Grocery margins in Canada: what the public numbers show

During the food price spike of 2022 and 2023, when the cost of groceries rose at double-digit annual rates for several months, one question kept coming back: were grocers taking a bigger cut? Politicians said yes, the companies said no, and both sides quoted margins. Often they were quoting different margins.

The arguments have cooled since, but the question has not gone away, and the numbers needed to think about it are mostly public. This piece explains the three margin measures that come up most, how to find them in a grocer's annual report, what the Competition Bureau found when it studied the sector, and why a margin can stay flat while profits in dollars climb. It is an explainer about public figures, not a view on any company or its shares.

Three margins, three different questions

A grocer's income statement starts with sales and subtracts costs in layers. Each margin is the money left after a different layer, expressed as a share of sales.

Gross margin is the one most people mean when they talk about mark-ups. It is also the one that moves most with the product mix. A store that sells more pharmacy items, prepared foods and cosmetics, all of which carry higher mark-ups than milk or bananas, will show a higher gross margin even if it charges the same on every food item. That is why comparing gross margins between chains, or between years after an acquisition, needs care.

Net margin is the one that shows how much money the owners keep. In grocery it is thin. A store's gross margin pays for wages, rent, refrigeration, electricity, trucks, cleaning and theft before anything is left, and most of it gets used up.

EBITDA, short for earnings before interest, taxes, depreciation and amortization, sits in the middle. Companies like it because it strips out accounting choices about how fast buildings and equipment wear out. Critics point out that store equipment and buildings do wear out and must be paid for, which is why EBITDA always looks better than net earnings.

How the money moves through a $100 basket

The figures below are round illustrative numbers, chosen to sit in a plausible range for a large food retailer. They do not describe any specific company.

Say a shopper spends $100 at the till.

1. About $72 goes to pay for the goods: the farmers, processors, packers and importers who supplied the food, plus freight to the warehouse. That leaves a gross margin of $28, or 28 per cent.
2. About $13 pays store and warehouse staff, including wages and benefits.
3. About $4 covers rent, property taxes and occupancy.
4. About $4 covers distribution, electricity, refrigeration, card fees, advertising, shrink and head office.
5. That leaves EBITDA of about $7, or 7 per cent.
6. About $2.50 goes to depreciation and amortization, the cost of stores, trucks, checkouts and software spread over their useful lives.
7. About $0.80 goes to interest on debt and leases.
8. About $1.10 goes to income tax.
9. About $2.60 is left as net earnings, the owners' share, of which some is paid out as dividends and some is kept for new stores and equipment.

The same $100 can be described as a 28 per cent margin, a 7 per cent margin or a 2.6 per cent margin. All three are true. When two people argue about grocery profits using different ones, they are not disagreeing about the facts. They are answering different questions.

Notice also how much of the $28 gross margin is spent before profit appears. If a grocer raised its gross margin by one percentage point, from 28 to 29 per cent, and its costs did not change, its net earnings would rise from about $2.60 to about $3.30 on the same $100 of sales, after tax. A small change at the top is a large change at the bottom. That is why a shift of one or two points in gross margin, which sounds trivial, matters a great deal to the companies and to the debate.

Reading a grocer's annual report

Canada's three largest grocery companies, Loblaw Companies, Empire Company (which owns Sobeys) and Metro, are publicly listed and publish annual reports, quarterly results and management's discussion and analysis. Costco and Walmart also sell a large share of Canada's groceries, but their published figures cover far more than Canadian food, which makes them less useful for this purpose.

A few habits make the reports easier to read:

• Find the segment. Loblaw, for example, reports a retail segment separately from its financial services. Its retail gross margin was reported at 31.3 per cent for the 2024 fiscal year, but that segment includes Shoppers Drug Mart, whose pharmacy and beauty sales carry higher mark-ups than food.
• Look for "adjusted" figures and read what was adjusted. Companies remove one-time items such as restructuring charges or gains on property sales. That can help comparisons, but the choices are management's.
• Watch fiscal years. Empire's and Metro's years do not end in December, so their annual numbers cover different months from Loblaw's.
• Read the management discussion for the mix. The text usually explains whether gross margin moved because of pricing, shrink, product mix or the cost of promotions.
• Compare dollars and percentages together. A report that shows both lets you see whether profit growth came from wider margins, higher sales or both.

Across the large chains, net earnings have generally amounted to a few cents per dollar of sales. That is low by the standard of many industries and normal for food retail, which moves high volumes of low-margin goods.

What the Competition Bureau found

The Competition Bureau launched a market study of retail grocery in October 2022 and published its report, titled Canada Needs More Grocery Competition, on 27 June 2023.

Its main findings, in brief:

• Grocers' food gross margins had increased over the previous five years by what the Bureau called a modest yet meaningful amount, roughly one to two percentage points.
• That rise predated the pandemic's supply chain disruptions and the inflation that followed, so it could not be explained only by recent cost shocks.
• The market is concentrated. The five largest grocery retailers together accounted for about 80 per cent of grocery sales.
• The Bureau could not compel companies to hand over data for a market study, so it worked from public information and what companies chose to provide. It said that limited what it could conclude.

The Bureau did not find that grocers were gouging, and it did not find that they were not. Its argument was structural: with few competitors, there is less pressure to pass lower costs on to shoppers. Its recommendations to governments included a national strategy to encourage new and independent grocers, including international chains, and clearer, harmonized unit pricing so shoppers can compare products. It also discussed property controls, the restrictions that stop a competing grocer from opening on land a chain once owned or leases, as a barrier to new stores.

Parliament later amended the Competition Act. The Affordable Housing and Groceries Act, which received royal assent on 15 December 2023, among other changes gave the Bureau a stronger footing for market studies and widened its powers over agreements that harm competition.

The parliamentary hearings

In March 2023 the House of Commons Standing Committee on Agriculture and Agri-Food heard from senior executives of the three largest grocery chains as part of its study of food price inflation. The companies' position was that their food margins had held steady and that higher shelf prices mostly passed on higher costs from suppliers. Several committee members pointed instead to record profits.

Both sides could point to real numbers, because they were talking about different ones. A stable percentage margin is entirely consistent with record profits in dollars, as the next section shows.

Why a flat margin can still mean bigger profits

Take an illustrative chain with $50 billion in annual sales and a net margin of 3 per cent. It earns $1.5 billion.

Now suppose food inflation of 10 per cent raises the chain's sales to $55 billion, with no change in the number of items sold. If the chain's net margin stays at exactly 3 per cent, its profit rises to $1.65 billion. That is $150 million more, a record if the previous year was a record too, with no change in the margin at all.

Three things add to this effect in real life:

• Volume growth. Population growth adds shoppers, so sales rise even without inflation.
• Mix shifts. When shoppers trade down from national brands to a grocer's own private label, the grocer's margin on the item can rise even as the shopper pays less.
• Non-food lines. Pharmacy, cosmetics, financial services and loyalty programs can grow faster than food and carry higher margins.

The reverse can happen too. If a chain holds back price increases to win customers, its margin can fall while profit dollars still rise on volume.

So the question to ask of any headline is: which margin, measured how, and over what period? A guide to reading food price forecasts covers the other side of the checkout, and a comparison of food prices in Canada and the United States explains why cross-border price gaps tell you little about margins on their own.

What the public numbers can and cannot settle

Public reports can tell you a chain's overall gross margin, its net earnings and how both changed. They cannot tell you the margin on a single product, or whether one category subsidizes another, or how much a supplier was charged in listing fees and promotional allowances. Those figures are commercially private, and the Bureau's study ran up against the same wall.

That leaves a modest, useful conclusion. The evidence supports a small rise in food gross margins over the late 2010s and early 2020s, thin net margins by the standards of other industries, and profits in dollars that grew with sales during the inflation years. Whether that adds up to too little competition is a judgment about market structure, not something an income statement can answer. The more practical test for shoppers sits on the shelf tag: the unit price, which more articles under food prices and retail take apart.