Toronto, May 21 - Canadian grocers have reported stellar results in the past few quarters on the back of rising food prices, but the boom will start to fade in the coming months as prices return to more normal levels.
Retail food prices climbed about 9 percent on average nationally in the first quarter of 2009 as grocers passed on rising prices for wheat, rice, vegetables, fruit and other goods to the consumer.
Industry experts now see a slowdown in price increases in the next few months and that will mean less spectacular earnings growth for Canada's big supermarket chains.
In the most recent quarter, higher food prices translated into a 73 percent jump in earnings at Loblaw Cos , the country's biggest grocery chain, compared with the year-before quarter.
No. 2 Empire Co Ltd reported a 26.5 percent rise in its quarterly profit, and Metro Inc , the third-largest supermarket chain, reported a 41.2 percent rise.
Those kinds of inflation-based profit rises are now likely history.
"Heading into the back half (of the year), you are definitely going see food inflation slow down," said Brian Yarbrough, an analyst at Edward Jones in St. Louis, Missouri.
"You are not going to see the high single-digit levels. I just think it is going to be more normalized rates."
That will put pressure on Canadian grocers to find other ways to maintain earnings growth and might result in retail price cuts as companies attempt to build market share.
"I don't know if earnings will come down, but I think what they are saying is that you are not going to see as near a benefit heading into the back half," Yarbrough said.
Loblaw, which reported a profit of 40 Canadian cents a share in its most recent quarter, is expected to see its earnings per share rise to 51 Canadian cents in the next quarter and finish out the year at about the same level, according to Reuters Estimates.
Similarly, Metro, which reported earnings of 68 Canadian cents a share, is seen reporting of 69 Canadian cents by the end of its fourth quarter.
SHIFT BEGINNING
The easing of food inflation was signaled earlier this week when Statistics Canada reported that grocery prices were up 8.3 percent year over year in April, versus a near three-decade high of 9.5 percent in March.
"We have finally seen some of the fever in grocery price inflation break a bit," said Doug Porter, deputy chief economist, BMO Capital Markets. "Grocery prices were still up on the month, but the year-over-year rate has finally started to come down."
Food prices from producers have only risen 1.4 percent in the past year, so most of the inflation has come in wholesale, distribution, and retail systems.
"That is an extraordinary gap that I suspect is not sustainable, so that does suggest that the kind of food inflation that we are seeing in the grocery aisle is likely to moderate substantially in the months ahead," Porter said.
Against Statistics Canada's reading of a 9.0 percent increase in food prices in the first quarter, Loblaw and Empire both said their prices rose only about 3.5 percent. Metro said its prices rose about 6 percent.
Perry Caicco, a retail analyst at CIBC World Markets, cautioned against reading too much into the companies' numbers.
"Compared to (consumer price index) inflation, the grocers are claiming much more modest rates," he wrote in a recent report. "They may be doing so to comfort the market that they are not inordinately benefiting from the inflation torque; or to indicate that they are staying highly competitive on prices."
Caicco defines "torque" as follows: "When a specific cost increase is processed, grocers pass it into a retail price increase and then 'round up' to the appropriate price point. A C$2.49 item experiencing a 7-cent increase doesn't go to C$2.56, it goes to C$2.59, generating an extra 3 cents of profit."
He estimates that food price increases at Loblaw will be about 2 percent in the second quarter and will be at about 1.5 percent by the end of the year.
The companies are already bracing for the inflationary easing.
"I'm a hawk on inflation because I think it unwinds, and in the same way that inflation is the retailer's friend, deflation is not the retailer's friend," Allan Leighton, president and deputy chairman at Loblaw, said earlier this month.
"We are very cautious about what happens when inflation unwinds in the second half." ($1=$1.15 Canadian)