Canada’s major grocers would prefer you not refer to “greedflation,” thank you very much.
“In every quarter since inflation took off last summer, gross margins in food have been essentially flat,” Loblaw Cos. Ltd.’s chief financial officer Richard Dufresne said last week on the company’s earnings call. “This gives us the confidence to say categorically that retail prices are not growing faster than cost and the company is not taking advantage of inflation to drive profit.”
Those comments are of course much milder than what Michael Medline, the chief executive officer of Sobeys owner Empire Co. Ltd., said in September: Public criticisms of grocer profits were “reckless and incendiary attacks,” he said.
The thing is, Canada’s major grocers, a group that also includes Metro Inc., have the ability to help lay the charges to rest. They decline to do so, however, using a loophole in accounting standards to obscure the facts about their operations.
Their decisions to not publish greater detail on their businesses deprives the investing public of information that allows it to better evaluate the companies’ shares, and the general public of information that might help address the policy question of whether grocers have indeed “profited” from inflation .
Loblaw, for instance, cannot say that its companywide gross margins – the difference between the cost of the goods it sells, and the revenue it gets for them – are flat. Indeed, they’ve increased, year-over-year, for six consecutive quarters, and are at all-time highs.
The explanation, the company says, is a change in product mix, particularly the high-margin stuff Loblaw sells at Shoppers Drug Mart. “As the summer ended and Canadians returned both to the office and to school, we saw a marked acceleration of sales in our beauty aisles,” chief executive officer Galen Weston said in last week’s call. “As a high-margin category, this significantly benefited our results.” (Note how Mr. Dufresne was careful to say gross margins in food have been essentially flat.)
You can take their word for it. Because you have to. Even though Shoppers Drug Mart was once a publicly traded company with its own financial reports, Loblaw doesn’t report its results separately. Nor does Loblaw report food versus pharmacy profits. Instead, all those results are lumped together in one giant category, “retail.”
The problem lies in the three companies’ approach to International Financial Reporting Standard 8 on “operating segments.”
Part of the accounting standard says that entities shall separately report information about an operating segment that accounts for 10 per cent or more of revenue, profits or assets. It also says an operating segment is a component of an entity whose operating results are regularly reviewed by the entity’s chief operating decision maker, and for which discrete financial information is available.
Shoppers Drug Mart, and other parts of Loblaw’s business, seem to meet these criteria. Under Mr. Weston, Loblaw has a president designated for Shoppers Drug Mart – as well as for its market division, its discount stores, its Joe Fresh line and its PC Financial business. One must assume these folks have some numbers to show to Mr. Weston when he wants to make some choices about where to spend his money.
The IFRS standard, however, also describes something called “reportable segments”– and this is where the grocers muddy the waters.
Companies can combine two or more operating segments into one if the segments have “similar economic characteristics.” These include the nature of its products and services, the production processes, the type of customer, the methods used to distribute their products or services and their regulatory environment.
You can tell from Loblaw’s disclosures, as well as those from Empire and Metro, that they have embraced this passage of IFRS 8 to create a big lumpy retail segment rather than provide distinct results for food and pharmacy products.
“The company has aggregated its retail operating segments on the basis of their similar economic characteristics, customers and nature of products,” Loblaw says in its summary of critical accounting estimates and judgments. “This similarity in economic characteristics reflects the fact that the company’s retail operating segments operate primarily in Canada and are therefore subject to the same economic market pressures and regulatory environment.”
Asked for additional comment, Loblaw spokesperson Catherine Thomas said: “We’re comfortable with our continuous disclosure. It meets all accounting and legal requirements and provides our investors with an appropriate amount of color on our business.” Metro declined to comment beyond its disclosures, while Empire did not respond to The Globe’s queries.
Of course they’re comfortable, because we can’t tell what’s going on.
In a recent report on whether there is indeed “greedflation” in the grocery industry, Samantha Taylor and Sylvain Charlebois of Dalhousie University said they couldn’t say, despite the companies’ gross profit margins being at recent highs. “We find it interesting that Loblaws can justify food and non-food (healthy, beauty, apparel, and other general merchandise) as a combined operating segment … It is unclear how food retail and drug retail are similar in nature, sales or production. ”
In a 2013 review of IFRS 8, the International Accounting Standards Board said “Many investors think that operating segments are aggregated inappropriately, reducing the value of the information presented.” Indeed.
We’ll give the next-to-last word to Mr. Weston, who was asked what a sell-side analyst called an “awkward question” about the federal Competition Bureau’s investigation of the grocery industry. “Our objective is to make sure that we share, in a transparent way, all the most relevant information and to make sure that the facts of what’s happening in this inflationary environment are properly understood by all stakeholders.”
And the last word to me: Loblaw and its peers are failing at that objective. For the sake of shareholders and Canadians, it’s time to get more disclosure about the parts of grocers’ businesses that are driving expanding profit margins.