Much like his counterparts at Metro last week, Loblaw Companies CEO Galen Weston cited food deflation as a significant and ongoing challenge in the grocery business, though the company still reported a first-quarter profit increase of more than 19%.
Aside from reducing costs, Loblaw cited aggressive data-driven merchandising and promotion strategies for the positive quarter. Revenue of $10.4 billion was up slightly from $10.38 billion Loblaw reported a year ago, with same-store sales essentially flat when adjusted for holidays.
“We were pleased with our performance in the first quarter of 2017,” said Weston in a call with analysts after releasing the Q1 numbers Tuesday morning. “The food retail business experienced a second consecutive quarter of deflation led by declines in produce prices,” he said. “Against these headwinds we grew our average basket, saw tonnage volume growth and share gain in both our discount and market banners.”
Weston addressed a number of key issues related to company performance and plans for growth. Here are a few of the key takeaways:
Deflation may ease, but competition will remain fierce
Food prices in March fell 1.9% compared with a year ago as Statistics Canada’s overall consumer price index for the same month rose 1.6% from a year earlier, following a 2.0 gain in February.
Compared with a year earlier, the cost of fresh fruit dropped 12.4% while fresh vegetable prices fell 10.2%.
Weston said they expected deflation to ease in the months ahead, but even as that happens, the intensely competitive promotional environment would offset early returns to inflation. “We still think the back half is going to improve, we just don’t think it is going to move back, in our view, to the more traditional 1% to 2% level of inflation,” he said. “It is pretty intense out there.”
If that’s the case, Loblaw is still positioned on costs and promotions to perform well financially, he said. “We are just really comfortable with our ability to merchandise that extra item [in basket] and continue to get the right sales trajectory and tonnage trajectory.”
Data is more important than ever
“More than ever we are leveraging customer data and analytics to better understand our customer and to drive our business forward,” said Weston. “For example, we are using our increasingly advanced analytics to expand our list of items with high punching power — products with high penetration rate that also drive a larger overall basket.”
“What we are essentially seeing is an added item or two in the basket and that is driving both sales and tonnage in the face of very moderate traffic declines,” he said. Loblaw is working with higher quality data and doing more with it, he said, adding that it learned a great deal from Shoppers in this regard. “They led the way, in our judgement, in terms of taking the customer insights that come from their loyalty program and using that to make really smart promotional investment decisions,” he said. That expertise and best practices has “probably been the biggest asset that has come to the group,” he said.
Click and collect is still the way to go
After opening its 100th click and collect store in January, Loblaw has increased the service to 128 locations across the country. “Click and collect typically increases the loyalty, reduces the promiscuity of customers so actually you get more of their total food basket,” he said. With the competition introducing home delivery options, Weston was asked if Loblaw would consider introducing delivery as well. He said delivery was not really new with Grocery Gateway offering the service for years, but he still considered it more of an experiment than a serious commitment in the industry. “Is it possible you’ll see us experiment? Never say never,” he said. “But, there has been no change in terms of our commitment to the click and collect proposition as the one customers feel the most strongly about.”
Food sales strong at Shoppers
Weston spoke at length about strong food sales at the company’s Shoppers Drug Mart stores as another positive trend in the quarter. “One of the most promising initiatives has been the success of fresh in our urban format stores,” he said. “In those stores, fresh items are in about 25% of baskets.” The focus has been urban centres and specifically Toronto, but the company recently introduced the concept at a store in Vancouver and is looking for additional locations.
While he sounded confident about expanding the program in urban centres, Weston said it would be more difficult expanding to suburban markets. The challenge is creating a reason for customers to buy food at Shoppers Drug Mart when they can do a full grocery shop at a supermarket that’s only a two-minute drive past that Shoppers, he said.
“That is all about changing people’s habits and changing their behaviour and we expect that to take longer,” he said. “If all you are doing is offering them a less complete full basket shop, why would they make that trade-off? If you start shifting the merchandising toward meal occasions and promoting for lunch or dinner, then you start to mimic what has happened in other parts of the world as the convenience food propositions have lifted off outside of the urban market.”