TORONTO — Embattled Canadian supermarket operator Loblaw Cos. made the case for its aggressive pricing actions last week by citing the struggles of U.S. operators Tops and Albertsons.
Though aggressive retail cost reductions over the past year have savaged Loblaw's earnings and have been called “irrational” by some competitors and industry observers, Loblaw officials in an investor conference last week said the tombstones of U.S. operators who failed to properly adjust pricing as they battled low-cost operators clearly illustrate a need to reduce prices as a means of survival.
“Are we interested in sparking irrational price competition? No,” Galen Weston, executive chairman, told investors. “But we have to have the right competitive price position — that's what drives the volume, so we have to maintain it. If we tried a turnaround while sales volumes were decreasing, we'd have a whole new set of problems.”
Pricing was among several initiatives addressed in a lengthy investor presentation marking the first anniversary of an ambitious turnaround. Emphasizing a theme of traction amid volatility, officials also reviewed Loblaw's progress in areas like store formats, cost reduction, supply chain, technology and store improvements.
Pietro Satriano, Loblaw's executive vice president, food, explained that looking to counterparts in markets like Houston and Buffalo, N.Y., showed a clear correlation between competitive price positioning and market share when competing against Wal-Mart, the Bentonville, Ark.-based giant that today is rapidly expanding its food retailing presence in Canada. In Houston, Albertsons' pricing skewed around 25% higher than Wal-Mart, and the supermarket chain was eventually driven from the market completely while H.E. Butt Grocery Co., at around a 5% premium to Wal-Mart, gained market share between 1998 and 2006.
During the same period in Buffalo, Tops Markets indexed at 20% higher than Wal-Mart and lost share, while Wegmans, having reduced its pricing spread to 9%, gained share. Tops has since shed dozens of stores and been sold.
“It drives home for us the importance of being price-competitive,” said Satriano.
While Loblaw's massive price investment has caused some turmoil in the industry and contributed to erratic financial performance, the chain through investments last year reached its target benchmarks in its hard-discount and superstore formats, Satriano said, explaining that its No Frills and Maxi hard-discount banners index equal to benchmark competitors, including Wal-Mart, on key items, while superstores average 2% to 4% above the benchmark.
Loblaw, however, needs additional investment in price to reach its target of a 6% to 8% price premium at its “great food” or conventional stores. Those investments — which officials declined to put a specific price on — would commence this year, Satriano said.
The chain is also using its newly centralized structure to reinforce price perception among shoppers through consistent signage in stores, he added.
A new focus on store operations and labor productivity is reducing out-of-stocks and shrink while seeking to reduce costly employee turnover, said Dalton Phillips, Loblaw's chief operating officer.
The company said it would begin offering a 10% colleague discount to employees this quarter. “We think it will drive retention and improve morale,” Phillips said. “You won't want to let your colleagues down if you are all shopping at the store.”
Shrink initiatives include an at-risk coupon program to reduce items nearing their expiration date rather than discarding them, as well as more rigorous employee background checks, Dalton added. So far in 2008, 7.5% of Loblaw's job applicants were rejected based on criminal records, he said.
Around 233 stores on Loblaw's new “always available” program are seeing dramatic reductions in out-of-stocks. That program requires stores to fill their shelves from the back and to reject the common practice of “facing” or “filling holes” on shelves.
“Don't abuse the planogram,” Phillips explained. “There's a hole for every item and an item for every hole.”
In addition to reducing out-of-stocks, the program is also reducing costs and helping to fund the ongoing turnaround, Phillips said.
Technology and supply chain improvements at Loblaw are proceeding gradually and with an emphasis on mitigating risk, officials said.
Rather than develop new technologies itself, Loblaw will instead rely on proven systems and outsourced technology, according to Catherine Booth, senior vice president of information services. And rather than introducing massive changes at once, Loblaw will introduce technology improvements “in small bites,” so as to minimize risk.
Loblaw's maligned supply chain is also undergoing a gradual transformation from a traditional “stock and ship” model to a “flow” model relying on collaboration with vendors and an advanced order management and replenishment system based on actual consumer purchases, said Peter McMahon, executive vice president of supply chain. Known as the “Supply Chain 2010” program, the “flow model” will improve efficiency, allow the chain to carry less inventory and dramatically improve speed, allowing for better fresh-food presentation. Loblaw intends to lay the groundwork for the program this year with an eye toward integrating the solution in 2010.
Company officials also discussed Loblaw's progress in creating “pilot stores” to shape future store renovation plans. Certain aspects of Loblaw's Milton, Ontario, Superstore pilot, which opened last August, including its bakery, apparel and drug modules, have proved to provide superior productivity and are scheduled to be rolled out to other units, said Jane Marshall, executive vice president of real estate. Milton has outperformed the average Ontario Superstore by 5% to 7% in sales, she said.
In addition, Loblaw is experimenting with a smaller, 80,000-square-foot Superstore concept as a way to renovate conventional stores. The company sees 40 potential locations for this conversion.
Marshall characterized Loblaw's “Great Food” pilot renovation in Burnhamthorpe, Ontario, as “an initial success,” with a revamped fresh program turning a 27% sales lift in produce and better performance from the general merchandise section, including the “Joe Fresh” apparel line. The company has identified five other locations for this renovation at a cost of $2 million to $5 million (Canadian) each, she said. In addition, Loblaw is currently testing new fresh and prepared-food concepts at a store in downtown Toronto with an eye toward making them scalable for further rollout.