BOLSTERED BY A STRONG Canadian dollar and a relatively tranquil competitive environment, all four Canadian companies whose stocks are tracked by SN showed gains in their share prices in the first half of calendar 2010.
That stands in sharp contrast to U.S. companies on SN's list, most of which lost value through the first six months of the year.
“It's all about margins,” said Perry Caicco, an analyst with CIBC World Markets, Toronto. “The Canadian dollar has been incredibly strong, so all of their purchases from the U.S. and Mexico — which is a pig part of produce buying for Canadian operators — benefit from the relative strength of the dollar, which gives them lower costs and benefits their margins.”
In addition, he pointed out that although Canada has a strong cadre of discount formats and an expanding presence of Wal-Marts, for the most part supermarket chains in Canada have enjoyed a relatively “benign” competitive environment that allows them to retain their profitability.
“Because we have not had increases in square footage growth for several years, and because the economy is OK, unlike in the U.S., Canadian supermarkets have not felt compelled to drive traffic by cutting retail prices,” Caicco explained. “Nobody is really driving big sales numbers, but there is a general belief that if you lower prices to drive sales, it probably won't be worth it.”
Loblaw Cos., Toronto, led the Canadian food-retailing group with a share-price gain of nearly 14% through June 30, to $38.61. Empire Cos., the Stellarton, Nova Scotia-based parent of the Sobeys chain, was also up in double digits — 10.4% — to close at $52.66. Rounding out the Canadian operators tracked by SN were Montreal-based Metro Inc., up 6.6%, to $41.81, and North West Cos., up less than 1%, to $19.12.
At Loblaw's first-quarter conference call with analysts in May, the company — Canada's largest food retailer — was able to drive 0.3% gains in comparable-store sales for the period, while also expanding gross margins — a feat U.S. operators have been struggling to accomplish. Similarly, Metro, despite citing 2% deflation in the second fiscal quarter, said it had slight increases in traffic and tonnage, while also expanding gross margins, and Sobeys had only a slight gross margin decline — 25 basis points — in its fiscal fourth quarter, reported last month, but a 0.5% gain in same-store sales.
Caicco warned that the “easy money” might be over now for Canadian operators, however, as inflation is expected to creep back again in the second half of the year.
“We are going to start to have issues now because the dollar starts to lap where it was last year, and year-over-year positive results are going to come to an end,” he said. “So companies are going to have to get price increases [to drive sales growth].
“The big question is whether anyone will try to break the peace and drive sales by lowering prices,” he said. “I don't think anyone is going to do that — there's been no evidence that anybody, with the exception of a few little skirmishes here and there, is really doing anything crazy with prices, including Wal-Mart.”
That stands in direct contrast with conditions in the U.S., he pointed out, where many companies have been forced to take retail prices lower to retain customer traffic and Wal-Mart often sets the tone for pricing.
“You could not have two more radically different markets,” Caicco said.