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Caroline Gagnon leaves a Loblaws store in St. Eustache, Que.Ryan Remiorz

Loblaw Cos. Ltd. is struggling to make sales gains - even as its profit rises - as spiralling gasoline prices start to curb consumers' trips to the supermarket.

Higher prices at the pump are prompting consumers to shop less frequently. And while spiralling global commodity costs are driving up food prices, the increases aren't enough to give Loblaw a sales lift. If it jacks up prices too much, customers would switch to cheaper alternatives.

So as Loblaw pumps up its profits, thanks to a strong Canadian dollar and savvier cost controls, it's sprinting to increase food sales - and counting more on emerging new areas of its business for future growth.

"Conditions continue to be tough," Loblaw president Allan Leighton said on Wednesday. "Suffice it to say, with the unknowns growing, we remain cautious in our outlook."

Moderate food inflation in the 2- to 3-per-cent range is a friend to grocers because they're able to cover higher costs with increased prices, he said. But inflation of 5 per cent or more "would cause severe indigestion."

An anxious post-recessionary consumer and tight competition are forcing Loblaw and other grocers to run an unprecedented level of discounts and promotions, making it harder for them to rev up sales.

With U.S. discounter Target Corp. coming to Canada by 2013, inevitably bringing with it a food line, the competition will only get more intense, forcing Loblaw to find new areas of growth. It is betting on such segments as apparel, financial services, health-driven products and goods catering to new Canadians.

In its first quarter, Loblaw's profit rose 22.7 per cent to $162-million but sales slipped 0.6 per cent to $6.87-billion. Its food sales remained flat, while its financial services revenues dropped 5.7 per cent to $115-million and its Joe Fresh Style apparel sales "declined marginally," the company said. Its drugstore sales also dropped "marginally," hurt by new generic drug laws.

Mr. Leighton said the "million-dollar question" for him is food price inflation - a matter that in "in many ways worries me the most." Analysts estimate that prices of Loblaw's food rose about 0.5 per cent in the first quarter, which ended March 26. In the same period, Statistics Canada reported 2.5-per-cent inflation.

Indeed, according to Statistics Canada, the cost for food bought in stores in March jumped 3.7 per cent, marking the biggest annual increase in 19 months. Nevertheless, Loblaw and other big grocers have reported lower levels of inflation than the federal agency as consumers trade down to cheaper alternatives than the products surveyed by Statscan.

But Loblaw faces other headwinds. Rising fuel costs are resulting in consumers shopping a little less and spending less on groceries, Mr. Leighton said. "You can start to see just some subtle changes in the way consumers are behaving."

In other key departments, Loblaw also needs to bolster business. Mr. Leighton expects operating profit in its President's Choice financial services division to continue to slide over the next 12 months as the company invests in the operation. The initiatives will eventually pay off, he said: Customers with its credit card spend twice as much at Loblaw as others.

As part of its financial services division, Loblaw is touting more mobile phones at its supermarkets, borrowing from a strategy of British retail titan Tesco.

"I think that there is some skepticism, given how well-developed the Canadian mobile offering is, as to the kind of traction that you are going to be able to get," said Irene Nattel, retail analyst at RBC Dominion Securities. "Who is the customer base that you are tracking?"

Mr. Leighton said the customers are those who shop at Loblaw stores; already, the company's mobile sales have been "very significant."

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