Re-Made in Canada: Loblaw's Road to Recovery

JON SPRINGER

A vegetable grower discusses the “deep, powerful, mellow soil” that nurtures the zucchini, cucumbers and carrots at his Manitoba farm. He pulls a carrot from the ground and clumps of black earth tumble off it dramatically as he hands it to a companion, a trim man in blue jeans, later to be revealed as a representative of Canadian grocer Loblaw. It is, in fact, its chairman, Galen Weston.

An acoustic guitar and orchestration provides majestic accompaniment to this and four other documentary-style farm vignettes in the new television campaign for Loblaw. Weston visits a cherry farm in British Columbia; an onion farm in Nova Scotia; and chats with a French-speaking grower of peppers in Quebec. The farmers discuss what makes their products unique as wide-angle shots frame a sprinkler shooting jets of fresh water into a purple sky and Weston biting into a peach picked off a tree in Ontario while a flat-bed truck carts away baskets of fresh fruit.

The tag line reads: President's Choice. Worth switching supermarkets for.

For a chain standing accused of losing its focus on food and its grip on the Canadian consumer, the “Grown Close to Home” campaign makes a powerful statement that Loblaw is, quite literally, finally coming back to Earth. Launched last month and created by the Bensimon Byrne agency in Toronto, the campaign highlights Loblaw's selection of Canada-grown produce as it attempts to win back a reputation for leadership in food that its own executives admit was fumbled away over years of distractions and shoddy execution.

While the new campaign has been well received, Loblaw still has a long way to go in its self-titled quest “to be the best again.” It is among a slew of new initiatives — refurbished stores and new formats, edited product selections, supply chain improvements, and an emphasis on service and price are others — introduced this year as Loblaw's turnaround, announced in February 2007, transitions from a phase of “fixing the basics” to a phase of “innovation,” and leaving behind the disruption of basic restructuring. But while Loblaw looks good on YouTube, the picture is muddled on the Toronto Stock Exchange, where its stock is trading near its lowest prices in a decade.

A range of observers contacted by SN for this article — Loblaw officials declined to comment — gave the retailer mixed reviews with regard to its turnaround progress, and offered differing opinions as to Loblaw's ability to ultimately pull it off.

“Things are slowly on the mend at Loblaw,” George Condon, a longtime observer of the Canadian grocery market, told SN. “In terms of shopping experience, they are nearly back. The stock market is probably a couple of years away. They've been punished severely. They still have work to do in getting back their reputation.”

Progress in improving a troublesome supply chain has not matched advances in stores, argued David Marcotte, director of retail insights for Management Ventures, Cambridge, Mass.

“The three-year plan was too aggressive in some places and very achievable in others,” Marcotte told SN. “It was achievable in getting the stores and the employees engaged again. The parts where it has not been effective is the relationship between IT and the supply chain, where they are only getting into the better practices and not into the best practices.”

Another observer, a financial analyst who asked not to be identified, acknowledged Loblaw has made strides to improve its food offerings this year, but not enough of them. “Instead of leapfrogging the competition, they've narrowed the gap,” the analyst told SN. “But I'm not sure whether they've narrowed it enough.”

Lost Soul
Weston, scion of the George Weston family that has controlled Loblaw since 1947, minced few words when talking about the need for change at Loblaw shortly after he joined the organization in his new role in late 2006. He and Allen Leighton, president and deputy chairman, took over the company from John Lederer, whose organization by the time he departed was wracked with issues stemming from a botched general merchandise expansion that observers said was driven by anxiety over a subsequent expansion of Wal-Mart Supercenters in Canada.

“We have great stores, but they're not run well enough. We have great products today, but they're not being merchandised well enough. We have great people in our stores, but they're not being given the tools to do their jobs well enough,” Weston said while announcing the turnaround plan early last year.

“We need to improve every key driver of our business,” he added. “Our organization is too complex, with ambiguous accountabilities, and is ineffective and slow to respond to the customer and the competitive environment.”

Industry watchers by then considered Weston's remarks to be plainly evident. According to Marcotte, its actions in the years leading up to 2007 provide “a case study for what not to do” in approaching a changing market.

According to John Williams, senior partner of J.C. Williams Group, a retail consultant based in Toronto, Loblaw “lost its soul” while striving to head off a planned expansion of Wal-Mart Supercenters in Canada.

“They were North American industry leaders in innovation. They were the go-to people if you wanted to see what was happening in the world of food, and they lost that position totally,” Williams told SN. “One wonders if it was because they decided to compete with Wal-Mart rather than rise above them.”

In the simplest terms, Lob-law's approach to Wal-Mart was to become “Wal-Mart-like.” It poured resources into developing a robust general merchandise offering and built new stores at a rapid pace, and tried to centralize operations and slash costs. But the company badly underestimated the complexity of a general merchandise operation, sources said. The additional products, requiring a different schedule of buying and rotation than food, caused havoc in the distribution centers and led to rampant out-of-stock conditions on shelves, affecting grocery and general merchandise alike.

“Their response to Wal-Mart was too broad and too quick, and they went into it with a sense of urgency they didn't need to have,” said Marcotte. “I've seen multiple supermarkets go into general merchandise in a big way and even when they have people that understand it, it's very hard to absorb the culture and the mind-set required to do that business correctly.”

Loblaw never established an identity as a general merchandiser, added Condon, and so had little credibility in that business.

“Most Canadian consumers think of Loblaw as a supermarket; they don't think of it as a Wal-Mart,” he said. “My thought is, if you go to Wal-Mart to buy a screwdriver you might also stop by the food section to get milk and hamburger meat on the way home. But you don't go to Loblaw to buy milk and hamburger and stop by and get a screwdriver. It's just a completely different thought process.”

In time, Loblaw had fewer food shoppers and warehouses jammed with inventory it couldn't sell. In 2006, it posted an annual loss for the first time in 19 years.

Loblaw's competitors took little pity on the 1,036-store giant. Particularly aggressive was Nova Scotia-based Sobeys, which saw Loblaw's foray into general merchandise as an opportunity to raise its profile in food and, according to some, claim the fallen crown as Canada's best food retailer. Sobeys savaged Loblaw in a satiric television ad showing customers waiting for a bus inside a massive superstore to get to the deli section — only to have the bus driver tell them it was on another route.

Others feel that the biggest beneficiary of Loblaw's Wal-Mart focus may have been Wal-Mart itself. The Bentonville, Ark.-based retailer has opened more than two dozen supercenters in Canada since 2006.

“You can make the argument Loblaw telegraphed how they were going to compete to Wal-Mart, and that gave Wal-Mart an advantage,” Marcotte said. “The supercenters in Canada feel more upscale [than their U.S. counterparts] and are easier to navigate. The merchandising is tighter. And looking at it today you can see that going after Wal-Mart created more problems than good [for Loblaw].”

“They've allowed competition to come in and focus more on food, and Wal-Mart still came and were still cheaper than them and still better than them on nonfoods,” added Neil Stern, senior partner with McMillan Doolittle, Chicago. “They never stopped them. And Wal-Mart has done well in Canada, with a supercenter that has a good emphasis on food.”

SIMPLIFY, INNOVATE, GROW
Loblaw officials in 2007 launched a three- to five-year turnaround plan to return the company to prosperity and growth. It focused its first year on “fixing the basics” by creating a centralized organizational structure, continuing with price investments, addressing out-of-stocks and revamping the failed Real Canadian Superstore concept in Ontario.

The out-of-stocks are now addressed by an “always available” program requiring stores to load shelves from the back and reject the notions of “facing” shelves or filling holes with products that do not belong there. The centralized company structure changed Loblaw from a federation of affiliated retailers to a centralized entity with central buying and regional managers.

A new concept Superstore in Milton, Ontario, reduced the overall offering in general merchandise while bringing emphasis to the few nonfood programs Loblaw feels it could succeed with — particularly the stylish private apparel line Joe Fresh. Thought of as a parallel to the President's Choice brand in food, officials believe Joe Fresh can become a $1 billion brand. The Superstore also carries items like cosmetics and kitchen gear.

Improvements in technology would be modest and made with an emphasis on controlling downside risk, officials said. Speaking earlier this year in a conference call, Leighton said Loblaw would focus on upgrading distribution and infrastructure “foundations” with an 18-month program of physical improvements at warehouses and the implementation of “simple, off-the-shelf, non-proprietary” tools to handle warehouse management, replenishment and forecasting.

Observers said Loblaw's price investments at its No Frills discount banner — while rough on margins of Loblaw and its competitors — were effective strikes against Wal-Mart's potential to dominate debate on price. Today, Loblaw is focused on making sure pricing is right at conventional stores.
“They were very worried that as Wal-Mart Supercenters started to roll out that No Frills traffic would be at risk. So as much as I think they went too crazy on [price investments], long term it will be looked back upon as a good decision,” an analyst told SN. “Because once you lose a customer you lose a customer for a long time. And you especially can't lose to a company like Wal-Mart that has ‘best price’ stamped on their forehead.”

Elements of the second phase of the program are showing up now. The effort to focus on local produce is part of an effort to source 15% of all Loblaw products locally. Conventional grocery stores have begun to receive renovations and reformatting under the “Great Food” prototype, which launched for the first time this spring. Great Food, a Loblaw spokesman told SN, “represents the return to Loblaw's strength in innovation for fresh food selection and quality,” with an emphasis on fresh food and specialty departments like bakery and sushi.

Employees at the new stores — Loblaw is shooting for 20 conversions by year-end — are in new uniforms, and like workers at all stores, are motivated by a new companywide 10% employee discount when shopping at any Loblaw store. That, along with the authorization to hire 1,000 new employees to improve service levels at stores also announced this year — is already making a noticeable difference, one source said.

Leighton, who was named president this spring and pledged to accelerate the turnaround now under way, said the company would also move to address renovations of Superstores in Western Canada and begin to convert Extra Foods stores there to the No Frills banner.

Leighton said the company is planning a “massive” 25th anniversary for the President's Choice label later this year. That label — positioned as a premium offering at a time when retailers used store brands almost exclusively as a price offering — earned Lob-law a deserved reputation as an innovator and as Canada's leading food chain.

“They were loaded with innovation then, not just in Canada but all of North America,” recalled Williams. “They innovated with President's Choice and with the yellow-label generic, their deli brand, the kids' offerings and a newsletter called The Insider Report, which was jammed with new products. When you got it you could hardly wait to go to the store.”

Loblaw said it is striving to grow private label from 24% penetration today to 30% of total sales.

One source, a financial analyst, said he felt Loblaw's revamped Great Food stores represent a promising improvement from “tired” conventional stores but still lack the “ambience” and presentation of prepared foods that conventional stores operated by Sobeys and Metro possess. But he is also giving Loblaw some time to refine the format.

“The key quarter to see how far they can push this thing is the fourth quarter of this year because there is more to come, particularly as they go through product development and sourcing in home-meal replacement,” the analyst said. “Right now, they need to romance the food more and see if they can't get the consumer to buy that one more item than was on their shopping list.”
Out-of-stock problems have subsided, the analyst added, but it could be months before the consumer gives the retailer any credit for that. “Once consumers are convinced there is a problem, it takes a very long time to convince them it is fixed,” the analyst said.

Marcotte said he disagreed with Loblaw's tactics to deal with the out-of-stock issue — leaving holes alerts the shoppers just as effectively as Loblaw that the problem exists. The larger problem, he said, is that those issues are indicative of underfunded information technology and a “European” approach to the supply chain issues he feels will be ineffective in Canada.

“For 10 years IT was the most neglected area of the company, and that was a bad 10 years not to have been paying attention,” he said. “Today, you need data from suppliers and consumers, and developing each of those areas is a tough five years.”

Stern likened Loblaw today to U.S. retailers like Safeway and Kroger earlier this decade, while they were experiencing erratic results and investor skepticism as they mapped out strategies to react to a changing environment.
“With those guys we saw three or four years of pain in transition, and that's what we're seeing now with Lob-law,” Stern said.

In retrospect, Stern said Loblaw made its own transition more difficult by failing to build on its strengths while it shored up its weaknesses. “You can do both,” he said.

“Retailing is all about reinventing yourself,” added Williams. “The problem was they reinvented themselves in the wrong direction.”

30% of sales targeted for private label, up from the current 24%.
Source: Loblaw Co.