Fast forward and our industry has gone from being starved of supply to being starved of demand. Product availability is back up on average around 95%, yet Canadians are purchasing 5% fewer groceries than before, a decrease equivalent to the total number of groceries bought in Nova Scotia and Saskatchewan combined. This drop in volume has far-reaching consequences for the entire value chain. The root of all evils impacting demand? Inflation. Not just grocery inflation alone, but total inflation is forcing consumers to make hard choices when they get to checkout.

Manufacturers are also feeling the pinch, with over 90% of food, health product, and CPG manufacturers seeing declines in their gross margins since 2019, coupled with input cost increases of 30% over the same period. This cost escalation is higher than the 23% cumulative grocery price inflation since 2019, indicating that manufacturers have absorbed a portion of these increased costs, instead of passing the full impact on to grocery retailers.

Food, health product, and CPG manufacturers are committed to keeping costs down, recognizing the challenges faced by all Canadians during this period of high inflation. That said, unhealthy gross margins are serious, directly impacting a company’s ability to invest and grow. In response to margin declines, manufacturers often cut jobs, cut innovation, and cut promotional spending that was allocated to providing Canadians with better deals. This viscous cycle hurts the economy and hinders consumer choice and spending, impacting both manufacturers and retailers alike.

The grocery business is a volume business. Productivity is directly correlated to volume and capacity utilization, where lower demand results in a higher fixed cost per case. When depressed profit margins are met with very few levers of relief, brands are forced to make hard decisions about which products to continue producing and which to discontinue. Moreover, a potentially dangerous question emerges: Why operate in Canada at all? Particularly when profitability significantly lags in comparison to the larger market down south.

On average, Canadian manufacturers index at 70% of the profitability of their U.S. counterparts across the same product segments. Why continue to choose to operate in a smaller, more uncertain market with higher costs and lower returns? Global CEOs of multinational manufacturers are starting to ask the same question, and the reality of an exodus of manufacturers from Canada is becoming tangible: in a recent FHCP member survey, 23% indicated they are likely to exit product segments altogether from Canada over the next two years.

At a time when Canadians are burdened by higher bills, why should they care about manufacturing profitability? Profitable businesses can expand, innovate, invest in new technologies, and create new jobs, adding value to workers and consumers alike. As Canada’s top manufacturing employer, our members represent over 350,000 jobs in 10,000 facilities in every region across Canada. The loss of these facilities and brands would have far-reaching effects on the communities they serve (lost jobs) and the overall consumer experience (less product choice on store shelves). We can’t take these numbers for granted; Canada needs to compete to be a great place to do business to maintain the brands that have become a part of both our national identity and our familial traditions. The future looks bleak without them.

To compete effectively, we need to stop focusing on the symptoms of inflation while nurturing the causes. Here is where I suggest we start:

• Manufacturers and retailers should focus on end-to-end value chain efficiencies and real, sustainable category growth solutions to unlock real value and enable a best cost, best price mentality. The recipe to achieve this is simple: Trust, transparency, and fair dealing!
• Government should collaborate with industry on smart regulations that enable our shared goals: consumer affordability, consumer transparency, and environmental sustainability.
• Government should support existing manufacturing plants in Canada through incentives and grants. Let’s keep the ones we have, while we create a healthier operating environment to build and attract more.

These proactive measures can help manufacturers adapt, thrive, and remain committed to doing business in Canada.

This op-ed was originally published on LinkedIn.