When cauliflower prices famously jumped to $8.99 this year, shoppers at Loblaw Cos. Ltd. suddenly ditched the vegetable and switched to lower-priced potatoes.
In economically fragile regions such as Alberta, Loblaw, the country's largest grocer, is seeing consumers shift most markedly to cheaper goods as some prices spike as grocers pass on higher prices to consumers as a result of a weak Canadian dollar, Galen G. Weston, executive chairman of Loblaw, said on Thursday.
"Where the economy is under the most pressure, we are seeing disproportionate momentum in the discount side of our business," Mr. Weston told an analyst conference call after the company released its fourth-quarter results. It reported that its food prices were "moderately higher" than Statistics Canada's 4.1 per cent food inflation rate for the period.
The Statscan consumer price index does not necessarily reflect the effect of inflation on the specific mix of goods sold at Loblaw stores, the company said.
For Loblaw, the good news is that it operates a lot of discount Real Canadian Superstores in places such as Alberta, Mr. Weston said. "I wouldn't say that's entirely helpful, but I think we're more insulated from the impact than others."
Retailers are grappling with the soft loonie because a lot of their purchasing of imports is done in U.S. dollars, which is adding to their costs amid a soft economy. Loblaw and other retailers have been passing on at least some of the higher prices to consumers, helping the retailers boost their sales.
Still, there is a limit to which consumers will accept the price increases.
"So far, the ability to pass through this inflation has surprised us," Mr. Weston said. "We've been able to do it more than we expected. Having said that, there is a limit."
A $9 cauliflower was a tipping point for consumers, prompting many to switch to lower-priced alternatives such as potatoes, he said. Red meat is another traditional product where, when prices get too high, customers trade down to cheaper meats, he said. (In the past, consumers have often bought chicken or pork as a replacement for pricey beef.)
"All of these things are happening, but none of them are happening at a rate that is fundamentally changing the sales trajectory of the market," Mr. Weston said. "But we are keeping a really close eye on it and we can't actually predict at this stage what is going to happen in 2016."
Among the major grocers, Loblaw has the most discount formats among its chains in its superstores and No Frills banners, while rival Metro Inc. has also beefed up its discount Food Basic stores but doesn't operate outside of Ontario and Quebec.
Sobeys Inc., the country's second-largest grocer, is a key player in Western Canada, but does not run a low-cost chain in that region.
Mr. Weston said the price gap between Loblaw's discount and conventional chains (such as its Loblaws format) will need to narrow "as the consumer gets more and more sensitive around price." Loblaw is cutting prices more in its flyer promotions to lure shoppers and the retailer "will do more of that," he said.
Loblaw, which acquired Shoppers Drug Mart in 2014, enjoyed strong non-pharmacy sales in its fourth quarter, helped partly by the exit of U.S. rival Target Corp. from Canada, Mr. Weston said. He said Loblaw "under-anticipated" the positive effects of Target's departure. Target filed for creditors' protection in January of 2015 and closed all 133 of its stores here by mid-April of that year.
As well, Loblaw's strategic move of stocking its private-label President's Choice and No Name foods in Shoppers is bolstering the chain's financial results, company executives said.
"The PC brand resonates way more with consumers and the margin that we are obtaining in that business is significantly higher than what Shoppers was obtaining" pre-acquisition with other foods, said Richard Dufresne, chief financial officer of Loblaw.
"That is creating a halo effect throughout the store which is benefiting all categories" and helping shore up Shoppers' non-pharmacy sales, he said.
In its fourth quarter, Loblaw's profit dropped by more than one-third compared with the previous year, largely because of special items including the writedown of some assets that are set aside for sale.
Canada's largest grocery and pharmacy retailer said net profit for shareholders fell to $128-million, or 31 cents per share. That's down from $247-million or 60 cents per share a year earlier, when the comparable quarter had an extra week. Excluding the extra week, the year-earlier profit would have been $195-million or 47 cents per share.
Loblaw said its stores performed well during the fourth quarter, with sales growth and stable margins.
Overall retail sales were $10.86-billion. That was down from a year earlier because of the extra reporting week in 2014, but up $241-million or 2.3 per cent from $10.6-billion on a standard 12-week basis.
Loblaw's profit was reduced by a number of unfavourable items, including a writedown of drug retail assets that are being held for sale as well as costs for switching some grocery stores to more cost-effective labour agreements.
The writedown of drug retail assets shaved $112-million or 20 cents per common share from the earnings, the largest of the special items. The second-largest was $55-million, or 10 cents per share, related to the new labour agreements.
After adjustments, Loblaw earned $363-million – up 5.5 per cent compared with the fourth quarter of 2014. The adjusted earnings per share were 88 cents in the latest quarter.
With a report from The Canadian Press