Arduous Journey Ahead For Loblaw's Recovery

JON SPRINGER

TORONTO — As the new management team at Loblaw Cos. here prepares to get Canada's largest retailer off the mat, observers are predicting a slow and occasionally painful recovery.

A new team of leaders at Loblaw is expected to unveil details of a new strategic plan at an investor conference Feb. 21. The strategy — which Loblaw executives said would be built around themes of “simplify, innovate and grow” — will aim to help the company recover from the effects of a botched supply chain project that cost the company millions in writedowns and its former leaders their jobs.

Loblaw's new executives are led by Galen Weston Jr., scion of the controlling Weston family who was named executive chairman in September, as John Lederer, the former president, resigned by “mutual agreement.” Weston's team includes Mark Foote, president and chief merchandising officer, who came over from the Canadian Tire chain last year; Dalton Phillips, chief operating officer, a former CEO at upscale Irish department store chain Brown Thomas; and Allan Leighton, the deputy chairman and a former top executive at Wal-Mart's Asda chain in the United Kingdom.

According to Perry Caicco, an analyst for CIBC World Markets in Toronto, the new team will likely draw on its background in the department store industry to centralize control at Loblaw.

An early indication of this came last month when Loblaw announced it would cut up to 1,000 jobs — around 20% of its employees at its head and regional offices — over the coming nine months. The cuts will accompany a shift of national buying responsibilities to suppliers and the introduction of common category management practices across Loblaw's banners, the company said.

“It's part of a large, comprehensive, restructuring of the business, that's for sure,” Caicco told SN in an interview. “The cuts were a little deeper than I would have thought, but directionally, they were right on where we would have thought. The bulk of the senior management team comes directly from the department store business. That's a centralized business where you can sell the same toaster coast-to-coast.

“This is the beginning of what I think will be the streamlining of a wide range of things in the business — including SKUs, stores, banners and formats,” he added.

In a recent report, Caicco warned against investors bidding up Loblaw in hopes that its announcement later this month would be a “magic bullet” to earnings growth. “The chance of a near-term earnings recovery or material valuation event is remote,” he wrote. “Even with perfect execution, there is likely to be little earnings upside, outside of headcount reductions, for at least two years.”

‘A STRAIN ON THE BUSINESS’

Bill Chisholm, an analyst at MacDougal, MacDougal and MacTier, Toronto, said he was surprised by the number of job cuts, and said a reduced staff will be especially challenging as Loblaw plots a turnaround.

“The pain is going to be more excessive than one would have thought a few months ago,” he told SN. “One thousand jobs is a pretty large number. Is that going to limit their ability to execute until they get the whole thing stabilized? Hopefully not, but that's the question people will have. Getting rid of that many people in that short a time frame will put a lot of strain on the business for a while.”

Much of Loblaw's recent troubles can be traced to issues encountered while streamlining its supply chain and adding general merchandise to its stores. Those initiatives, launched under Lederer three years ago, were seen as necessary steps to compete with an anticipated expansion into the Canadian food business by Wal-Mart. However, they were poorly orchestrated and slowly corrected, observers said. Mistimed deliveries led to poor in-stock positions of some items, excesses of others and unproductive labor scheduling chainwide. Solving those issues required a slowdown in sales promotions and resulted in fewer shoppers.

“What became clear when their supply chain problems began to erupt was how long it took them to get things corrected,” Chisholm remarked. “Maybe the business wasn't as flexible or quick to respond as it should have been. The new management came to the conclusion that what was going on was too gradual an approach. It was too slow to correct the problems they created for themselves.”

The company last month said it would take a charge to liquidate excess general merchandise that gathered in its warehouses as a result of the supply chain glitches.

Despite the difficulties encountered streamlining the supply chain, the project will ultimately serve Loblaw well, Caicco said.

“It is a little ironic that after three years of supply chain pain the previous management team forced the company through, it might be beginning to bear fruit mere weeks after they were turfed,” Caicco said. “I think the bulk of the savings and productivity gains of that initiative are still to come. Nevertheless, there was no way you could effectively centralize the business if there hadn't been a project to remake the systems and processes in the business. Strategically, the idea of streamlining the supply chain and logistics was absolutely the right thing to do.”

Caicco said he expects the “simplify” part of Loblaw's plan to come as the result of a 20% reduction in SKUs, dropping tertiary and regional brands and “big-ticket” items in nonfood, such as electronics. He also predicted that Loblaw would eliminate regional banners in favor of a more consistent approach countrywide. Under “innovate,” he said Loblaw may consider adopting a loyalty card program, developing a new convenience-focused store and building a leadership position in natural foods. The “grow” phase of the strategic plan could involve selective acquisitions, a low-price strategy and continued store development, with multiple formats allowing for flexibility to all markets.

WAL-MART'S IMPACT

Wal-Mart, which operates more than 500 discount stores in Canada, last fall began expanding some of them to a food-discount supercenter concept. The Bentonville, Ark.-based retailer currently operates seven such stores in Ontario.

While Wal-Mart's prices are competitive, its real effect on competitors has been to add square footage to already tight markets, Chisholm said. “Wal-Mart is priced aggressively, but certainly nobody's been overwhelmed by their presentation.”