Loblaw Cos. Ltd. will start to test carrying fresh fruits and vegetables in some of its Shoppers Drug Mart stores later this year in a bid to capture higher margins and encourage more frequent store visits.
Within days of Loblaw closing its $12.4-billion deal to acquire the pharmacy chain on March 28, it began to stock its iconic President's Choice Decadent Chocolate Chip Cookies and PC Organics baby food on Shoppers' shelves. More of Loblaw's high-margin private-label products will appear in 2014, while the grocer will stock more of Shoppers' health and beauty lines, Vicente Trius, president of the grocer, said on Wednesday.
"This is obviously just a taste of what is yet to come," Mr. Trius said.
Loblaw is racing to share best practices and merchandise with Shoppers, counting on the merger of the two companies to generate $300-million of annual savings in three years and help battle fierce competition amid steeper fuel, exchange-rate and other costs.
The fresh food pilot project is part "of a comprehensive convenience food offer that caters to consumer needs for breakfast, lunch and dinner, including fresh categories," Loblaw spokesman Kevin Groh said. Shoppers already carries some groceries, such as milk and packaged goods.
Loblaw's plan plays into the grocer's goal to become a key health and wellness destination, said Peter Chapman, president of grocery consultancy GPS Business Solutions, and a former Loblaw executive. The grocer will be able to find savings in its distribution network by having its trucks drop off produce at Shoppers stores on the way to other locations, Mr. Chapman said. "I think it's definitely an opportunity for Loblaw."
But Loblaw will have to modify its delivery methods and stock a more edited offering at Shoppers' urban stores than at its larger supermarkets, requiring frequent replenishment and possibly more tossing out of stale fare to ensure high quality, he said.
The move to exchange Loblaw and Shoppers "hero" products comes as the retailers face "headwinds" this year in a tougher market, Mr. Trius said. Higher expenses – including steeper fuel costs, a weakened Canadian dollar against the U.S. greenback and the upcoming increase in minimum wages in Ontario – are putting pressure on the bottom line.
"Looking ahead in our core grocery operations, we see very little relief from the intensely competitive environment in which we operate," Mr. Trius said after releasing the retailer's first-quarter results, which were close to or above analysts' expectations.
But there may be some easing of the unprecedented growth in retail space in the second half of 2014, as U.S. discounters Wal-Mart Stores Inc. and Target Corp. restrain their respective expansions, he added.
In its first quarter, Loblaw benefited from raising prices of some produce and meats, passing on to customers higher costs from a weaker loonie and beef and pork shortages. Even so, Loblaw reported that its quarterly food inflation slightly surpassed Statistics Canada's national food price inflation of 1.2 per cent in the period.
Inflation as well as strong sales in fresh foods helped Loblaw post a first-quarter same-store sales gain of 0.9 per cent or, excluding the effect of a late Easter, 1.1 per cent. Those sales at outlets open a year or more are considered a key retail measure; At Loblaw, they reflect, in part, the grocer's ability to pass on price increases from suppliers to consumers.
Loblaw also faces challenges from prescription-drug reforms as provinces continue to scale back payments to pharmacies, Mr. Trius said.
But the company is getting a boost from its new PC Plus loyalty program, whose performance is exceeding expectations, he said. Almost 40 per cent of the retailer's sales in participating chains (its discount banners such as No Frills are not part of the program) are now made with a PC Plus card, he said. Rewards members make more trips to the stores, purchase more and shop in more product categories, he said.
Nevertheless, the company is still trying to turn around weaker sales in its non-grocery sections, with its Joe Fresh apparel sales remaining the same in its first quarter from a year earlier, pinched by a "tough winter" and a delayed spring, he said. Even so, Joe Fresh e-commerce is picking up, with average online orders double those in stores, he said.
In its first quarter, Loblaw's adjusted profit rose to $139-million or 49 cents a share from $134-million or 48 cents a year earlier. On a non-adjusted basis, profit fell 39.3 per cent to $103-million or 37 cents from $171-million or 61 in the previous year. The adjusted earnings beat analysts' consensus estimate of 46 cents. Revenue rose to $7.3-billion from $7.2-billion.
"While the industry backdrop continues to be challenging with the intensely competitive market environment and the continued impact of drug reform, we still expect to advance our combined business both financially and operationally this year," Loblaw executive chairman Galen G. Weston said.
First-quarter operating profit fell to $253-million from $309-million, largely because of a gain from defined benefit plan amendments in the year-earlier period, $23-million in costs tied to the Shoppers acquisition, costs related to Choice Properties Real Estate Investment Trust and year-over-year asset and other impairments, the company said.
Adjusted operating income of $268-million versus $258-million was due primarily to an increase in adjusted operating income in the financial services segment. Financial services revenue increased by 9.1 per cent compared with the first quarter of 2013.
Retail sales in the quarter were up 0.8 per cent while same-store sales increased 0.9 per cent compared to the year-earlier period. Excluding the shift in the timing of Easter, same-store sales growth in the quarter was about 1.1 per cent, said Loblaw.