Imagine you have a modest amount of money in your RRSP (Canada) or 401(k) (USA). Let's say it's $1,000, and you want to buy shares in a company that will preserve that capital and, ideally, pay a dividend.
You're presented with a company that reported a staggering $63 billion in revenue. You think, "Wow" - now that is a successful company.”
But you know better.
You understand that top-line revenue alone doesn't tell the whole story. You need to ask a more important question: what did it cost the company to earn that $63 billion?
Digging deeper, you discover it's not all milk and honey. Despite that massive revenue figure, the company earned only about $2.5 billion in net profit. Suddenly, the headline number doesn't look quite so impressive.
Then you examine the balance sheet and notice something else: the company carries roughly $19 billion in debt.
Yowsa.
You do the math and realize that even if the company devoted every penny of its profits to debt repayment, it would take well over ten years to clear that obligation - and that's before accounting for interest costs.
Of course, that's not how real businesses operate. This company must also consider:
- Maintaining cash reserves for emergencies
- Paying dividends to shareholders, many of whom are retirees
- Ongoing property maintenance
- Investing in business expansion
- Absorbing rent increases at expensive mall locations
- …and more
When you factor all this in, you realize that paying down that debt is more likely a 20- to 30-year responsibility, not a short-term problem.
Suddenly, this doesn't look like such a stellar company after all.
Would YOU invest your hard-earned money in a business with thin margins and massive debt servicing requirements?
Probably not.
And yet - this company is Loblaws.
Yes, the much-maligned grocery chain that so many Canadians love to criticize for charging "excessively" high prices.
People stomp their feet and demand that Loblaws stop gouging ordinary Canadians who simply want to put food on the table. Government officials publicly scold the company, accusing it of enriching itself at the expense of the public.
It's easy to join that chorus. After all, we all like to have someone to blame when costs rise.
But shouldn't we dig a little deeper?
Why does Loblaws attract such widespread condemnation for grocery pricing? What are the real drivers behind higher food costs - and what, realistically, can be done about them?
So let's ask the key question: Is it even true that Loblaws prices its groceries unfairly?
The answer is complicated.
Should we compare Loblaws to a bulk retailer like Costco, where lower unit prices are expected in exchange for buying larger quantities? That isn't an apples-to-apples comparison.
Should we compare it to a big-box retailer like Walmart, which often uses grocery staples as loss leaders simply to drive foot traffic? Again, not a fair comparison.
What about discount grocers like FreshCo or No Frills?
Now we're getting closer.
At a discount grocer, you can often buy the exact same product - say, a can of beans - for less than you would pay at Loblaws. But does that automatically mean Loblaws is gouging?
Once again, the answer is complicated.
Discount grocers don't carry the full range of specialty and upscale items that Loblaws offers. That means you may end up making two separate shopping trips: one to Loblaws for specialty items, and another to a discount grocer for staples.
That's perfectly reasonable - and entirely your choice.
You'll also notice that discount grocers are often located in areas with lower property taxes and lower carrying costs. Loblaws locations, by contrast, are often in premium, high-traffic areas.
Making just one stop for everything is convenience - and convenience comes at a price.
Loblaws does charge more for products you can find cheaper elsewhere. But in exchange, it provides convenience, variety, and access - and despite popular perception, it does NOT "swim" in excess net profits.
So the question remains:
Still think Loblaws should lower its prices?
