How the grocery supply chain works

Over the past year, the CEOs of Canada’s biggest grocery chains have become familiar faces to lawmakers studying food prices.

Executives have faced questions from MPs and battled accusations of profiteering as their earnings rise.

But experts say the main factors that have driven grocery prices up over the past couple of years are global.

“The supply chains we have depended on for many decades now have come under massive stresses over the last five years — COVID, conflict, climate change being the most notable examples of big global macro stresses — and that is translated into broad-based inflation for all goods across the global economy,” said Evan Fraser, director of the Arrell Food Institute at the University of Guelph.

Consumers are acutely aware of increases in food costs because other costs, especially housing, are also skyrocketing, said Fraser, and so food prices have become emblematic of a wider problem.

Because consumers don’t really understand the ins and outs of the supply chain, the bulk of the blame is often placed on the retailer, said Michael Graydon, CEO of the Food, Health and Consumer Products of Canada association.

“People are significantly pressured from a cash flow perspective. And so … they’re seeking to blame,” he said. “And that’s a bit of a challenge that the whole industry is facing.”

Higher interest rates have slowed inflation since it peaked in 2022, but grocery inflation continues to outpace the overall figure. The annual headline inflation rate was 3.4 per cent in December, while food prices rose at a rate of 4.7 per cent.

The major commodities that soared in price and drove breakneck food inflation due to factors including the war in Ukraine have moderated, but are still higher than pre-pandemic levels, said Karl Littler, senior vice-president of public affairs for the Retail Council of Canada.

“There’s no return to the status quo,” he said.

The supply chain

At its most simplified, the food supply chain comprises three levels. Farmers or producers are at one end and retailers on the other. In the middle are processing, shipping and manufacturing companies, making everything from packaging to ingredients to food products, and buying and selling between each other on their way to bring products to the grocery store.

Farmers are “price-takers,” meaning the prices they’re paid for what they produce are mainly dictated by global commodity markets and not by negotiations with buyers, said J.P. Gervais, chief economist at Farm Credit Canada.

Companies in the middle section of the supply chain, such as processors and manufacturers, are also dealing with rising costs like packaging materials, wages and energy, he said.

“While those costs may not be going up at the same pace as before, they’ve not come down for the most part,” he said.

“There’s a lot of pressure in the supply chain overall on margins.”

In order to mitigate rising costs, processors may change their packaging, invest in automation or alter recipes, said Graydon. But higher interest rates are making it harder to invest in adaptations.

When they’ve done all they can to mitigate rising costs, processors then turn to negotiations with grocery retailers, said Graydon.

Over the past couple of years, retailers have been “very responsive” to price increase requests, he said. That’s likely in part because the retailers have their own private-label brands and are aware of the forces driving costs higher.

But Graydon said the consolidated nature of the grocery retail industry means retailers often have more power in negotiations, which is why the industry has been working on a code of conduct intended to level the playing field.

The grocery store

It’s the retailers that have borne the brunt of scrutiny over food prices — and their rising profits have made them an easy target, though some industry watchers have been at odds over whether the companies are unduly profiting off of inflation.

Some of the global pressures affecting other parts of the supply chain affect retailers directly too, said the Retail Council’s Littler, like fuel prices, rising labour costs and interest rates. The others affect retailers indirectly through negotiations with suppliers.

Requests for price increases soared over the past couple of years in frequency and in magnitude, said Littler, and it’s up to the retailer to figure out “how much is legitimate, and how much is opportunistic.”

“They can’t reasonably expect people to operate on a loss or on unsustainable margins. So if they don’t accept reasonable price increases, then they won’t be getting the product,” said Littler.

But similarly, he said grocers also can’t be expected to “operate with no margin or a margin that’s cut to the bone.”

Large multinational suppliers of major brands are the chief concern when it comes to unreasonable requests, noted Littler.

Once a price increase request has been accepted, the grocer has to decide how much of it to pass along to the consumer, he said.

The outlook

The good news is that things are starting to normalize along the supply chain, said Gervais, with commodity prices coming down and prices at the manufacturing level stabilizing.

But it may take a bit more time for that to translate to the retail level, he said, as some costs — like wages and transportation — remain elevated.

“We’re one major supply shock away from seeing some disturbances in the marketplace,” he noted.

“But the bottom line is, we’ve seen commodity prices come down, we’ve seen the price that food manufacturers get for their products (come down), we’ve seen that inflation come down.”

Littler says food inflation and headline inflation will continue to converge as the factors that have made food inflation stickier are abating.

“I think we can look forward to a more stable period.”