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Minimum-wage hike just one challenge in store for Loblaw

A Loblaw store in downtown Toronto is seen in this file photo.

Fred Lum/The Globe and Mail

A growing array of issues threaten to pinch the bottom line of grocery and drugstore titan Loblaw Cos. Ltd. in the coming years, touching off uncertainty about its operations and those of other retailers.

Loblaw revealed on Wednesday that plans for minimum-wage increases in Ontario and Alberta could add about $190-million of labour expenses to the retailer in 2018 alone. As well, generic drug reforms coming to Quebec – and probably other provinces – will put pressure on Loblaw, while building its e-commerce is another burgeoning cost. Meanwhile, German grocery discounters, which have pinched European rivals, are starting to turn their sights on North America.

"We have a lot of work ahead of us," Galen G. Weston, chief executive officer of Loblaw, told an analyst conference call about mitigating the effects of higher minimum wages and drug pricing. "What we are doing is we are flagging a significant set of financial headwinds and the organization is mobilizing all of its resources to see whether or not it can close that gap. At this point, we don't know the answer."

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Read more: How businesses can handle the hikes in minimum wage

Loblaw and other retailers are rushing to navigate a rash of changes that could take a bite from their profits unless they can find ways to offset them with cost cuts and new technological applications.

The issues range from government-imposed minimum wage increases and accelerating drug pricing reforms to the expansion of e-commerce behemoth Amazon.com Inc. into groceries with its planned $13.7-billion (U.S.) acquisition of organic supermarket chain Whole Foods Market Inc. In the coming years, German discounters Lidl and Aldi could set up shop in Canada, analysts say.

"There are a lot of things going on and a lot of uncertainties as a result of some of the changes in the industry," said Brittany Weissman, an analyst at Edward Jones in St. Louis.

Investors seemed to feel shaky. Loblaw's shares fell almost 4 per cent to $68.80 on the Toronto Stock Exchange on Wednesday. Even before that, the grocer's shares had slipped more than 5 per cent following the June 16 announcement that Amazon was swallowing Whole Foods.

Other retailers will feel the same pressures as Loblaw, to varying degrees, especially in the shorter term as a result of higher minimum wages, said grocery specialist Kevin Grier of Kevin Grier Market Analysis and Consulting in Guelph, Ont. "It is a problem but, on the flip side, everyone [among retailers] is facing the same thing" in Ontario and Alberta, he said. "It's going to hit everybody."

Ontario plans to boost the hourly minimum wage of $11.40 to $11.60 in October, $14 on Jan. 1 and $15 the following year, aiming to improve consumer purchasing power and stimulate the economy. But a number of business groups, including the Ontario Chamber of Commerce and the Canadian Federation of Independent Grocers, have opposed the changes, warning they will result in job cuts. Alberta plans to increase its hourly minimum wage to $15 from $10.20 by next year.

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Sobeys Inc., the country's second largest grocer, has calculated the effects of steeper minimum wages in Ontario and Alberta on its operations but won't disclose the amount "until we have a comprehensive mitigation plan in place," spokesman Andrew Walker said. The retailer, which is struggling from its botched 2013 takeover of Safeway Canada, expects to provide an update when it releases its quarterly results on Sept. 14, he said.

On the drug front, the Quebec government plans to lower generic drug prices over the next five years, beginning in the fall, with estimated annual savings of more than $300-million. Loblaw did not disclose an estimate of what the drug pricing could cost it but Mr. Weston said that "this will put increased pressure on our pharmacy business model both in Quebec and across the country."

He said the minimum wage increases are "the most significant in recent memory." And he outlined ways Loblaw is looking at to find savings, including increasingly digitizing manual invoice jobs; rolling out more self-checkouts at its Shoppers Drug Mart stores; using analytics to reduce inventory and ensure goods are available when customers want them; and using predictive tools to improve the effectiveness of discounting.

He said Loblaw will focus on using technology and "process improvement" to lower expenses rather than "things like having to steal your pencils from hotels because there are none available in the office. That's not the culture that we aspire to, there are other ways, in our judgment, of becoming a more cost-oriented business."

In e-commerce, Loblaw uses a "click and collect" operation that entails customers ordering online and picking up their groceries at stores, which is cheaper for the retailer rather than delivering orders to customers' homes. "But our job is to meet customers' needs and our customers tell us what they want," Mr. Weston said. "To the extent that delivery needs to become part of that, we are certainly open to considering it."

He said Loblaw's current discount chains, such as No Frills and Maxi, are "powerful assets" that, with improvements, "are the place that we are going to fight any eventual arrival of the German hard discounters."

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Loblaw's second-quarter profit rose to $358-million or 89 cents a share from $158-million or 39 cents a year earlier. Revenue climbed to almost $11.08-billion from $10.73-billion. Sales at stores open a year or more, an important retail measure, rose 1 per cent.

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