Loblaw profit, sales gain as inflation-weary shoppers visit discount banners, opt for private-label brands

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Loblaw Companies Ltd. L-T reported growth in profits and sales in its fourth quarter, as shoppers feeling the pain of inflation have continued to visit its discount stores and buy more private-label brands.

Canada’s largest food retailer, which owns banners including Loblaws, No Frills, Maxi and Real Canadian Superstore, as well as Shoppers Drug Mart, reported an increase in traffic to its grocery stores in the quarter ended Dec. 30, 2023.

“Canadians continue to seek greater value as they face challenging and persistent inflationary pressures, and we are committed to delivering that,” Loblaw’s new president and chief executive officer, Per Bank, said on a conference call Thursday to discuss the company’s results.

Mr. Bank, who took on the top job at Loblaw on Nov. 1, said he expects to see these behaviours continue in 2024, including shoppers seeking out promotions, turning to more affordable store-brand products – which carry a higher profit margin for retailers – and visiting discount stores such as No Frills and Maxi.

Consumers trying to manage their budgets have also been leaning more on the company’s Optimum loyalty program, leading to slightly higher redemption activity as people pay for purchases with points more frequently, chief financial officer Richard Dufresne said.

Loblaw’s reported growth was compared to a period in the prior year when it also reported significant increases in both sales and earnings. The company’s net earnings available to common shareholders rose to $541-million or $1.72 per share, compared to $529-million or $1.62 per share in the same period the prior year.

The Toronto-based retailer reported fourth-quarter revenue of $14.5-billion, an increase of 3.7 per cent compared to the same period in 2022.

Loblaw has faced political and public pressure over rising grocery prices. While food inflation has been moderating, prices remain significantly higher than they were just a couple of years ago. This week, Statistics Canada reported that the growth in food prices is slowing, and rose at an annual pace of 3.4 per cent in January, compared to 4.7 per cent in December.

Loblaw reported that its internal measurements show food inflation at its stores was lower than the food price growth tracked by Statistics Canada’s Consumer Price Index.

Same-store sales – an important measurement that tracks sales growth not tied to new store openings – grew by 2 per cent at Loblaw’s grocery stores and 4.6 per cent at its drugstores in the fourth quarter.

“Food price increases in our stores are as low as they have been over the past two years,” Mr. Bank said on the call. “We are pushing back whenever we can on suppliers’ cost increases, and we are finding more ways to be efficient to keep prices low for our customers.”

Mr. Bank said he sees opportunities to take more costs out of the business. As one example, he cited “shelf-ready packaging” – ensuring that products are delivered to stores in units that can be placed directly on shelves with less handling. This can reduce labour costs by making stocking more efficient, and is something that European discounters such as Aldi and Lidl already have across all of their products, Mr. Bank said. In Loblaw stores, as few as 10 to 15 per cent of the stock is in such packaging, he added.

Loblaw plans to build more than 40 new discount stores in the coming year. In Quebec, the company has already converted 24 of its Provigo stores to the discount Maxi banner, and plans to do the same in 30 more locations this year.

The company also recently launched a new promotional program, called Hit of the Month, which offers deep discounts on a handful of items each month. In some cases, this will mean selling products at a loss, Mr. Bank said in a recent interview with the Globe.

Political pressure ramped up once again last week, as a House of Commons committee studying food prices sent a letter to Loblaw and Walmart addressing their refusal to sign a grocery code of conduct the industry has been developing. The code would regulate dealings between retailers and their suppliers, and the committee warned that if the retailers do not participate, it will “recommend that the federal and provincial governments adopt legislation to make it mandatory.”

This week, Loblaw announced that it is planning a record investment in the coming year to build more stores and renovate 700 locations. On Thursday, the company reported that it expects gross capital investments of approximately $2.2-billion in the coming year. That is in addition to $2.1-billion in capital spending last year.

The plans include opening more than 140 new pharmacy-based clinics in the coming year, nearly tripling the current number of clinics. Revenue from healthcare services is growing, according to the company: same-store sales in pharmacy and healthcare services grew by 8 per cent in the fourth quarter, compared to 1.7-per-cent growth in the front of the drugstores.

The pharmacy business has recently attracted additional scrutiny, after Manulife Financial Group, Canada’s largest insurer, announced a deal that would have given Shoppers Drug Mart and other Loblaw-owned pharmacies the exclusive right to fill prescriptions on several specialty medications. Following negative reactions from some consumers and from Innovation Minister François-Philippe Champagne, the company reversed its decision earlier this month.

Growth in prescriptions – including ongoing strength in specialty drug sales – helped to drive sales increases at Loblaw’s pharmacies, executives noted on Thursday.

“It’s a relatively new phenomenon. The average value of these drugs is extremely high, and so it’s a driver of average scrip value,” Mr. Dufresne said on the call.

That front-of-store business also continues to be strong, partly because customers have proven less price-sensitive when it comes to buying beauty products such as pricey fragrances than they are at the supermarket, Mr. Bank noted.

“It feels like it’s not the same customer as we have in our grocery stores,” he said.

E-commerce sales grew by 14.6 per cent in the quarter.

For the full year, Loblaw’s revenue grew by 5.4 per cent last year, to $59.5-billion. Net earnings available to common shareholders grew by 9.4 per cent, to nearly $2.1-billion or $6.52 per share, compared to $1.9-billion or $5.75 per share in 2022.