Grocers continue to contend with a tight labour market, mounting input costs and supply chain issues, while Canadian households attempt to keep up with the rising cost of living. We recently spoke with Nathan Janzen, senior director, economic research with the Royal Bank of Canada on these topics and what challenges grocers could be faced with in the year ahead. The interview has been edited for clarity and length.
Some of the country’s grocers have suggested food price inflation is starting to moderate. Is this what you’re seeing?
Yeah, I think we are. It’s important to remember that inflation is a rate of growth. So, it’s not that food prices are declining, but the rate of growth in food prices has been slower. If you look at the Canadian Consumer Price Index, the price of food purchased from stores is up just under 7% year-over-year as of August and it peaked at more than 11% last winter. So still rising, but more slowly.
Will food prices return to pre-COVID levels?
In terms of the level of prices, likely not. Prices do rise over time. It’s not usually as fast as it has been over the last couple of years, but we’re not expecting significant declines in prices. It’s the pace of price growth that can slow.
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Right. And as prices increase, how do you put that toothpaste back in the tube?
Yeah, exactly. It’s easier for prices to rise than for them to fall. There’s a lot of catch up to past inflation that’s still happening in wage contracts. But, as you do catch up on the wage side it makes it harder for prices to fall from that point on.
A recent report from Reuters suggests supermarkets in other parts of the world (Europe, Middle East) are struggling to predict demand as the receding experience of COVID-19 and a cost-of-living crisis change shopping habits. Are we seeing similar issues in Canada?
I think we certainly have. The pandemic was an atypical shock. So, you have these huge swings in household purchasing more of their food at grocery stores than at restaurants. And some of that I think has reversed – restaurant spending has been fairly strong. It's maybe softened a little bit over the summer, but it's still been fairly strong, which means less purchases of food happening at grocery stores.
During COVID, there was a sizable increase in disposable income. Do these excess savings remain?
It looks like they do remain. We haven't seen any significant spending out of this excess pandemic savings in Canada, but that savings isn’t equally distributed. We don't have great data on this, but probably a large share of that excess savings is held by higher income households who typically spend less out of income as it comes in anyway. Some data, like bank deposits, are still incredibly high, but they've shifted into term deposits so it's less likely to be spent soon. And we think that is a sign that a lot of that savings is concentrated among higher income households, who just don't need it right now. And they're going to save it for longer. It's at the low end of the income distribution where you have less savings and a larger impact from higher prices for non-discretionary purchases and debt payments.
When it comes to inflation and food prices, what are some of the headwinds that grocers are still facing?
The economy is still short of labour. High immigration rates are helping right now to fill some open positions, but we also know every new arrival to Canada that fills a job also becomes a consumer and increases demand for products and downstream demand for more workers as well. Labour shortages over the longer run are being driven by structural factors like the aging population. The share of the population that’s in retirement age is growing. These are people that are consuming, but no longer producing in a job. Also, in Canada, supply chain disruptions lasted longer than some of the international supply chain disruptions we had earlier in the pandemic recovery, which was tied to labour shortages. And things like domestic trucking and rail transportation costs peaked later than the international supply chain challenges peaked and have declined more slowly. That’s partly why we’ve seen more persistent price growth overall, but particularly for food products.
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A recent StatsCan report casts doubt on the idea that Canada is facing a widespread labour shortage.
The Canadian Federation of Independent Business surveys its members monthly on labour shortages, the Bank of Canada surveys regularly, and businesses tell us they're short workers. I think where you've seen a significant improvement in labour shortages is the number of job openings has declined substantially. So, a year ago the number of job openings were more than the number of available unemployed workers. What you see now is a mild increase in the unemployment rate, but a pretty significant drop in job openings back to more normal levels relative to the unemployment rate. Even though you haven't seen the unemployment rate increase significantly, you have seen the intensity of labour shortages ease. That doesn't mean the problem's gone away, though, and I think that's the way we've been thinking about it. Because even over the next year, we expect the economy is going to continue to soften. We have in our best case, the unemployment rate broadly rising to about 6.5% next year from 5.5% right now. So, you would see some easing in labour shortages over that period, if that's right.
What are some of the hiring challenges companies are facing?
I think it’s demand for workers running ahead of supply. Population growth in Canada is very strong. Even if you compare it to some of the larger emerging markets that historically have driven global population growth, Canada is significantly outpacing those regions. So, we’ve got a big rise in the pool of labour that’s available but, at the same time, we’re also increasing demand because of that. We’re getting population growth pretty much entirely from immigration and every new arrival that comes, especially if they come and find a job quickly, they become a new Canadian consumer and they increase demand as well. Both demand and supply are increasing and that’s what limits how much of an improvement you get in the net shortage of workers that we have in Canada.
Food prices are rising and belts are tightening, but are we seeing improvements from, let’s say, a year ago?
Food prices look like they’re growing more slowly. Hopefully that gives households time to catch up. You can have a period where food prices aren’t expected to decline, but wages are still rising so household purchasing power starts to improve. The worrying thing now is we are starting to see some softness in labour markets – the unemployment rate has increased by half a per cent since the spring – and households are vulnerable to any kind of a downturn in labour markets. To date, we’ve seen slower hiring more than firing. We have a lot of labour force growth and it’s just been taking more time to absorb those new workers. But households are a year and a half into significantly higher prices, significantly higher interest rates and higher debt payments. For now, broader consumer demand has held up well, but households at this point look vulnerable to any kind of a downturn in labour markets.
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How have shopping habits changed over the last year?
Purchases of physical merchandise declined sharply in the second quarter of this year but, overall, consumer spending held steady just because households are spending more on services. Part of that has been hospitality services, hotel stays and restaurant meals with a larger share, I think, of those hotels and restaurant sales occurring outside of Canada. We've had more travel just because households had a couple years off during the pandemic from being able to travel abroad.
What challenges will grocers face in 2024?
We know some food demand is cyclical. We know food at its core is a non-discretionary item, but spending patterns do change when the economy gets softer. We think headwinds for higher interest rates and higher inflation over the last year are building and we’ll see a “mild” downturn in the economy over the second half of this year, which is what we’ve been assuming at a higher unemployment rate. So, households are still going to buy food, they’re still going to eat, but they might make different decisions at the store – buying cheaper options when available, potentially wasting less. But through those factors, you do historically see some softening in food sales because of an economic downturn.
This article first appeared in Canadian Grocer’s November 2023 issue.