, detailed and thorough answer including all relevant examples is required for full marks.BusinessBusiness – Other