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Loblaw Invests in Low Pricing

The tough economic times Loblaw Cos. officials have been worried about have finally arrived. But they haven't come without opportunity. Resigned to a period of slowing revenues as the Canadian grocery market absorbs rapid deflation, the retailer said it has launched a slew of new pricing programs to drive volumes and win market share across its banners. Allen Leighton, president and deputy

TORONTO — The tough economic times Loblaw Cos. officials have been worried about have finally arrived. But they haven't come without opportunity.

Resigned to a period of slowing revenues as the Canadian grocery market absorbs rapid deflation, the retailer said it has launched a slew of new pricing programs to drive volumes and win market share across its banners. Allen Leighton, president and deputy chairman of Loblaw, in a conference call last week noted that inflation began to recede during the third quarter, confirming predictions of a second-half downturn he'd been making for about a year. He maintained, however, that Loblaw is equipped to survive it.

“We entered the quarter with moderate inflation and volume share under a bit of pressure in a food market with bumpy volumes,” Leighton said. “We exited the quarter with close to no inflation and volume share on an upward path in a food market of bumpy volumes.”

According to Leighton, investments from a “war chest” of funds assembled through asset sales and internal cost reductions is going toward pricing programs at all of Loblaw's banners.

“We believe that inflation — or a lack of it — will be a factor for at least the next six months, restricting revenue growth,” Leighton said. “Volume growth and volume market share will be key.”

Loblaw estimated inflation declined by about 3.5% overall during the quarter and that the decline accelerated toward the quarter's end. This contributed to a 0.2% decline in overall sales and a 0.6% decline in same-store sales. Adjusted for items including acquisitions and divestitures, same-store sales fell 1.1%.

In the meantime, Loblaw posted net earnings of $178.7 million (U.S.) — an improvement of 20.4% from the same period last year and in excess of analyst expectations. Overall sales were $9 billion. Analysts said the earnings surprise — Loblaw posted earnings per share of 71 Canadian cents per share vs. consensus of 62 cents — came as a result of controlling costs and maintaining margins, despite launching new pricing programs.

Perry Caicco, an analyst with CIBC World Markets in Toronto, noted that the new pricing campaigns — including “Just Lower Prices” in Atlantic Canada; “Rounded Down” at Superstores; “Won't Be Beat” at No Frills; and “Thousand Ways to Save” at Maxi — appear to be carefully constructed to improve pricing perception at minimal cost to margins.

“From our observations, although prices in some of these efforts were certainly lowered, they were not done so in isolation, or without offsetting price increases, or without supplier support,” he said in a research note.