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Roula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.
Good morning. Chip stocks took a hit yesterday as investors got antsy about Nvidia earnings, which land on Wednesday. Super Micro Computer, a partner of Nvidia, fell 8 per cent. ARM and Broadcom fell about 5 per cent. Will a disappointing Nvidia release spell the end of the AI narrative? Some investors are not hanging around to find out. Send us your thoughts: robert.armstrong@ft.com and aiden.reiter@ft.com.
Greedflation revisited
Greedflation — roughly, inflation driven entirely by rising corporate profits — may or may not be a bad thing. In fact it may or may not be a thing at all. Yesterday, inspired by the Democratic nominee’s noises about price gouging in groceries, we tried to find greedflation in the financial statements of four of the biggest US grocery retailers (Walmart, Target, Albertsons and Kroger). One very unsurprising result was that the retailers saw a big jump in sales growth in the wake of the coronavirus pandemic. That’s what inflation is, after all.
Looking further, the big suppliers for the retailers — makers of food, drinks and personal care items — also enjoyed a burst of growth. Here is a chart of compound annual sales growth for the four years ended in June of 2020 (dark blue bars) and the four years ended in June 2024 (light blue bars) at three retailers and eight big food and branded goods companies:
The idea of this chart is that the difference between the pre-pandemic and post-pandemic growth rates is a very rough proxy for the rate of price increases. I emphasise “very rough”: growth may well have accelerated (or decelerated) at these companies for reasons that have nothing to do with pricing. There was more eating at home during the lockdowns, for starters.
Here is a chart that just shows the differences (I have left Coke out, because very negative 2016-2020 revenue growth is a byproduct of divesting bottling operations):
The range is between an extra percentage point of growth a year (Kroger) to almost 10 (Mondelez). For comparison, CPI inflation in food away from home compounded at 4.6 per cent a year over the latter four-year period, and CPI for personal goods compounded at 3 per cent.
It is tempting to read the last two graphs as capturing something about brand power. Companies with great brand equity — Colgate, Coke, Pepsi and Mondelez — were able to supercharge growth, largely on the back of pricing. Weaker brands — Kraft, General Mills and Campbell’s — were able to do less.
Retailers and suppliers saw big increases in operating profit, too. This chart shows which companies were able to grow operating profit (light blue bars) faster than revenues (dark blue) — that is, which companies’ margins expanded:
Remember that any large enterprise has a good shot, even in normal circumstances, of increasing profit a bit faster than revenue. That’s operating leverage. The ones to focus on above are the ones that were able to increase profits much faster than revenues, suggestive of price increases significantly overshooting input cost increases. Kroger, Procter and Mondelez stand out. Below are their margins over the past five years:
The rest of the companies’ margins were either roughly flat, or rose for a year or two before falling again. At Kraft Heinz, whose brands are notoriously vulnerable to trading down, margins fell even as sales rose. But note that companies like Coke or Pepsi, which took price increases above the rate of general inflation but hardly expanded their margins, are still much more profitable today, in the simple sense of earning more dollars of profit than they did before — in inflation-adjusted terms, too — mostly on the back of price. And dollars, not percentages, are what ultimately matters.
This is one reason that sales margins are an inadequate measure of corporate profitability. Another is that they don’t capture the amount of capital required to make a given level of profit. A low-margin company can be more profitable — a better business — than a high-margin one, if it requires less capital to operate. That is why we suggested yesterday that return on invested capital might be a better net for capturing greedflation. But as readers pointed out, that has drawbacks too (assets held on the balance sheet at historical cost mean that inflation drives up ROIC).
Still, a reasonably clear picture is emerging here. The biggest retailers and suppliers in the grocery value chain took a lot of price increases after the pandemic. In some cases this led to expanding margins, but even in the cases where margins were roughly flat, profits often rose at a rate faster than the pre-pandemic trend and faster than the rate of general inflation.
Whether or not this constitutes greedflation will be a topic for tomorrow. An additional issue for today is whether, in months and years to come, some of the price increases the industry has taken will have to be given back, in one form or another. Rahul Sharma, a consultant at Neev Capital and Unhedged go-to retail expert, thinks this is happening already. In the pandemic “everybody looked like a hero” — even the companies with the weakest brands could take price increases without pushback from consumers. “This was truly unprecedented in terms of the uniformity of price increases.” Now, however, companies with weaker brands are having to give some of the pricing back and pricing is starting to soften. “The food companies are having to give it back much faster than the high-brand-equities companies like Coke,” he says.
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