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The Loblaws store located at Churhc St. and Carlton St. in Toronto, is photographed on Nov 15 2017. (Fred Lum/The Globe and Mail)

Fred Lum/the Globe and Mail

Competition in the discount grocery sector intensified in the summer and early fall, weighing on prices as Loblaw Cos. Ltd. and other retailers battle to hold on to bargain-hunting customers and attract new ones.

Loblaw signalled on Wednesday that growing competition is likely to continue through the end of the year. Competitors have been adding more discount grocery stores or renovating existing locations, and that “pricing activity” has intensified, including from giants such as Walmart Canada Corp., executives said. Loblaw has also contributed to those pressures by cutting prices on some items and keeping its overall food price increase about 1 to 2 percentage points below the average national inflation in food prices of 4.1 per cent in the third quarter.

"While we were directionally better in the quarter, we are not where we want to be," Loblaw president Sarah Davis said on a conference call to discuss the company's earnings on Wednesday.

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Loblaw said traffic in its grocery stores was down, though bigger basket sizes helped to make up the difference.

“We believe traffic declines reflect the impact of stronger competitors and anticipate competition will continue to strengthen,” Bank of Nova Scotia retail analyst Patricia Baker wrote in a note on Wednesday. “...[Loblaw] is making deliberate and measured investments to get sales back, but we note getting customers to return is not an easy task and will likely take several quarters.”

Customers have more alternatives in discount grocery, which puts pressure on prices, said Barclays retail analyst Karen Short.

“There has been decent inflation, but there also has been some talk from other companies that have a presence in Canada, that there has been some weakness on the part of the Canadian consumer. ... Retailers are seeing a little bit of greater [price] sensitivity,” Ms. Short said.

In addition to pricing, Loblaw is working to improve its e-commerce options, for which customer demand has been higher than expected in many stores. For example, Western Canada has seen the most enthusiasm for click-and-collect services, so Loblaw renovated seven of its locations to meet demand.

The company is converting 12,000 square feet of "less-productive space" in a Great Canadian Superstore at Dufferin and Steeles in Toronto, to test out an online order-fulfillment area there for its PC Express click-and-collect grocery service. The area will use automation to help staff fill orders faster. In the future, such a location could potentially act as a "hub" to help other stores fulfill orders, Ms. Davis said, though she cautioned it is only in the test phase at this point.

The pilot project is a partnership with Takeoff Technologies, which builds what it calls “micro fulfillment centres” that fit in smaller spaces rather than large warehouses. Unlike the usual -click-and-collect system where staff fill orders by shopping the store, the system delivers items to a staff member in the mini-warehouse who then puts orders together more quickly (or combines the automated and the manual approach). The test will launch in 2020, and will be able to fill orders at that store and others nearby.

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Loblaw is facing pressure from competitors such as Walmart and Amazon, which have been ramping up grocery sales both online and in stores. Canadian competitor Sobeys Inc. is also betting big on e-commerce, investing in building robotic warehouses in Montreal and the Greater Toronto Area in preparation for the launch of its online delivery service “Voilà by Sobeys” (“Voilà par IGA” in Quebec.)

Pricing competition restrained Loblaw sales in the quarter. Loblaw’s food retail segment - which includes the Loblaw, Valu-Mart, Provigo and No Frills banners, among others - had $10.4-billion in same-store sales in the third quarter, roughly flat compared to last year. The company noted the later timing of Thanksgiving this year worked against sales in the latest quarter compared with the year earlier.

Overall revenue rose 2.3 per cent to $14.7-billion in the three months ended Oct. 5, the company reported Wednesday, compared to $14.3-billion in the same period last year.

Shoppers Drug Mart saw growth of 4.1 per cent in same-store sales, to nearly $4-billion, led by growth in its pharmacies. The drugstores dispensed 2.9 per cent more prescriptions in the quarter and the average value of those prescriptions was also up, leading to 5.3-per-cent growth in pharmacy same-store sales. The front-of-store growth at Shoppers was 3.1 per cent. Revenue in the company’s financial services segment grew by $35-million, to $309-million.

Loblaw recorded $22-million in restructuring and related charges in the quarter, connected to a cost-cutting and operational efficiency plan launched last year. Initiatives include the expansion of self-checkout, which will be in 600 Shoppers Drug Mart stores by the end of the year. More than 30 per cent of Shoppers customers choose self-checkout, compared to more than 20 per cent in the grocery stores that have the option.

Third-quarter net profit grew to $353-million, up from $117-million in 2018. Earnings last year were impacted by a one-time charge due to a tax court ruling, but also included results from its interest in Choice Properties Real Estate Investment Trust, which Loblaw spun out on Nov. 1 last year.

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Loblaw reported $458-million in adjusted net earnings available to common shareholders from continuing operations, or $1.25 per diluted share, compared to $466-million or $1.24 per diluted share in the quarter last year. Adjusted earnings strip out a number of items such as restructuring costs, the amortization of intangible assets acquired with Shoppers Drug Mart, and gains on property sales.

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