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Report on Business New Loblaw pricing strategy restricts quarterly sales but improves profit margins

A man leaves a Loblaws store in Toronto on May 3, 2018. Loblaw has been working to sharpen its pricing, offerings and digital capabilities as it takes on giants Amazon.com Inc. and Walmart Canada Corp., both of which have been expanding their grocery selling online and in bricks-and-mortar stores.

Nathan Denette/The Canadian Press

Loblaw Cos. Ltd. has shifted its pricing strategy for its non-food merchandise, dropping promotional discounting and instead keeping prices at a steady rate – which limited the retailer’s fourth-quarter sales gains.

The strategy, which is called everyday-low-pricing, was successful in improving profit margins and drawing loyal customers while weeding out non-profitable shoppers who come just to “cherry-pick" discounted items, said Sarah Davis, president of Loblaw.

“We would have liked to have seen more sales,” Ms. Davis told an analyst conference call on Thursday after the country’s largest grocer reported a better-than-expected fourth-quarter profit but lower-than-anticipated sales increases. “Having said that, they’re profitable sales that we’ve got.”

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To shore up those non-food sales, Loblaw this year will fine-tune the pricing strategy by adding a few deals to the everyday-low-price initiative for products that range from televisions to patio sets and barbecues, she said.

Loblaw has been working to sharpen its pricing, offerings and digital capabilities as it takes on giants Amazon.com Inc. and Walmart Canada Corp., both of which have been expanding their grocery selling online and in bricks-and-mortar stores.

Loblaw shares fell more than 5 per cent early Thursday, likely due to the quarterly weak same-store sales results at outlets open a year or more, analyst Peter Sklar at BMO Nesbitt Burns said. However, the stock rallied later in the day, closing down about 1.5 per cent to $65.50 after company executives explained that the sales shortfall was in Loblaw’s general merchandise department – and by design – and not in its core food division, he said.

Loblaw’s same-store food sales, a key retail measure, rose 0.8 per cent in its fourth quarter with inflation of about 1.5 per cent – implying a drop in real sales volumes, Mr. Sklar said. But excluding its non-food business, Loblaw’s same-store sales grew 1.8 per cent, suggesting flat to slightly positive volume sales, he said.

Meanwhile, Loblaw’s e-commerce sales last year were about $500-million, Ms. Davis disclosed, making up roughly 1 per cent of the retailer’s overall business and essentially on par with the Canadian grocery market.

Some of Loblaw’s online sales scoop away business from its bricks-and-mortar stores, she acknowledged. “Clearly there would be some cannibalization of our brick-and-mortar sales."

Loblaw has e-commerce pick-up depots at 670 locations – and growing – including its grocery outlets and its Shoppers Drug Mart drugstores, while also offering deliveries for an extra fee through its partnership with San Francisco-based online delivery startup Instacart.

Ms. Davis said she feels Loblaw is gaining market share in its digital sales, with not a lot of customer pushback about the additional delivery charge. “Definitely we would consider doing something with the charge if it became a competitive barrier."

As for the shift to non-food everyday-low-pricing, Ms. Davis said Loblaw isn’t looking at extending it to other areas. The retailer introduced it to improve efficiencies and profitability, doing away with the “ups and downs” of promotional discounting, she said. “But we underestimated the impact on sales.”

The company has launched other digital initiatives to gain efficiencies, including centrally controlled electronic shelf pricing in five stores with plans to expand it to 50 stores, she said. “Changing price labels is one of our colleagues’ least favourite tasks,” she said. Digital labelling allows staff to focus on other things, such as assembling e-commerce orders.

On cannabis, she said Loblaw has started to sell medical marijuana through delivery on its Shoppers website in Ontario and would like to do it across Canada, but doesn’t have the licence to do so. It is testing the recreational cannabis waters in Newfoundland.

Loblaw’s fourth-quarter profit jumped to $221-million or 59 cents a share from $31-million or 8 cents a share a year earlier. Revenue rose to $11.22-billion from $10.99-billion.

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