Who is Responsible for Grocery Inflation?

A Dive Into Financial Statements of Companies Within the Grocery Supply Chain.

In March of this year, the Federal Trade Commission (FTC) published a report on the causes and impacts of supply chain disruptions during the COVID-19 pandemic blaming grocers for expanding net profits while experiencing cost of goods and transportation increases.

The report used three grocery data sources to come to this conclusion: WalMart, Kroger, and Amazon. Since just the food sales at WalMart and Amazon aren't available to the public- they're bundled with the total sales in financial statements- we'll just have to take the FTC's word for this.

While these three retailers sell a lot of the groceries, I wanted to dig a little deeper. I recently posted my analysis of a broader group of Grocery retailers with publicly available data. I found that grocers' sales, gross profit (sales minus cost of that product), and operating profit (gross profit minus all of their expenses to sell said groceries) all increased from fiscal year 2018 through fiscal year 2023.

However, their profits didn't increase as a percentage faster than their sales increased. In other words, their prices DID NOT grow faster than their costs did. Here's the summary of all retailers.

The 3-year trends show large percentage growth of all 3 financial metrics with gross profit showing the smallest increase. If retailers were driving inflationary increases, rather than just passing their cost increases along to the customer, gross profit % would grow faster than sales %. This didn't happen:

Operating profit did increase faster than sales and gross profit, but that's likely due to more effectively using the massive fixed costs grocery stores have. The more dollars of goods they can push through their distribution centers, into their stores, and out through the registers, the more profitable they'll be.

So, if the retailers were just passing on their cost increases to customers, are the manufacturers of food products to blame?

Big CPG Manufacturers

I used the same analysis for some of the biggest, public, domestic food and beverage producers in the US: Coca-Cola, Pepsico, Mondelez, General Mills, Kraft Heinz, Hershey, and Campbell's. Here's what I found:

I looks like food manufacturers were really fighting to maintain their gross profit percentages but largely saw their gross profit percentage decrease over the last three years. Sales dollars increased and drove total gross profit and net profit generally higher. Here's the comparison between the last 3 years and 3 years prior:

Generally, Gross Profit increased at a slower rate than sales with half the manufacturers seeing faster growth in Operating Profit and half not.

As a summary of all the food manufacturers, gross and operating profits bounced around the same level and sales, gross profit % and operating profit % all grew at generally the same rate.

Still no smoking gun on who caused inflation. So we went a level deeper to understand what drove input costs of these food manufacturers. We looked at the trucking industry, packaging, and finally commodities.

Packaging Companies

We looked at 5 domestic, public packaging suppliers: Ball Corp, Amcor, Berry Global, Graphic Packaging, and International Paper. As a whole, their gross and operating profits decreased as a percentage of sales:

Also, their sales increased at a rate much faster than their gross and operating profits did:

Packaging, especially cans and PET was a big concern for suppliers during the pandemic, but it looks like the suppliers of these products were also squeezed.

Trucking Companies

Here's where it gets interesting. We pulled 8 companies data: ARC Best, SAIA, Werner, JB Hunt, Landstar, Schneider (Truckload only), Knight Swift (Truckload only), and Old Dominion. Every one of these companies saw Operating Profit % grow in 2021 and 2022 compared to 2018 and 2019.

Seven of the Eight saw Operating Profit grow faster than sales in the last 3 years vs. prior 3 years. Schneider led the pack with a 67% increase in Operating Profit vs. only a 2% increase in Sales. As a whole, sales grew 39% and profit grew 88%.

SAIA is especially interesting with profit growing from $34 million in 2017 (1% of sales) to $394 million in 2022 (8% of sales). In their 2021 annual report, SAIA attributed the increases due to pricing actions and increase in demand: "The Company’s operating revenue increased by 25.6 percent in 2021 compared to 2020. The increase resulted primarily from pricing actions, including a 5.9 percent general rate increase taken on January 18, 2021, for customers subject to general rate increases, in addition to increased volumes, terminal expansion and improvements in mix of business."

Their 86% improvement in profitability was only mentioned in that it could have been higher if not for larger wage expense, fuel prices, and equipment costs: "Consolidated operating income was $335.1 million in 2021 compared to $180.3 million in 2020. In summary, the operations were favorably impacted in 2021 by higher revenue per shipment and volumes, which were partially offset by salary and wage increases, higher fuel costs and higher purchase transportation costs."

While these trucking companies greatly expanded their profitability, their overall impact is small compared to top line grocery store sales, so there's one place else to look, commodities.

Commodity Pricing

Every single commodity mentioned in these annual reports reached a ten-year, if not an all-time, high between 2020 and 2024. Lots of charts follow:

PET Plastics:

Who won out on all of these record-high prices? Commodity traders booked record profits in 2022 and 2023. Bloomberg , Oilprice.com , and Financial Times all highlight the huge cash inflows these companies have made by simply speculating on the price of these commodities.

Summary

With Gross Profits remaining constant across most segments of the CPG and Grocery industry, I think input costs were mostly responsible for the inflation we saw on the aisle of grocery stores. Trucking companies certainly saw increased profits from higher rates, but it seems like the ingredients used to produce products had the biggest impact.

The global freight issues we experienced throughout 2021 and 2022 likely had an impact on the ability for commodities to get to manufacturers that needed them, but I also assume the speculative trading of these commodities (by players that had no intention of taking delivery) exacerbated the increases.

It seems like there were very few outright winners in this crisis, but just about every company we examined showed increased total dollars sales, gross profit dollars, and operating profit dollars.

Now that input costs have stabilized and volumes at retailers are beginning to decline, it will be interesting to see how retailers and manufacturers react. I believe we'll see the pendulum swing the other direction with price cutting to increase volumes. Those that don't react fast enough will see operating profits lag sales and gross profit as operations become less efficient.

Note: I don't claim to be an expert in financial statement analysis and I quickly got in over my head as I went down this rabbit hole. I'd love for additional perspective from more seasoned experts. Feel free to reach out on LinkedIn. Thank you!