‘Ottawa’ Loblaw Companies Ltd Sharpens Pencil, Posts Profit Jump as Grocery Price War Heats Up
Consumers are getting fed up with rising food costs, and that is only adding fuel to the brewing retail grocery price battle.
At a time when cauliflower prices spiked to $8 just before Christmas, Loblaw Cos Ltd. “began to notice consumer resistance” to soaring food prices in the fourth quarter, president Galen Weston told analysts on a first-quarter conference call Wednesday.
“We will have the sharpest possible pencil on the promo programs,” Weston said, as retailers across the country step up their promotions.
Retail food prices have been a hot topic of late, in particular those of fresh fruit and vegetables: 81 per cent of the produce consumed in Canada is imported, and those prices ballooned last year due to the low dollar.
Overall food prices were up 3.6 per cent year over year in March, according to Statistics Canada, after rising 3.9 per cent in February. Fresh vegetable prices were up 14.9 per cent while fresh fruit prices were 11.3 per cent higher than a year ago. Meat prices rose 3.2 per cent.
Weston said he sees consumer prices getting lower in certain markets and certain categories where consumers are more price-sensitive, noting the trend is noticeable in Loblaw’s “hard discount” business, which includes No Frills.
But consumers are also watching prices at all ends of the spectrum, and Loblaw executives “need to continue to ensure that the gap from a pricing point of view between opening-price formats (such as No Frills) and (full-line) stores doesn’t get too wide,” he said.
Weston’s remarks came after a strong quarter for the retailer, which also owns Shoppers Drug Mart, but one in which food sales were “slightly disappointing,” according to the executive, with same-store sales at Loblaw rising just 2.6 per cent.
His observations also came on the heels of a report this week that Walmart Canada is making strategic price cuts on certain popular brand-name packaged goods in order to boost its price perception among consumers against rivals such as No Frills and Real Canadian Superstore.
Sobeys, too, reduced prices by five per cent to seven per cent last month on 8,500 items at its IGA stores in Quebec and the retailer is expected to introduce a similar program in Western Canada in the coming months.
The University of Guelph’s Food Institute has predicted food prices will move even higher in 2016, estimating the average Canadian household will spend up to $345 more on food than last year. The institute forecasts 2016 overall food inflation rates in Canada of two per cent to four per cent.
However, the industry outlook is positive. Inflation appears to be slowing down as the Canadian dollar rises, Weston said. “We see consumer prices coming down in certain markets and certain categories.” To that end, Loblaw will not make any drastic moves on its prices. “We’re not going to yank a lever,” he said.
Loblaw profit rose 32.2 per cent in the first quarter, ended March 26, to $193 million, or 47 cents per share, compared with profit of $146 million, or 35 cents), in the same period last year. Adjusted net earnings were $338 million, or 82 cents per share, up 12 per cent from $301 million, or 72 cents, and were in line with analyst estimates from Thomson Reuters.
Revenue was $10.38 billion, up from $10.04 billion last year, with strong performance at Shoppers Drug Mart, which had same-store sales growth of 6.3 per cent.
The retailer, whose shares were up 91 cents to $70.36 in afternoon trading Wednesday, increased its common share dividend to 26 cents per share, payable July 1, up four per cent from 25 cents per share.