November 3, 2014
Loblaw stymied on price increases
Many Canadians are refusing to pay more for food
Canada’s largest grocer is feeling the heat from strapped Canadians, who are refusing to pay more for food, officials suggested in an analyst conference call today. Food inflation at Loblaw Companies Ltd. ran at near 2.8% in the third quarter roughly in line with Statistics Canada’s Consumer Price Index data. However same store sales rose by 2.6%, which means that volumes actually shrank.
Galen Weston, Loblaw president and executive chairman, put a positive face on the results, citing the Shoppers Drug Mart acquisition, cuts in selling, general and administrative expenses and implementation of a new IT system, as signalling progress going forward.
“We continued to advance strategic initiatives (during the quarter) and improve market position,” said Weston. “We delivered solid performance across our businesses, recognized efficiencies, realized significant synergies, and remained on track with deleveraging targets.”
Weston noted growing demand and a willingness among some customers to pay more in the high quality fresh and ready-to-eat segments. However he also acknowledged that in today’s tough market, in which total square footage growth is likely to slow in coming years, that Loblaw is unlikely to see major overall market share gains. The company is thus counting on marketing, merchandizing and administrative initiatives to chip away at competitors.
Canadians craving more
Some of these efforts are starting to pan out. According to Richard Dufresne, Loblaw’s chief financial officer, qualitative and quantitative measures indicate that the Crave More marketing campaign, launched in September, has struck a chord with Canadians.
Traffic on the President’s Choice web-site has increased more than threefold and the company charted strong sales lifts that coincided with TV and digital launches. In fact initial results are so positive that officials expect Crave More to become a sustained, longer-term success. Loblaw is also expanding its “Box” small-store discount concept, modeled in part on a similar effort in the UK, to see if there is a hole in the market that it can exploit.
However company officials, who confirmed that head office staff had been cut by 1,200 posts during the past few two years, from 6,100 posts to 4,900, are counting heavily on administrative moves to maintain profitability.
Drinking from a fire hose
Those efforts, which include installing a SAP enterprise resource planning system, will take time though. Dufresne confirmed that the technology has now been put into 440 Loblaw stores, and that recent conversions have gone smoothly. However the company continues to simultaneously run its legacy IT systems, so right now there is actually more work (not less). Furthermore, leveraging all the information produced by the SAP system, which one official likened to “drinking out of a fire hose,” will take time.
That said, Loblaw’s biggest challenge will be digesting the Shoppers Drug Mart acquisition. Officials say that the company has already generated almost half of the $100 million in projected synergies. However Loblaw took on huge debt, when it removed the non-channel competitor from the market and now owes close $13.5 billion. Grocery sector stakesholders will be watching closely to see how that plays out.
Loblaw Companies 2014 Third Quarter Highlights
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Peter Diekmeyer Communications Inc.