Loblaw Cos. Ltd. is lowering the prices of some of its products in some of its stores, offsetting the hit to its bottom line with cost cuts – a strategy that has already helped the grocer generate better-than expected second-quarter results.
Still, Galen G. Weston, president and executive chairman of Loblaw, said it isn't seeking to set off a price war in the country. "We will certainly be ready if the marketplace heats up," he told an analysts' conference call on Wednesday after the company posted a better-than-expected second-quarter profit.
After a couple of years of healthy price increases, Loblaw and other grocers face stiffer competition from low-cost rivals – particularly discounter Wal-Mart Canada Corp. – as more bargain-hungry customers begin to resist steep prices.
At the same time, grocer Sobeys Inc. was caught with what consumers viewed as too-high prices, prompting the retailer to slash prices after it posted heavy losses amid its troubled takeover of Safeway Canada.
Loblaw, for its part, reported its second-quarter profit dropped by 14.6 per cent to $158-million or 39 cents a share, from $185-million or 44 cents a year earlier. Sales rose to $10.7-billion from $10.5-billion.
Loblaw said its reduced profit was the result of higher interest expenses and financing charges. Its adjusted profit, excluding some items, grew to $412-million or $1.01 a share from $350-million or 84 cents from the previous year.
The retailer's sales grew faster at its Shoppers Drug Mart division, which it acquired in 2014, than at its core food retailing business.
To help shave retail prices, Loblaw recently told its largest suppliers it will cut their wholesale prices by 1.45 per cent for goods received by the country's largest grocer and drugstore chain after Sept. 4.
The move followed suppliers having raised their prices by more than $1-billion since 2014, the company said. A weak Canadian dollar relative to its U.S. counterpart resulted in higher import costs that suppliers passed on to retailers in steeper wholesale prices.
"Prices got to the point that they were too high in the Canadian market," Mr. Weston said on Wednesday. "And it is in our joint best interest, as suppliers and retailers, to lower prices. And lowering prices should drive volume.
"And we are seeing in the places that we are making the [price-cutting] investments – and we've been doing it now for a couple of months – that the customer is very much looking for that kind of value. And they are responding more quickly than we perhaps would have expected."
To succeed in the current low-growth inflation environment, big retailers such as Loblaw need to sell more products, spurring the move to lower prices, Mr. Weston suggested. It is focusing its price-cutting at its more premium and conventional chains, he said.
Analysts had expected Loblaw to post a second-quarter adjusted profit per share of 94 cents, according to a poll by Thomson Reuters, compared with the retailer's reported $1.01. Peter Sklar, retail analyst at BMO Nesbitt Burns, pointed to Loblaw having gained better-than-anticipated savings from its Shoppers takeover and other cost cuts.
Loblaw said its quarterly retail food inflation was "slightly lower" than Statistics Canada's 1.8-per-cent inflation rate for the period.
Loblaw's same-store sales in its food retail division rose 0.4 per cent, compared with 2.1 per cent a year earlier. Excluding its volatile gas revenue, those sales were up 0.7 per cent. On the other hand, drug retail same-store sales grew a stronger 4 per cent, up from 3.8 per cent in the previous year.
Loblaw's investors seemed pleased, driving up its shares by almost 3 per cent to $72.90 in midday trading on the Toronto Stock Exchange.
Nevertheless, suppliers have been angered in previous years after Loblaw and other grocers have retroactively rolled back vendors' prices. The Competition Bureau continues to investigate Loblaw's pricing practices with its suppliers. Last October, the grocer told its suppliers it would overhaul those practices to streamline its operations and smooth relations with its vendors.