Inflation Is Still Too High. Don’t Blame Food Makers and Supermarkets.

Packaged food companies have blamed the higher costs of many of these raw materials—along with increased transport, supply chain, energy, and wage costs—when implementing price increases, which they say pass on some of the burden to customers. And in many cases, shoppers have had little choice but to keep buying, as volumes haven’t necessarily declined with price hikes for many companies.

The upshot is that consumers are understandably upset that their weekly grocery bills are growing even as the number of items in their carts dwindles. The fact that some products’ prices have gone up seemingly more than their components further spurs suspicions of price gouging.

Greedflation—the idea that companies are using high inflation as a cover to push up prices more than necessary in an attempt to pad profits—has taken hold in the current environment. Some blame the food and household products makers themselves, while others argue stores are the problem, or both. They point to growing profits as proof.

Yet the numbers don’t necessarily bear that out.

Barron’s looked at the top 25 holdings of the
Consumer Staples Select Sector SPDR Fund
(ticker: XLP), which includes a mix of product makers like
Procter & Gamble
(PG) and
PepsiCo
(PEP) and retailers like
Walmart
(WMT) and
Costco Wholesale
(COST), and found that profits certainly are higher. Annual earnings per share climbed year over year in the most recent period for all but nine of those 25 companies.

However, earnings per share can be impacted, for better or worse, by things like stock buybacks and capital expenditures that have little to do with handling inflation. Therefore we looked at gross margins, which are designed to reflect more closely the relationship between the cost of merchandise and merchandise prices. And gross margins tell a different story.

Only five of the top 25 staples companies saw their year-over-year gross margins expand on an annual basis:
Altria Group
(MO),
Estée Lauder
(EL),
General Mills
(GIS),
SyscoCorp.
(SYY) and
Dollar Tree
(DLTR). The remaining 20 saw gross margins contract last year from the year prior.

In addition, only four companies—Altria, Sysco,
Dollar General
(DG) and Dollar Tree—notched gross margins above their five-year average in their most recent year. And for Sysco and Dollar General, their most recent gross margins were just a fraction of a percent higher than the five-year average.

All of this suggests that these major consumer staples companies aren’t simply raising prices to dramatically bolster their profits. Their margins too have been squeezed by inflation, just like many of the households they sell to.

Of course, there are important caveats to keep in mind. Some might prefer to compare operating or net margins, given increased administrative and labor costs. And the past few years have been very atypical ones, given the impact of the pandemic.

Then there’s the fact that prices tend to be sticky, making consumers feel like companies are quick to raise prices but slow to pass on savings with costs fall. Even if food prices do come down at the grocery store a bit in the coming months, they’re unlikely to revert to prepandemic levels. The fact that so many companies have seen their margins hurt by inflation gives them all the more incentive to try to prop them up by resisting discounting.

In the end, consumers are right that food prices have been rising for some time, and are understandably upset by tactics like “shrinkflation” that assumes shoppers won’t notice that package sizes are getting smaller even as price tags aren’t. The fact that grocery prices have climbed so quickly over a sustained period has put a huge strain on millions of American households, and it’s natural to want to point the finger at a corporate culprit.

Nor is that to say those bad actors don’t exist elsewhere in the supply chain. Yet the supermarket doesn’t appear to be the supervillain here.

Write to Teresa Rivas at [email protected]