Why the price fixing scandal might not be all bad for Loblaw

The bread price-fixing scandal has garnered Canada’s biggest grocery chain a lot of negative media attention.

A recent survey from Dalhousie University suggested that consumer trust in Loblaw has fallen by 10% since the announcement of the bread price-fixing issue.

But will the scandal have a sustained negative impact on Loblaw?

While the company may face civil suits at some point, there is no risk of prosecution under the whistle-blower provisions of Canada’s competition regulations. And so the outstanding question is whether the decline in consumer trust results in significant losses in sales and market share to Loblaw.

Several factors suggest perhaps not.

All retailers painted with same brush

It’s clear that consumers are becoming increasingly distrustful of business generally. They feel in many cases that bad behaviour is the norm, and aren’t surprised when stories like the Loblaw price-fixing emerge.

READ: Loblaw, George Weston admit to bread price fixing

This is particularly true in this case because Loblaw has claimed that many, but not all, Canadian retailers were involved in the bread scheme. And so, if consumers believe everyone cheats, there’s little motivation to switch stores. Food is a staple. We can’t choose to forego groceries.

READ: Court documents name players allegedly involved in bread price-fixing scheme

Who is Loblaw anyway?

Another factor that will likely buffer any impact is that customers may not realize they’re shopping at a Loblaw-owned banner.

The company sells food under many different banners including Real Canadian Superstore, Zehrs, Provigo, Fortino’s, No Frills and Shoppers Drug Mart. Many customers likely shop at a favourite store without making an explicit connection to the Loblaw name.

That means even those customers who are inclined to punish Loblaw might not even know they are shopping there.

Free groceries

Loblaws has reportedly distributed as much as $150 million in gift cards (in $25 increments) as part of the campaign to win back public trust in the wake of the price-fixing revelations. These gift cards need to be spent in Loblaws stores. It will bring customers back into the store and they will likely spend more than the $25 they’re entitled to via the gift cards.

There will also be people who have never shopped at a Loblaws store who applied for gift cards. Rival grocery chain Sobeys has said it expects to feel an impact from the distribution of the gift cards.

Once again, we would expect customers who may have never set foot in a Loblaws store before to spend more than the gift card. It’s even possible that they’ll enjoy shopping at Loblaws so much that they’ll switch stores after spending the card.

Short-term pain

That’s not to say Loblaw won’t feel an impact from the price-fixing scandal. It distributed millions of dollars in gift cards. Some of them will not be redeemed — that’s always true of gift cards.

Those that are redeemed will not cost Loblaw the full $150 million as they must be spent in its Loblaws stores. That means that, although Loblaw will lose the margin they would have made on the sales, the actual out-of-pocket cost of the card is less than the face value of the card. There also remains the real threat of class-action lawsuits.

In the long run, however, it doesn’t seem likely that Loblaw will suffer significant losses in food market share. The price-fixing announcement came very late in the year, so fourth-quarter results will not provide much insight.

It’s worth noting that same-store food sales were up 0.5% over the previous year in the fourth quarter. While third-quarter results showed a 1.5% increase over the previous year, it does not appear that there was a dramatic flight from shopping at Loblaws in the immediate aftermath of the announcement.

Loblaw’s first-quarter 2018 results will be telling. But the market also seems to believe Loblaw will weather the price-fixing storm. Share price did not decline significantly after the announcement, and a late January drop was attributed to generic drug-pricing reform and the cost of minimum wage increases.

There are still challenges in the market. Stiff competition in the grocery sector still exists and will increase if and when online sales grow. Other factors will continue to keep Loblaw on its toes, but the price-fixing scandal might not be among them.

Michael von Massow is an associate professor, food economics at the University of Guelph. This article was originally published on The Conversation, an independent and nonprofit source of news, analysis and commentary from academic experts.