Skip to main content

A Whole Foods employee pushes a cart out of the store, in New York, Oct. 30, 2015.

DOLLY FAIBYSHEV/NYT

No one ever said that the grocery business is easy, but key Canadian grocery stocks have performed extraordinarily well over time.

Is that about to change?

The stock market certainly has its doubts. After Amazon.com Inc. announced its $13.7-billion (U.S.) takeover of Whole Foods Market Inc. on Friday, every company with a fresh-produce aisle wilted over concerns about new competitive pressures.

Story continues below advertisement

Read more: Amazon shakes up grocery sector with $13.7-billion Whole Foods deal

In Canada, Loblaw Cos. Ltd. fell 3.6 per cent, Metro Inc. fell 2.9 per cent and Empire Co. Ltd. – which owns Sobeys – fell 3.6 per cent.

They joined casualties in the United States, where declines were more severe: Costco Wholesale Corp. fell 7.2 per cent, Wal-Mart Stores Inc. fell 4.6 per cent and Kroger Co. fell 9.2 per cent.

The fear arises from the belief that Amazon.com can do to food what it did to books and other retail items: Cut margins at the expense of profits and make competitors' lives very difficult.

This is likely an overreaction, though, and any meaningful pullback in the share prices of Loblaw and Metro looks like an opportunity to head on over to the discounted stock aisle.

These two Canadian companies, in particular, have navigated turbulent times exceptionally well, delivering outsized returns to investors.

(I've excluded Sobeys because the retailer's parent has been having trouble digesting its recent takeover of Canadian Safeway stores.)

Story continues below advertisement

Consider this: Over 10 years, Loblaw's share price is up 298 per cent (including dividends) and Metro is up 73 per cent, versus a total return of just 45 per cent for the S&P/TSX composite index.

These figures include Friday's carnage. They also follow a period of intense competition, food-price deflation, flat sales growth and razor-thin profit margins.

Yet, over the past five years these two grocers have also outperformed. Over the past three years, Loblaw's return was 10 times larger than the TSX and Metro's return was six times larger. Even year-to-date, the grocers are winning the race with modest returns – that's including Friday's downturn.

What's remarkable is that these share-price gains coincide with a difficult operating environment.

At Loblaw, year-over-year sales rose just 0.2 per cent in the first quarter. Net earnings were a slim 2.2 per cent of revenue. Food prices shrank 3.9 per cent. However, apart from groceries, Loblaw offers everything from prepared foods to financial services to pharmaceuticals, which is giving it an opportunity to grab a larger share of the household wallet. Sales per retail square foot have risen more than 40 per cent over the past five years, according to Bloomberg.

Even though margins are slim, actual profits at both Metro and Loblaw have been climbing to record highs.

Story continues below advertisement

But back to Whole Foods: Reports suggest that Amazon.com will use the high-end grocer – with just 13 stores in Canada – to enhance online shopping and chop prices, which raises some uncertainty about the future of the traditional grocery business.

I confess that part of my defence of traditional grocers rests on my stubborn refusal to believe that online food shopping is where grocery retail is headed in any meaningful way.

Ordering clothes, books and other nonperishable items online usually beats the mall. But salmon, apples, milk and dozens of other items I buy each week? Get me a cart.

In-store shopping also seems to offer a significant advantage for the traditional retailer. Order online and you're likely to skip impulse purchases; shop in-store and you'll come home with higher-margin ice cream, chips and chocolate bars. If I'm wrong and online sales take off, leaving me all alone as I peruse the produce section? Traditional retailers can respond with their own technology upgrades. They have adapted to significant challenges in recent years, rewarding patient shareholders along the way. Amazon.com won't change that.

Report an error Editorial code of conduct
Tickers mentioned in this story
Unchecking box will stop auto data updates
Comments

Welcome to The Globe and Mail’s comment community. This is a space where subscribers can engage with each other and Globe staff. Non-subscribers can read and sort comments but will not be able to engage with them in any way. Click here to subscribe.

If you would like to write a letter to the editor, please forward it to letters@globeandmail.com. Readers can also interact with The Globe on Facebook and Twitter .

Welcome to The Globe and Mail’s comment community. This is a space where subscribers can engage with each other and Globe staff. Non-subscribers can read and sort comments but will not be able to engage with them in any way. Click here to subscribe.

If you would like to write a letter to the editor, please forward it to letters@globeandmail.com. Readers can also interact with The Globe on Facebook and Twitter .

Welcome to The Globe and Mail’s comment community. This is a space where subscribers can engage with each other and Globe staff.

We aim to create a safe and valuable space for discussion and debate. That means:

  • Treat others as you wish to be treated
  • Criticize ideas, not people
  • Stay on topic
  • Avoid the use of toxic and offensive language
  • Flag bad behaviour

Comments that violate our community guidelines will be removed.

If your comment doesn't appear immediately it has been sent to a member of our moderation team for review

Read our community guidelines here

Discussion loading…

Due to technical reasons, we have temporarily removed commenting from our articles. We hope to have this fixed soon. Thank you for your patience. If you are looking to give feedback on our new site, please send it along to feedback@globeandmail.com. If you want to write a letter to the editor, please forward to letters@globeandmail.com.