Canada: Loblaw, Metro post gains amid deflating food prices

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Two of the country’s largest grocers are seeing little if any increases in food prices – and even some deflation – but still managed to generate healthy profit gains in their latest fiscal quarter with the help of price breaks from suppliers.

Loblaw Cos. Ltd., the biggest in the field, and Metro Inc., which ranks No. 3, both reported better-than-expected profit on Wednesday as expenses fell and discounting attracted more shoppers.


“We are reducing the prices to see if we can draw the customer back in and we are having a reasonable degree of success,” Galen G. Weston, Loblaw’s executive chairman, told an analyst conference call. “We are pretty happy with the results so far.”

Loblaw saw some inflation at the beginning of its third quarter, which turned to deflation by the end of it, resulting in zero inflation over all. Metro reported 0.7-per-cent inflation in its fiscal fourth quarter, which spanned roughly the same period as Loblaw’s quarter.

After a couple of years of rising prices – $8 cauliflowers became the poster child for food inflation last year – grocers are feeling the pressure to moderate prices after consumers started to resist higher ones. Some of the biggest increases came in the meat and fruit and vegetable departments, prompting consumers to ditch cauliflowers and switch to lower-priced items.

And a growing number of consumers are switching to discount from traditional, higher-priced supermarkets, or opt for the low-cost, U.S.-based Wal-Mart Stores Inc. and Costco Wholesale Corp. Both Loblaw and Metro operate discount banners, including Loblaw’s No Frills and Real Canadian Superstore, and Metro’s Food Basics and Super C.

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To help it lower prices, Loblaw told its suppliers this summer to drop their wholesale prices by 1.45 per cent, starting in September. Other grocers, including Metro, followed suit.

“We’re pleased with those discussions with our suppliers,” Eric La Flèche, chief executive officer at Metro, told a later analyst conference call. “For competitive reasons, I’ll leave it at that. But we’re making progress. … On our pricing, I can tell you we are competitive. We make the price investments [reductions] that are necessary to stay competitive. It’s aggressive. It’s promotional and we compete pretty well.”

He said the trend of consumers heading to discount rather than conventional chains continues, but at a slower pace.

Metro started to respond about a year ago to consumer resistance to higher prices by dropping its prices. Loblaw, for its part, waited several months before it began to lower prices this year.

“We shifted quite definitively into a deflationary position as we exited the [third] quarter,” Mr. Weston said on Wednesday. “We think it’s meaningful. … It’s manageable deflation.”

Profit at Loblaw was helped by lower selling, general and administrative costs and an increase in same-store sales at existing outlets in the quarter, the company said.

Loblaw said revenue climbed 1.4 per cent to $14.14-billion in the third quarter ended Oct. 8, edging past the average analyst estimate of $14.12-billion, according to Thomson Reuters I/B/E/S.

The company’s adjusted net earnings attributable to shareholders rose to $512-million, or $1.26 a share, from $408-million, or 98 cents, a year earlier. Analysts on average had expected a profit of $1.12 a share.

Same-store sales at outlets open a year or more – a key retail measure – rose 1.4 per cent, compared with a 3.1-per-cent drop a year ago. At Metro, those sales picked up even more – by 2.8 per cent (compared with a 3.4-per-cent increase a year ago.)

In its fourth quarter ended Sept. 24, Metro reported a 10-per-cent increase in its profit to $145.0-million, or 60 cents a diluted share, compared with $131.7-million, or 52 cents, a year ago.

Sales in the quarter totalled nearly $2.93-billion, up from $2.83-billion in the same quarter last year.

At Shoppers Drug Mart, which Loblaw acquired almost two years ago, Mr. Weston said the company is intent on selling marijuana prescribed for medical reasons.

He said the company has applied to the government for a mail-dispensing licence to sell marijuana, following in the footsteps of other mail-order firms.

And Loblaw is part of the pharmacy industry’s discussions with Ottawa and the provinces to get the green light to dispense medical marijuana from its drugstores’ pharmacy counters.

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“We see that as a really compelling change in approach for managing marijuana,” Mr. Weston said. “We think that the pharmacy business is extremely well suited for processing controlled substances and we think there are significant medium-term opportunities for marijuana to be part of the pain-management-therapy formula for Canadians as we move forward. So we’re keen on it.

“As far as what the size of the opportunity is, let’s say it’s meaningful but it’s not transformational to the pharmacy business.”

He also said Loblaw is pleased with the early results of selling beer and wine in its grocery stores in Ontario. He said selling alcoholic beverages draws more shoppers to Loblaw stores and boosts the amount that each customer purchases, although it doesn’t directly contribute to improved profit margins.

“We are being very careful that we don’t overpay for the [liquor] licences that we do want to have access to,” he said. “But we will continue to add as those licences become available.”

Source: The Globe and Mail


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