Loblaw builds stronger value proposition for shoppers

Loblaw Cos., Canada’s largest food and drug retailer, aims to sharpen its value focus as price continues to remain top-of-mind for inflation-weary consumers.

To that end, Brampton, Ontario-based Loblaw plans to convert more conventional supermarkets to its discount grocery formats, fine-tune its promotional mix to bring shoppers more savings and mitigate supplier cost hikes to keep a rein on pricing, executives said in the company’s fiscal 2022 conference call with analysts.

For the 12-week fiscal 2022 fourth quarter ended Dec. 31, retail sales totaled $13.69 billion (Canadian), up 9.7% from $12.49 billion a year earlier, Loblaw reported. E-commerce sales grew 8.3%.

Food retail sales climbed 8.8% to $9.51 billion in the quarter, with same-store sales rising 8.4% year over year. In the Shoppers Drug Mart drug retail unit, sales jumped 11.6% to $3.74 billion for the fourth quarter. Drug’s same-store sales increased 8.7% overall, including 11.5% in the front end and 5.4% in the pharmacy. Prescriptions filled rose 2.2% on a comparable-store basis.

“In food retail, absolute sales increased 8.8% and same-store sales grew 8.4%. Improvement in our market share and strong traffic reinforce the belief that our offer is resonating with customers,” Loblaw Chief Financial Officer Richard Dufresne said of the food retail business in the Feb. 23 analyst call. (Call transcript provided by AlphaSense.)

Loblaw said its discount food retail banners, such as No Frills and Maxi, have outperformed its traditional grocery formats. / Photo: Shutterstock

“Our discount banners continue to perform well, with strong traffic and items-count growth in our hard discount banners. We strengthened our discount position having converted four additional stores in the quarter for a total of 11 last year, all with strong initial results,” Dufresne explained. “Going forward, in 2023, we plan to convert over 20 market stores to discount and plan to open some 30 new food and drug stores. Though discount continues to outperform conventional grocery, our market banners are also delivering strong results. Having the right customer offer in all of our stores remains a key focus.”

Loblaw’s "no name" value grocery and household brand has contributed the solid performances by its conventional supermarkets and No Frills and Maxi discount food banners. Last fall, Loblaw instituted a price freeze on more than 1,500 items carrying the no name label, which provides an average savings of 25% over comparable national brands.

“Customers responded well to our efforts helping deliver strong sales and market share growth. The no name price freeze was an important driver of that success, as was the strength of our weekly promotional programs. This was true in both divisions,” Loblaw Chairman and President Galen Weston said in the call. “One notable item in the quarter was the outstanding growth in our prepared meals categories, as customers chose fresh, prepared food at great value as an alternative to dining out.”

Internal food inflation was essentially in line with the Consumer Price Index in Q4, Dufresne reported. Yet, going forward, “managing the balance between cost and price inflation will remain difficult,” Weston told analysts.

“We are seeing some costs stabilize and even begin to reverse in a few areas, and we are actively lowering prices in key categories. However, we still have over 1,000 supplier requests on our desks for significant cost increases,” he said. “We continue to believe that these inflationary pressures are temporary and that they will ease with time. But predicting how long that will take is proving extremely challenging. In that context, we recently reaffirmed our commitments to no name prices being an average of 25% less than national brands. We’re delivering the best available value in our 400 No Frills and Maxi hard discount stores, and we will continue to push back on unjustified cost increases from suppliers.”

Last fall, Loblaw Chairman and CEO Galen Weston promoted a price freeze on the retailer's no name value own-brand. / Photo courtesy of Loblaw

Dufresne said Loblaw continues to receive “a large number of higher-than-normal cost requests” from suppliers, which paints a picture of elevated inflation through the 2023 first half.

“Our decrease in food retail gross margin ties directly to the combination of continued cost pressures and higher investments in promotion, including our no name price freeze initiative,” he said in the call. “Our food retail gross margins peaked in mid-2021, prior to the onset of accelerating inflation. Since then, our food retail gross margin has not returned to those levels. Our Q4 results are further evidence that retail prices are not growing faster than costs and the company is not taking advantage of inflation to drive profit. And our strong sales and market share performance this quarter are a clear indication that our efforts resonate with customers.”

In the 52-week 2022 fiscal year, Loblaw’s retail sales came in at $55.49 billion (Canadian), up 6.2% from $52.27 billion in fiscal 2021. Despite the Q4 uptick, e-commerce sales for the year dipped 3.8%, which the company said marked a cycling of elevated online sales from lockdowns in the previous year.

Full-year food retail sales gained 5.1% to $39.4 billion, including same-store sales growth of 4.7%. Meanwhile, drug retail sales increased 8.8% to $16.09 billion. Comp-store sales in the drug unit were up 6.9%, reflecting gains of 8.2% in the front-of-store and 5.7% in the pharmacy. Script count rose 2.6% on a comparable-pharmacy basis.

Loblaw said it opened 13 food and drug stores and closed 10 locations in fiscal 2022. As of the fiscal year-end, the company’s retail network encompassed 2,444 stores, including 547 corporate-owned supermarkets under multiple banners, 551 franchised grocery stores and 1,346 Shoppers Drug Mart/Pharmaprix associate-owned drugstores. Aside from drug stores, Loblaw Cos. retail banners include Loblaws, Zehrs, Independent, Valu-Mart, Provigo, Atlantic Superstore, Fortinos T&T Supermarket, Wholesale Club, Real Canadian Superstore, No Frills, Maxi and Extra Foods.

Capital expenditures are slated to rise to $2.1 billion (Canadian) for 2023, investments will focus on stores and distribution centers, according to Dufresne.
“Our role is to meet the needs of the communities we operate in and the expectation of our customers,” he said. “This means refining the promotions, mix and presence of our supermarkets and drugstores. If we’re successful, results follow.”