The latest financial results of two of Canada's major grocers back up one analyst's description of the supermarket industry operating in the "glory days."
Both Loblaw Cos. Ltd., the country's top grocer, and Metro Inc., the third-ranked supermarket retailer, reported healthy quarterly results on Wednesday, benefiting from higher prices and a tamer competitive landscape following the departure earlier this year of U.S. discount rival Target Corp. from Canada.
While Loblaw faces some headwinds, including profit-pinching provincial drug reforms at its Shoppers Drug Mart division, the parent is in the unlikely position of gaining from a weak Alberta economy. Loblaw's key supermarkets in that market – Real Canadian Superstores – cater to bargain hunters.
Still, despite the glory days, food retailers also need to be ready for the next stage in their development – e-commerce – as well as the threat of losing food sales to global discount giants, including Wal-Mart Stores Inc. and Amazon.com Inc.
For now, "we feel pretty good about our sales performance," Galen G. Weston, Loblaw's president and executive chairman, told a third-quarter earnings conference call. "Could it be better? Yes, I think it can always be better, and we have great performance in some markets which we feel really good about and others where it's a little bit softer. … The long and short of it is, we feel fine."
After a few years of struggling with added investments and a tight competitive market amid Target's 2013 arrival, many grocers are now enjoying a period of relative calm and prosperity.
They've been able to reap the rewards of inflation by raising some prices to cover higher currency costs and offering more expensive products. But they also could face off with fast-growing German discounters Lidl or Aldi, which have created havoc for many established supermarket chains in Europe and could arrive here in future years, some industry observers have warned.
Perry Caicco, retail analyst at CIBC World Markets, said 2015 "has been an excellent year for the grocery industry thus far and we expect this trend to continue the rest of this year and into 2016."
It was Mr. Caicco who in August called this supermarket era the "glory days."
He said this month: "The Canadian consumer is holding in fairly well in terms of spending, industry square footage growth is modest, the Canadian dollar should eventually be less of a headwind, and a recovering Ontario should add materially to grocer profitability."
He noted that Metro's assets in Ontario are in the process of rejuvenation, and the company has "shown the ability to engineer strong price inflation resulting from softer competition."
Nevertheless, Sobeys, the second-largest grocery chain, which acquired Canada Safeway in late 2013, is suffering from the pain of integrating the two businesses as well as troubled Western Canada oil markets, where Safeway is a key player. Sobeys is less likely to capture the opportunities in the grocery industry this year or next because it "has its hands full on many fronts in Alberta," Mr. Caicco said.
But Sobeys, which is owned by Empire Co. Ltd., has a lot going in its favour once it gets over the roadblocks, said Stewart Samuel, program director at grocery expert IGD in Vancouver.
Mr. Samuel said retailers have focused on improving their supermarkets after having neglected them for years and "it's starting to pay off," including with an expanded offering of higher-margin fresh, organic and prepared foods. As well, grocers will reap the rewards of recent consolidation, he said.
Major grocers are beginning to focus on e-commerce. Loblaw is ramping up its "click and collect" program that involves ordering online and picking up at designated supermarkets. Eventually, Loblaw could use its Shoppers stores as pickup centres as well, Mr. Weston said.
"I think it's fair to say those points of convenience at the Shoppers Drug Mart network represent a meaningful opportunity for us if it works," he said.
Eric La Flèche, Metro's chief executive officer, said it will roll out its own online shopping test in 2016. "So stay tuned."
He added: "A big part of the Metro banner is convenience, and for a portion of the population, e-commerce might be the most convenient way to shop. So we'll see how big that demand is and how big that market is as it evolves. So when the consumer is ready for that, we'll be ready."
Loblaw third-quarter profit jumped to $166-million, or 40 cents a share, from $142-million, or 34 cents, a year ago. Revenue rose to $13.95-billion from $13.6-billion. Same-store sales in its food business grew 3.1 per cent, excluding its gas bars and tobacco distribution changes.
The company's drug retail same-store sales growth, which includes Shoppers Drug Mart, was 4.9 per cent. Same-store pharmacy sales increased 3.5 per cent, while front store sales increased 6.2 per cent.
Metro's fourth-quarter profit rose to $131.7-million, or 52 cents a share, from $115.6-million, or 44 cents, a year earlier. Sales increased to $2.83-billion from $2.71-billion. Same-store sales rose 3.4 per cent.