Loblaw Cos. Ltd. is taking big steps to compete in an e-commerce world, and warning the changes will come at a cost.
The country's largest supermarket chain said on Wednesday it is launching home delivery of groceries in two major cities and shutting 22 unprofitable stores as it takes on rapidly shifting consumer preferences along with rising labour costs.
Loblaw is teaming up with the U.S. delivery technology startup Instacart to begin fresh food and other grocery shipments to customers beginning Dec. 6 in Toronto, and early next year in Vancouver before it rolls out more broadly. The service will come with premium prices and delivery and service fees.
The store closings and other efforts are aimed at helping Loblaw find ways to shave expenses and gear up for multiple financial pressures that retailers will feel in 2018, including rising consumer demand for e-commerce, higher minimum wages in Ontario and Alberta – and possibly elsewhere – and generic-drug reforms.
"Given all the headwinds, we expect 2018 will be a very difficult year," Loblaw chief executive Galen Weston told a quarterly analyst call, adding later the "headwinds" next year are potentially "more significant than anything that the organization has experienced before."
On the e-commerce front, grocers face Amazon.com Inc., which this year acquired organics grocer Whole Foods Market Inc. for $13.7-billion (U.S.) and is expected to expand its online food-order deliveries, putting heat on incumbent retailers to offer that service.
Canadian grocers have been generally slow to offer extensive home deliveries because of the considerable cost of shipping perishable products, as well as many low-cost, sometimes bulky items to customers' homes.
Loblaw has led the way in the more economic e-commerce model of what it calls "click and collect," in which consumers choose their groceries online and pick up their orders at the stores.
Mr. Weston said Loblaw has had success with click and collect, which he said has been a convenient service for many Canadians and is being expanded in more of its stores, today reaching more than 30 per cent of the country's population.
Still, Kaan Yigit of Solutions Research Group said consumers prefer "no fuss" grocery deliveries over click-and-collect e-commerce.
"I am not sure that you can be a consumer-facing 2017 company and not offer a true mobile contact point and a delivery option, especially in the largest markets," he said.
But, he noted Loblaw and other grocers are still struggling with the economics of home delivery. He said Loblaw's home-delivery service with Instacart is relatively expensive, thus potentially discouraging many consumers from using it.
Even so, Mudit Rawat, founder of Canadian online delivery startup Urbery.com, said customers have to pick up some of the costs of home delivery in return for the added convenience.
His company failed to find a big enough grocer such as Loblaw to partner with to do deliveries, making the economics of the business unworkable, he said. He has now switched to doing online deliveries for consumer-product companies.
He said Loblaw's online delivery service is not for mainstream customers but rather for those ready to pay a premium. "Could it become a big enough business for Loblaw? Probably," he added.
The Instacart delivery fees will range from a low of $3.99 (Canadian) depending on the size of the order and deliver time, to as high as $9.99 for one-hour shipments of an order of less than $35. And there will be an added service fee of 7.5 per cent of the value of the order. Home-delivered grocery prices will be higher than Loblaw's regular prices.
Loblaw hasn't disclosed its home-delivery pricing yet. "This is a financial tradeoff," Mr. Weston said. "There's lots of room to modify the cost structure depending on the consumer appetite for the service. So we will monitor it closely and we will make the necessary adjustments."
He said Loblaw has a road map to reaching profitability in its grocery e-commerce, but he would not disclose how long that would take.
In the debate over pickup-versus-delivery, consultancy McKinsey & Co. has found click-and-collect generates higher profit margins: After variable costs, such as marketing, margins are 13.8 per cent for pickups and just 10.7 per cent for home deliveries. That's in a "best-case scenario" of densely populated areas in Europe, it says in the 2013 report. "The economics of pickup can be substantially more attractive."
Mr. Weston said Loblaw will try to refrain from raising prices to cover burgeoning costs of e-commerce, minimum wages and drug reforms.
Among other moves to rein in costs, Loblaw last month told its largest suppliers it was introducing a "supply-chain handling charge" of 0.79 per cent of the value of their orders starting in 2018, an initiative that has angered many vendors.
Michael Graydon, CEO of the suppliers group Food & Consumer Products of Canada, said Loblaw and the country's major grocers are pushing more costs onto their vendors than merchants in other major trading markets, "further hampering our already-lagging manufacturing competitiveness … "It's time to simply call the increase what it is – a direct transfer of costs from retailer to supplier to ensure [or increase] retailer profitability," Mr. Graydon said.
Loblaw CFO Richard Dufresne said the new supplier fee is just one of many strategies to deal with overall headwinds.
Loblaw has made other recent moves to offset cost pressures, including laying off 500 employees from its office and store-support operations, along with finalizing plans to close 22 stores, most of them by the first quarter of 2018. It expects to record charges of about $135-million, most of which are expected in the fourth quarter, and generate $85-million in annual savings.
In Loblaw's Instacart program, shoppers will order from local Loblaws, Real Canadian Superstore or T&T locations through the Instacart website or app; Instacart will pick, pack and deliver the orders.
Loblaw reported it more than doubled its third-quarter profit to $883-million, or $2.24 a share, from $419-million, or $1.03, a year earlier. Revenue climbed to $14.19-billion from $14.14-billion. The results included a $432-million gain on the sale of the company's gas-station business to Brookfield Business Partners.
Instacart delivery fees in Canada:
- $3.99 on orders of $35 or more
- $7.99 on orders under $35
- $5.99 for one hour delivery on orders of $35 or more
- $9.99 for one hour delivery on orders under $35
- $0 delivery fee for Instacart Express members
- customers will also pay a 7.5-per-cent service fee, and prices will be higher online than in stores.
- shoppers won't be able to order alcohol online, or earn or redeem PC Plus points through Instacart.