LOBLAW RAMPS UP GM OFFERINGS

MARK HAMSTRA

TORONTO -- Loblaw Cos. here said it expected to open a general merchandise distribution facility in Ajax, Ontario, in February, as Canada's largest supermarket chain prepares to aggressively expand its Real Canadian Superstore format in the eastern part of the country.

In a conference call with analysts discussing its results for the third quarter ended Oct. 9, Loblaw said it planned to open about eight to 10 Real Canadian Superstores in Ontario next year, after opening about 10 of the 100,000-square-foot-plus supercenters this year throughout the country.

"It's a giant step forward for us in terms of the general merchandise supply chain," said John Lederer, president, about the new distribution center.

He noted that shifting Loblaw's general merchandise operations from Calgary in western Canada to Ontario made sense because it brought the company closer to its suppliers.

"At the end of the day, we are going to have a lower cost organization. But more importantly, we think we are going to come to market in a far more effective manner," he said.

The company said its operating margins have benefited from an improved product mix that includes more high-margin general merchandise. Operating margins for the quarter improved to 5.6%, from 5.2% in the year-ago period. Other factors contributing to the improved operating margins were buying synergies and operating efficiencies.

The company reported a net income for the 16-week quarter of $258 million Canadian, or about $216 million U.S., an increase of about 18.4% over the year-ago results. Sales in the period grew by 6%, to about $6.8 billion. Same-store sales were up 1.5% in the period. Food-price inflation was up a little more than 1% in the quarter.

For the year-to-date span, Loblaw reported net income of about $532 million, an increase of 14.5% over year-ago results, on sales growth of 5.5%, to about $16.8 billion.

The company said all regions of the country experienced sales growth in the quarter. During the past year, Loblaw has added 3.2 million square feet of retail space, including 81 new and franchised stores, vs. 71 that have been closed. During the third quarter, 26 new corporate and franchise stores opened and 20 were closed for a net increase of 1 million square feet of retail space.

Lederer said the company was focused more on top-line growth as same-store sales were difficult to grow in mature markets. The added retail space is causing the company to cannibalize some sales at existing stores, Lederer explained.

"You're seeing that wherever you either drop in additional footage, or significantly convert old footage to make it more powerful and more potent in markets where you've got significant share," Lederer said in response to an analyst's question about cannibalization. "It's not just in Ontario. It can be in some markets where we've moved from food to food and general merchandise."