TORONTO — Loblaw here said the growth of nonunion competition in Canada is forcing the company's hand in its negotiations with labor unions.
As previously reported, the company is in the midst of contract talks with four locals of the United Food and Commercial Workers Union covering nearly 30,000 workers. The workers have already authorized a strike but have not yet taken any action.
“I like being the best payer in the industry, but I also want to give the best customer service, and to give the best customer service we've got to have the flexibility that allows us to put the right people in the right place at the right time,” said Allan Leighton, Loblaw's president and deputy chairman, during a conference call discussing second-quarter results. “And there is a watershed in this industry — there are more nonunionized players than unionized players, and therefore, it's time for a change. Now my objective and the objective of the negotiating team is to negotiate that.”
The company said it expected negotiations to continue through the current third quarter.
Leighton reported a 6.7% decrease in net income for the second quarter, to about $173 million (U.S., at current exchange rates), while net income year-to-date was up 5%, to about $305 million. Sales of $7 billion were up 1.2% for the quarter, which ended June 19. Same-store sales declined 0.3%. Year-to-date sales were up 2.1%, to about $13.8 billion.
Gross profit for both the quarter and year-to-date periods was up significantly more than sales. For the second quarter, gross profit of $1.74 billion was up 6.2%, and for the year-to-date period, gross profit rose 6.4%, to about $3.2 billion.
Gross profit as a percentage of sales in the second quarter was 24.5%, compared with 23.4% in the second quarter of 2009.
Perry Caicco, an analyst with CIBC World Markets, Toronto, said the strong Canadian dollar gave Loblaw's margins a big boost in the most recent quarter.
“Given that the results featured huge gross margin growth with a poor sales performance, the primary driver of the over-achievement had to be the [Canadian/U.S. dollar] exchange rate, which continues to create windfall profits, mostly in the fruits-and-vegetables category,” he said in a report.
The high exchange rate has also trimmed private-label ingredient costs, he pointed out.
“The trouble with making big money on the exchange rate is that it can't last,” Caicco added. “Clearly, the exchange rate party is slowly ending and Loblaw will, by Q4, have to actually look for margin improvements the old-fashioned way.”
In addition to the strong Canadian dollar, Loblaw attributed the improved margins to “continued buying synergies, disciplined vendor management, improved control label profitability, and inventory management.”
The company also said it has begun testing a new pharmacy configuration for small-format stores.
The 400-square-foot pharmacy, inside a NoFrills store in Ontario, features high-density shelving, new technology for the pharmacist and a counseling room. Plans call for retrofitting the pharmacy into “about a dozen” stores in the next three to four months.
“I think it will become a pretty powerful model,” said Leighton. “You could run at probably 30% to 50% less scripts than you would in a traditional, conventional store and still make probably a better return than you do in a conventional store.”