TORONTO -- Loblaw Cos. will continue to expand its general merchandise while focusing on offering lower prices to consumers, the company said at its annual meeting here April 30.
The grocer will also spend $910 million ($1.3 billion Canadian) this year to open new outlets and upgrade others.
John Lederer, president, said traditional food will remain Loblaw's main business, but it will continue to diversify into other everyday goods and services. This includes President's Choice Financial, fitness and medical centers, fuel centers and consumer seminars in Loblaw's "community rooms."
General merchandise results were weaker than anticipated in the first quarter due to an unusually long and cold winter, Lederer said in a conference call with analysts after the meeting.
But the strategy of adding more general merchandise seems to be working for Loblaw, according to analyst Bill Chisolm of Dundee Securities here, who noted same-store sales were up 5.4% in the first quarter.
"They're migrating to eastern Canada what they've successfully done out west where profit margins are higher," he said. "It also protects them against Wal-Mart with their gradual intrusion of their food services in Canada."
Perry Caicco of CIBC World Markets agreed, but noted that while sales are extremely strong, margin growth of 20 basis points for the quarter was lower than the typical 40 to 50 basis points growth.
"What they're doing is Wal-Mart-proofing their stores across the country by lowering prices and adding general merchandise to discourage Wal-Mart from bringing in their superstores," he said. "And as you bring prices down, margin growth is not as good, but it's a good strategy."
This fall, Wal-Mart Canada plans to launch its Sam's Club food and general merchandise warehouse-club stores in this country, but has not announced plans to open superstores here.
Loblaw is at a disadvantage with its unionized workforce against non-unionized Wal-Mart, which Lederer referred to in his speech as a possible warning to Loblaw workers.
"The marketplace is now home to more global and non-unionized competitors," he said. "The definition of a level playing field is changing. So are the elements required to remain competitive."
Lederer added that management and union leaders need to maintain "a positive dialogue" in achieving their common objective while taking on those unnamed rivals.
He also told shareholders he sees business opportunities in each region of the country in different categories. In western Canada, for example, Loblaw is improving the quality of its perishables while being very aggressive on pricing. In Ontario, the grocer is expanding its superstores and nonfood, general merchandise content.
The company had a 19.8% increase in net earnings to $104.6 million ($151 million Canadian) or 38 cents a share for the first quarter ended March 22, from $87.3 million or 32 cents a year earlier.
Sales for Canada's largest grocer increased 8.6% to $3.7 billion in the quarter.
The company predicts sales will increase between 6% and 8% this year from last year's record revenue of $16.1 billion.
