Thursday, 31 March 2011

The Money Person

When you work as a reporter you're always on the hunt for a story, and occasionally you'd hear a good one, but there was just no way to use it.   That's how I felt about what an acquaintance who worked for years in the food retail business called "the money guy" (I used the correct word in the title of the post!).  My informant said the money guy had the most important job in the business, even though he had absolutely nothing to do with food.

Here's how it worked. A lot of what supermarkets sell is fresh and sold fairly quickly, but the food retailers  have 30 days at least  to actually pay for it, so there's a little window in there where the company has the consumers money, but it doesn't have to go out to the supplier. The acquaintance said he remembers in the 1970's that a call would often come from head office on a Friday that all the cash needed to be in the bank by 6 because the company was involved in weekend bridge financing for an oil company in the middle east.  In the right circumstances the interest rates for this kind of short-term financing can be quite high, and when millions of dollars are involved, the returns definitely help the food retailers bottom line. I had always thought my food dollars went to a farmer. Apparently not.

This whole money lending/investment strategy is much more sophisticated these days. Those fancy cash registers are hooked up to bank accounts, and I suspect "the money guy" gets to use it a lot more quickly now.  What I was never able to discover is whether the profits form this money-lending sideline went to the bottom line of the supermarket, or some separate company. I'm not implying there's anything wrong with this, it's just an interesting wrinkle in a business that's very sophisticated and competitive. I can say for sure that the farmers people deal with at the farmers markets don't  have secret  Swiss bank accounts.

The other eye opener for me was a study done by two  Agriculture Canada economists in 2002 called Performance in the Food Retailing sector of the Agri-food Chain.  It's a little out of date now, because of the consolidation in the food retailing (Loblaws and Sobeys bought up most of their competitors) and the emergence of Walmart as a player in the supermarket business.  In their effort to keep customers happy, these retailers have seen their profit margins shrink.

In 2002, the economists discovered that food retailers were doing better than other retailers (hardware stores, clothing retailers, etc.), but the most interesting finding was that these "better returns" were coming at a time when food prices were stagnant..

 Here's part of what they said:
Grocery retailing constitutes a substantial component of food retailing and both have
exhibited rates of return (12.68% and 12.15% respectively) which are much larger than
the rates or return for non-food retailing (6.99%) or the general economy (7.33%). The
superior performance of grocery/food retailing is largely accounted for by the
performance of the large firms, which registered returns almost double those of small and
medium sized firms. In contrast to food, the large non-food retailers under-performed
relative to small and medium non-food retailers.
The superior profitability of large grocery/food retailers is a bit of a puzzle given that
food prices have been rising less rapidly than the price of consumer goods in general
implying that the real price of food has been declining. On the one hand, this declining
relative price of food suggests that grocers are not extracting monopoly profits from
However, if prices are not the underlying reason for increasing profitability within food
retailing, then the driver by necessity will be decreasing costs. Costs can be decreased
through increasing efficiencies, better managerial skills, or through the leverage of
market power. Unfortunately this study does not explore deeper into the underlying
mechanics of the profitability in food retailing, but future research in this area would
prove interesting.



The economists didn't want to say it, but I will. "then the driver by necessity will be decreasing costs" means these retailers have enough economic power (and even more now with consolidation), to squeeze their suppliers ie. farmers. This has been the magic that Walmart has used so well to offer such good value in their stores. Don't forget that that the Walton family which controls 39% of the company collectively is worth $89.5 Billion dollars as of March 2010, so it's not as if the company is shortchanging its profits by offering low prices.  I promise not to badmouth Walmart too often, but when you're talking about money,  you can't ignore the best.

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