May 4th, 2016
Loblaws caught flat-footed in discount wars
Grocer did not react fast enough to more agile competitors
Disappointing food retail results at Loblaw released this morning, were compensated somewhat by stronger performance from its drug retail arm. Much of the grocery division’s weakness stems from its discount banners, which were caught off guard, during the first three months of the year, by challenges from rivals. So said Galen Weston, its president, in a conference call with analysts.
“Discount is very responsive to promotion offers,” said Weston. “Our promo was not as strong as it should have been. We backed off too much, while our competitors ramped up.” Loblaw was also hurt by its declining retail space, which shrank by 200,000 square feet during the quarter, due in part to the company’s previously announced shuttering of 50 stores.
Loblaw’s overall revenue performance was once again a mixed bag. Same store sales growth came in at just 2.6% during the quarter, due to price increases coupled with the continuing success of its Live Life Well merchandizing program. Loblaw’s internal food price inflation ran above the 4.0% national average CPI increase for food sold in stores during the period. Indeed tonnage volumes actually shrank at the company, on a same store basis during the quarter.
Boosted by Easter and strong food sales at Shoppers
Loblaw’s numbers would have been even worse, had they not been boosted by Easter weekend sales, which this year took place during the first quarter, as opposed to the second. This in turn, however will weaken the company’s sales totals for the coming three months, particularly in comparison with last year’s numbers.
Loblaws compensated for the stagnant revenue growth by reporting strong net income and earnings per share numbers, driven in part by price hikes, and continued share buybacks. The company’s pharmacy arm is also performing well. Same store sales growth at Shoppers Drug Mart hit 6.3% during the quarter. However front of store sales (non-pharma items) did even better hitting 8.2%, driven in large part by strong food offerings.
Furthermore according to Weston, enhanced food tests in a variety of Shopper Drug Mart locations are going well, with the exception of one outlet in Regina, where the mix will need to be updated. “As every month goes by, we are convinced that Shoppers has the potential to scale up the (food) proposition,” said Weston. The company also got good news on the credit card front, where receivables increased by $166 million during the quarter to $2.6 billion, due primarily to growth in the number of Loblaw customers who are buying on credit.
Making up lost ground gradually
That said, despite the weak first quarter on the grocery front, Weston is sticking to his initial full-year targets, and will try to make up the lost ground gradually, through incremental actions, rather than creating destabilizing large swings. New capital investments will help. Earlier in the quarter the company confirmed that it would invest $1.0 billion into its Canadian retail business during 2016.
The new money would finance construction of 50 new stores, 150 renovations, increased e-commerce expansion as well as IT infrastructure and supply chain projects. Nearly 20,000 new construction and retail jobs will be created.
Peter (at) peterdiekmeyer (dot) com
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