Interior of a Real Canadian Superstore, owned by Loblaw, in Calgary.LARRY MACDOUGAL
Loblaw Cos. president Allan Leighton has a full plate, grappling with shrinking food prices, sluggish grocery sales and a potential strike at the grocery retailer's key Ontario market.
On top of those major challenges, Loblaw is pouring $185-million this year alone into a crucial upgrade of its outdated supply-chain systems, and the British retailing veteran says proper execution of the new technology is vital for getting products to the shelves on time.
"We have now entered the darker side of the moon," Mr. Leighton said Thursday. "All of these major infrastructure projects are now in the period of maximum risk."
Amid the pitfalls, Mr. Leighton is slowly re-fashioning the food retailer in a dramatic transformation of the country's largest grocer. Just a few years ago, Loblaw was a deeply troubled merchant, its stores in disarray, its shelves often empty and its stock at rock-bottom levels. It had been racing to take on discount titan Wal-Mart Canada and its expansion into groceries.
Under Mr. Leighton, signs of progress are emerging. Operating profits are creeping higher, and the company is putting more focus on fashion - its cheap-chic Joe Fresh Style apparel - which brings higher margins. But the grocer still faces major hurdles. Its single biggest group of employees could be on strike soon, while food prices continue to fall. Its systems overhaul will inevitably create hiccups.
"They're doing the right things and they're making progress," said Brian Yarbrough, an analyst at Edward Jones in St. Louis, Mo. "But they still have some work ahead of them."
Loblaw's second-quarter results reflect both the progress and snags. Its same-store sales, a key retailing measure, slipped 0.3 per cent from a year earlier as food deflation deepened, and bottom-line profit fell almost 7 per cent to $180-million, pinched partly by one-time supply-chain investments.
But operating profit rose almost 2 per cent amid tight cost controls, a stronger Canadian dollar and a sharper focus on its lucrative private labels, including the iconic President's Choice.
Loblaw has been pushing its suppliers to help it cut prices, and Mr. Leighton predicted that deflation would persist as consumers remain frugal. "The way things are going, sales performance is certainly not going to pick up the slack," added Perry Caicco, retail analyst at CIBC World Markets, in a note on Loblaw's results.
In the second quarter, while overall food prices in Canada were essentially flat - rising a meager 0.3 per cent - Loblaw's food prices fell, the company said. It didn't elaborate, but Mr. Caicco estimated the grocer's prices fell by 1.5 per cent.
On the labour front, Mr. Leighton appears to be digging in his heels in his goal of gaining more flexibility in scheduling and assigning employees, while keeping a lid on wage gains. Last week, after talks with the United Food and Commercial Workers union broke down, its members gave it a strong strike mandate. The union's labour contract expired early this month, and the two sides this week negotiated with the help of a mediator. (Talks are to resume Aug. 9) "It's time for a change," said Mr. Leighton, who took a tough stance with strike-prone unions as former chairman of the British postal system. "My objective and the objective of the negotiating team is to negotiate that."
He said it's a watershed era in the Canadian grocery sector as the non-unionized work force for the first time overtakes the unionized work force in size. A driving force behind the shift is the non-unionized Wal-Mart and its bulking up on food.
Amid the changes, Mr. Leighton is finding a bigger role for fashion in food retailing. Loblaw's Joe Fresh clothing consistently outperforms its core business, and now he has an ambitious plan to pump up the apparel. Within two months, he's launching a standalone apparel store nowhere near one of its supermarkets; in the next couple of years, he envisions 20 Joe Fresh stores.
"We all know that apparel has a lot higher margins than the grocery business," Mr. Yarbrough said.
LOBLAW (L-T)
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