Tuesday, June 18, 2024

"Greedflation" Math Gets an F

Click here to read the original Cautious Optimism Facebook post with comments

4 MIN READ - The Cautious Optimism Correspondent for Economic Affairs and Other Egghead Stuff calmly shreds the latest left-wing accusations of food “greedflation”... with simple math.

Lately the “greedflation” crowd (i.e. anyone who doesn’t realize inflating the money supply by 44% in two years causes inflation) has resorted to some homespun “evidence” that greedy companies are responsible for jacking up food prices in particular on American consumers.

The attached meme about General Mills is an example the Correspondent came across posted by someone trolling a free market page.

Of course none of the quoted statistics, all designed to shock readers into thinking General Mills is greedy—dividend payments, stock buybacks, CEO pay, and net income, all of which happen every year regardless of whether annual inflation is 1% or 9%—have anything to do with whether or not inflation is impacting the company’s cost and pricing structures.

Well fortunately the Correspondent has a few decades worth of experience with something the greedflationists have evidently never looked at in their lives: publicly traded companies’ SEC filed finances.

In less than 60 seconds the Correspondent retrieved General Mills’ most recent SEC-filed annual report, the 10-K. 

The company’s consolidated income statement is at this link on page 42.


Generally accepted accounting principles lay out very simply how much General Mills, or any company for that matter, is charging customers (“net sales” or “revenues”) against how much they’re paying to procure the final product they sell to the same customers (“cost of sales” or “cost of merchandise”):

FY2021 Net Sales: $18.1B
FY2023 Net Sales: $20.1B ( +11.0%)

FY2021 Cost of Sales: $11.7B
FY2023 Cost of Sales: $13.5B ( +15.4%)

Yes that’s right, during the two worst years of America’s recent inflation General Mills had to pay 15.4% more for the goods they sold their customers, but they only charged 11.0% more.

In other words, their wholesale costs rose faster than their revenues and their gross profit margins shrank.

(On a side note, companies have additional costs they must pay out of gross profits that whittle their bottom line down to a smaller net profit. A list of those other costs, and why they aren’t a good gauge for measuring the effects of inflation, is available at the end of this article.)

Also two weeks ago a Cautious Optimism reader/commenter made a similar comment about the greed of grocery stores driving food prices higher.

The accusation was that “Kroger’s profits have risen 49% since 2021 and Publix’s profits are up 45% since 2022.”

Now the identity of the commenter is not important here, and even if it was in error (it was) civil discourse still helps us all arrive closer to the truth, even when social media tries to censor it.

But once again simply checking Kroger and Publix’s SEC-filed financial statements we can get to the heart of whether “corporate greed” is to blame.

Kroger FY2023 10-K, page 56


Publix FY2023 10-K, page 20


For Kroger:

FY2021 Net Sales: $137.9B
FY2023 Net Sales: $150.0B ( +8.8%)

FY2021 Cost of Sales: $107.5B
FY2023 Cost of Sales: $116.7B ( +8.6%)

So Kroger’s gross margin was virtually unchanged and hardly “49% higher.”

(For the record Kroger’s gross margin rose 1/6th of one percentage point in two years)

Now for full disclosure, Kroger’s “net profit” rose more sharply. Still not “49% higher” but net income did rise from $1.66 billion to $2.16 billion or up 30%.

But there’s more, and much more important, full disclosure: 

FY2021’s net results were depressed by Kroger’s one-time unrealized $821 million loss on its portfolio of investment securities. And FY2023’s net results were inflated by Kroger’s one-time unrealized $151 million gain on its same portfolio of securities, none of which have anything to do with price-gouging or greedflation.

So backing out the volatile movements of its securities portfolio, something Wall Street analysts do regularly, Kroger’s core business net income actually *fell* by 19% from FY2021 to FY2023 ($2.48B down to $2.01B).

The Correspondent suspects the commenter wasn’t aware of the standardized accounting and probably saw the “Kroger’s profit was up 49%” shock number on an ignorant left-leaning meme somewhere, or even less reliably from MSNBC.

Lastly there’s Publix’s 10-K finances.

The Correspondent thought it odd that Kroger’s alleged profit gain was “since 2021” but Publix’s was only “since 2022,” and his suspicions about cherry-picking years to manipulate a desired result proved warranted. 

Yes, as suspected Publix had a $1.262 billion one-time loss on its 2022 securities portfolio which artificially depressed its net income, providing the perfect platform for an impressive “gain” in 2023. Further boosting the "gain" was Publix's investment loss swung to an $863 million gain a year later.

But once you back out all those volatile one-time securities portfolio movements Publix’s net income also fell by 16% from 2022 to 2023 ($4.18B down to $3.49B).

And looking again at Publix’s much more meaningful gross metrics across two full years we get:

FY2021 Net Sales: $48.0B
FY2023 Net Sales: $57.1B (+18.9%)

FY2021 Cost of Sales: $34.8B
FY2023 Cost of Sales: $42.1B (+21.0%)

Publix’s cost of merchandise also rose faster than the prices they charged.

BTW Kroger’s 2023 final net income (adjusting for securities gains/losses) generated a net profit margin of 1.3%. Publix’s was 6.1%.

Publix seems to have a higher-margin business model, but neither company’s net margin is a portrait of “greed,” especially when considering liberal favorites Google, Facebook, and Netflix—all three of whom have lobbied the federal government heavily for favorable Net Neutrality regulations—enjoyed FY2023 net profit margins of 24.0%, 29.0%, and 16.0% respectively.

(links to their 10-K financials available on request)

Now the Correspondent is sure that if some greedflation loon turns over enough rocks he might find a consumer company or two out there among hundreds that really have expanded gross margins nicely in the last two years. After all, in any given period some companies are growing margins while others are narrowing.

But the larger point is that of the three consumer companies the Left has chosen to accuse online of massive greed, which in turn they blame for rising food prices, all three are a giant fail when analyzing what the greedflationists seem to have no clue about: standard corporate accounting. The Correspondent suspects if one looks at a larger number of other retail grocers and food companies, most will show similar results.

Because as Milton Friedman settled decades ago, but which most leftists refuse to learn from:

“Inflation is always and everywhere a monetary phenomenon…”

…and (in his words) inflation is not caused by “greedy businessmen” or “grasping trade unionists” or “spendthrift consumers” because…

“None of these groups possesses a printing press on which it can turn out those multi-colored pieces of paper you call money.”
(Comment from the Economics Correspondent regarding additional corporate costs):

After gross profit companies typically subtract additional costs:

-Selling, general, and administrative
-Research and development
-Depreciation and amortization
-Interest expense
-Onetime gains and losses on asset sales and investments
-Corporate income tax

Most of these metrics, and the net income that results once they are all accounted for, are typically unreliable for measuring the impact of inflation on a company’s finances because they are highly variable from year to year.

For example interest expense can rise rapidly if a company takes on new debt one year, or if it refinances at a higher interest rate. It can fall rapidly if a company pays off its debt or rolls over debt to a lower interest rate.

SG&A expense can rise or fall rapidly one year to the next if a company decides to undertake a new marketing campaign or wind down an old one.

Depreciation and amortization can rise rapidly if a company buys a lot of capital assets and suddenly has new depreciation to log.

Income tax expense can vary wildly if a company defers taxes by a year or two.

There are other examples but you get the idea.

For measuring “greedflation” there are no better metrics than topline net sales/revenues and topline gross cost of sales.

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