Analysis | Yes, big grocery stores make a lot of money

Food markets maintain that their profit margins have not increased in recent months.

The leaders of the big companies forming the oligopoly of grocery stores in Canada testified before parliamentarians in Ottawa, Wednesday, at the end of the day. They all defended their practices, claiming not to take advantage of the inflationary context to unduly increase their prices. As proof, they say, our profit margins have not increased. However, this deserves some additional explanation.

First, we can talk about oligopoly, since five large groups hold 80% of the grocery market in Canada. Parliamentarians have raised the possibility of a form of collusion between the major groups in the evolution of prices. There is no evidence to that effect and the executives have completely dismissed the possibility of an anti-competitive agreement between the companies.

CEOs insist that the market is very competitive and that they must compete with strategies of all kinds to attract and retain customers. Still, Canadians feel like they're being cheated by the grocers these days, as the inflation rate for food purchased at grocery stores in the country was 11.4% in January, virtually the double the general rate.

If profit margins do not increase, grocery stores still have greater financial capacities, which allow them to increase the salaries of senior executives and to carry out various financial operations.

And, even if the margins are stable, we see that the shareholders have benefited from the current context. Since inflation has exceeded the Bank of Canada's target range since April 2021, Metro's stock has jumped 20% and Loblaw's by 67%.

For a company like Metro, the economic context is largely favorable. In 2022, Metro's net income grew 2.9%, revenue grew 3.3%, dividends per share increased 10.3% and debt was reduced by 11.2%. %. Superb year!

Diluted net earnings per share decreased from $3.14 in 2020 to $3.33 in 2021 and then to $3.51 in 2022.

Metro's financial situation has improved in recent years.

In a press release published on November 18, Metro wrote that it is renewing its share buyback program to give itself an additional option to use its excess cash.

Metro may repurchase between November 25, 2022 and November 24, 2023 a maximum of 7 million ordinary shares, nearly 3% of the outstanding shares.

This practice is common among stock market companies. It generally improves earnings per share and shareholder returns.

This result, judged as a good financial performance, can also lead to an increase in executive compensation. Pay-at-risk is primarily tied to the Company's financial results, states Metro's Fiscal 2022 Proxy Circular.

However, 76% of CEO Éric LaFlèche's compensation is said to be at risk. The Metro boss' total compensation reached $5.36 million in 2022, up 6.8%.

Metro CEO Eric La Flèche.

Moreover, Metro's financial situation allows the company to increase its investments in its facilities and activities. Capital investments in 2022 totaled more than $620 million, a record high, Metro's 2022 circular says.

Despite this record level of investment, despite wage increases and the share buyback program, Metro was able to reduce its debt from 2021 to 2022. It fell from 2.637 billion to $2.343 billion, a decline of 11%.

If investments go up, Metro renews its share buyback program and debt goes down, it's necessarily because Metro is generating cash, don't you think?

Metro, like any other stock market company, seeks to enhance shareholder equity and improve its profitability. She does.

It is also taking advantage of its favorable financial situation to invest and reduce its debt. It has also chosen to buy back shares and increase its dividend, the total payment of which has increased from $240 million in 2021 to $258 million in 2022.

Si Metro is absolutely not responsible for the rise in the prices of foodstuffs, resources and energy, it is nonetheless responsible for the choices it makes. Metro is injecting millions of dollars to buy back shares, to pay dividends, to improve the compensation of its executives and to increase its investments.

It is important to understand that the choices made by a company like Metro are legitimate and are made in the interests of shareholders. But it is also important not to reduce the analysis of the state of the finances of grocery stores to their sole profit margin, as we did this week during the testimony of CEOs before parliamentarians in Ottawa.