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Loblaws knew it had to get into the 21st century in a hurry.

It had Wal-Mart on one flank, and price-conscious consumers on the other. And as it looked for ways to beat one, and serve the other, it realized that one of its big impediments was right at the core of its business: It was taking too long to get goods from the warehouses to the store shelves.

And so last year Canada's biggest grocer embarked on a $62-million effort (with more to come) to revolutionize its distribution system. It launched an ambitious -- and ultimately costly -- plan to trim its 32 warehouses by six. It wanted to consolidate operations in large, high-volume facilities run on state-of-the-art technology. Ordering systems were to be streamlined so that shelves would be full of the goods the company marketed so famously in its Insider Report flyers.

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But things went awry. Loblaw moved too fast. It laid off people, relocated others, and closed facilities before other locations were able to take up the additional load. Last summer, the Calgary warehouse got so jammed that one supplier waited three or four months just for his shipment to be received.

How did one of Canada's savviest supermarket chains find itself in this predicament? Why couldn't a leader in developing designer groceries also produce President's Choice pots and pillows and get it right?

For president John Lederer, a man who is usually in total control of a situation, it wasn't his finest hour. He tried to do too much, too quickly, and is now eating humble pie. His missteps set the grocer back at least a year, and tens of millions of dollars.

"We've had a very challenging year," he told analysts recently. "It has to be said that probably we -- I -- went a little bit too fast. And, obviously, you learn from that. And we are far better prepared now to cope with the final stages of setting this business absolutely right, than we were certainly a year ago."

While he says the company is well on its way to getting its house in order by the summer, others think it may take longer. And time is of the essence because as Loblaw Cos. Ltd. works to sharpen its operations, discounter Wal-Mart Canada Corp. isn't wasting a second. The giant general merchandiser within a year plans to roll out supercentres with a full array of supermarket and non-supermarket goods.

So the grocer that mastered Memories of Szechuan peanut sauce has to figure out how to sell towels, toys and clothing, and do it quickly. Otherwise it may get overtaken in the competitive heat.

"Their task is to make people aware of their general merchandise offerings, and the scope of them, because they don't have a long record at it," says Don Watt, a retailing consultant who advises Wal-Mart.

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To compete successfully against the mighty Wal-Mart machine, a merchant has to have a well-oiled system of getting in-demand products from the supplier to the store shelves. To his credit, Mr. Lederer understands that, and last year set about retooling Loblaw's systems to slash costs and gear up for his expansion into general merchandise at discount superstores.

Not one to shrink from challenges, he's a Loblaw man to the core, having served the company for 29 years. At 50, he's been at the helm since 2001, from success to success.

But in trying to take on the 800-pound gorilla Wal-Mart, the low-profile executive met his match. As he raced to streamline Loblaw's distribution and administrative network to lower costs -- all so that he could lower prices -- the process snowballed into a series of stumbles that he didn't anticipate.

His goal was to consolidate 32 warehouses across Canada by closing six and cutting 1,400 jobs. But the remaining distribution centres just weren't ready for the onslaught of inventory. Indeed, the company was "a little bit careless" in executing the makeover, Mr. Lederer said this month.

At the same time as the warehouses were being shut or overhauled, the company was preparing to move 2,000 administrative employees to its new headquarters in Brampton, Ont., from a number of offices in Canada. That's where things started to get really bogged down. Some people decided to quit rather than move, specifically a good half of the 150 general merchandise product buyers in Calgary. Merchandise purchasers play an important role at a retailer, and were badly needed at Loblaw. But just when it needed them most, many of Loblaw's key people were instead thinking either about looking for new jobs or spending time house-hunting in Ontario.

The staff turnover, and general turmoil, hit many suppliers hard.

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"What's been really frustrating is the rapid change in people," one supplier says. "The guy that was buying last week isn't buying this week and may not be buying next week. It's been very difficult." (Suppliers asked not to be identified out of fear of Loblaw's clout.)

Adds another supplier, who had several thousand dollars' worth of general merchandise turned away repeatedly from a backlogged Loblaw warehouse last fall: "When buyers leave, you don't have any continuity. Mistakes are made."

There were just too many irons in the fire all at once -- too many changes occurring concurrently, admits Loblaw spokesman Geoffrey Wilson. (Mr. Lederer declined to be interviewed.) The team in Western Canada, where the grocer had an established general merchandise business at older superstores, was accustomed to doing business in the same way, and wasn't able to focus properly on the transformation.

"They were not as prepared as they should have been to accept this change -- partly because of all of the things happening and partly because we could have managed it better," Mr. Wilson says.

The company has begun to slow its pace of change. But it hasn't been easy on suppliers, who have borne their share of bruises along with Loblaw. As one large food supplier puts it: "When Loblaw burps, everybody feels a bit of the pain along the way."

One vendor, who also asked to stay anonymous, shipped tens of thousands of dollars' worth of general merchandise to the Calgary warehouse last June, only to have the shipment refused. The boxes sat for three or four months in containers before making it into the warehouse, when he was finally paid, he says. "I don't think I was the only one."

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Backlogs last summer were compounded by the Vancouver port strike, Mr. Wilson says, although he insists that delays were generally a matter of "days, not months."

Because of the delivery foul-ups, particularly with general merchandise, Loblaw put off heavily marketing the goods and spreading the word that it had added an array of non-grocery items.

"They're not promoting things that they're having trouble getting to the stores because all they do is end up disappointing their shopper," says an executive at a major packaged goods firm. "They should be growing that side of their business but they are not."

The snafus resulted in indirect costs too. The stores scheduled night crews to unpack boxes that never arrived, or arrived in inadequate quantities; suppliers shipped goods straight to stores rather than to warehouses, racking up extra labour and transportation costs; Loblaw was forced to mark down prices of many seasonal goods (such as toys for Christmas) that came late to stores.

"If you don't get the seasonal product in at the right time and you don't have enough selling time, you have to move too early in a markdown situation," Mr. Lederer has said. "So the reality of general merchandise is it is perishable as well."

The problems haven't been limited to the loading docks. Displays at stores often have looked scattered because of empty shelves. Some of the earlier, smaller superstores don't have a complete range of general merchandise, thus confusing consumers, says Mr. Watt, who helped design Wal-Mart's U.S. supercentres, which combine groceries and general merchandise.

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Loblaw superstores are so big that they can be difficult to navigate, he says. And there are often fewer customers in the non-grocery sections because many people just aren't aware of all the new items that the outlets now carry, he says. Mr. Watt, chairman of DW + Partners in Toronto, was instrumental in developing its first superstores in Western Canada about 25 years ago, as well as its iconic President's Choice private label.

The challenge is to differentiate itself from Wal-Mart by emulating U.S. discounter Target Corp. and focus on adding flare to home goods and fashions at a low price, he adds.

In this vein, the grocer's troubles may go beyond logistics, some analysts say. The chain runs the risk that its new discount superstores may increasingly cannibalize sales at its conventional supermarkets, says Keith Howlett, retailing analyst at Desjardins Securities. And its push to reduce prices may bode badly for the bottom line for a little while yet.

"We continue to grapple with whether transitory supply chain issues are able to fully account for Loblaw's weak sales and earnings performance in 2005 and as projected for 2006," Mr. Howlett says in a recent report.

No matter how you slice it, the numbers aren't pretty. Last year, the grocer saw its same-store sales, a key retailing barometer that excludes the impact of annual store openings and closings, barely grow at all while they slipped 0.7 per cent in the fourth quarter.

Store productivity, measured in sales per square feet, dropped 2.4 per cent last year to $590.25, Mr. Howlett estimates.

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While Mr. Lederer foresees a turnaround by the second half of this year, others aren't as sure.

"We are not fully convinced that all the necessary components of the company's transformation will have fallen into place by then," Mr. Howlett writes. Not only do internal cost reductions need to take hold, but both Loblaw employees and customers need to embrace the changes. "A great company is transforming itself dramatically in Canada's largest markets of Ontario and Quebec," he says. "Timing is hard to predict."

Certainly, Mr. Lederer is moving to tackle the problems. But he is facing big hurdles, not the least being the Wal-Mart juggernaut. And then there are the tough labour talks in Ontario, where lowering payroll expenses is a critical goal. After all, in Wal-Mart, he is taking on a powerful non-unionized rival whose low cost base is at least partly a result of notoriously low compensation for its employees.

Loblaw is in the midst of negotiations with the union representing employees at its Ontario traditional supermarkets, some of which the retailer wants to convert to discount superstores. That province is the focus of the superstore expansion as well as the branching into a wider range of higher-margin goods, from towels to toys to tumblers. A few years ago, when the company was launching those Ontario outlets, it was successful in getting the union members to agree to lower pay scales for general merchandise staff.

Now Mr. Lederer is expected to seek further wage cuts from the United Food and Commercial Workers union. The UFCW, for its part, is only in the early stages of the talks. But union leaders "are all concerned about Wal-Mart growing those Wal-Mart superstores," national director Michael Fraser says.

On the procurement front, Loblaw has hired new product buyers, while on the supply chain side, the glitches are being ironed out at warehouses. The food end of the business is up to scratch, company executives say, while general merchandise will be mended by the summer.

To ensure long-term stability, Mr. Lederer has plucked a supply chain veteran from Wal-Mart itself to head up those crucial operations at Loblaw. To bolster product offerings, Loblaw is scrambling to "Target-ize" its private label offerings, tapping into style meister Joseph Mimran of hip fashion chain Club Monaco fame to put his stamp on the new lines.

Last fall, Loblaw launched a line of PC home products. In March, the superstores will begin carrying a new line of clothing, developed by Mr. Mimran exclusively for Loblaw and called Joe Fresh styles.

And to make superstores more shopper friendly, Loblaw recently rejigged the layout of some Ontario stores and installed colour-coded signs to make it easier for shoppers to find their way around and to flag low prices.

Once the company feels it has a handle on its logistic headaches, it will try to get some attention with a cranked-up marketing campaign. It is looking at relying less on flyers and considering advertising on television, radio, billboards and on-line, company executives have said.

As Mr. Watt says: "They need to find ways to tell people about their stores . . . There is a sense of urgency here."

1,400

Number of Loblaw warehouse job cuts. The company is closing six warehouses in Ontario and Quebec in a bid to streamline operations. Loblaw began 2005 with 32 facilities across the country and ended the year with 28.

-18%

Decline in Loblaw stock price over the past year. The warehouse and supply chain woes have cut a hole in Loblaw's bottom line. The problems cost $10-millin in the fourth quarter alone. Out-of-stock signs have left investors out of luck.

30,000

Number of President's Choice toasters sold so far. President John Lederer said customers have purchases 20,000 PC coffee makers. A thousand PC-branded general merchandise items were launched in 2004. But the cookware and sleepsets have had trouble getting to stores because of warehouse snags and supply chain problems.

77

Number of Real Canadian Superstores in 2004. These are the stores where Loblaw is stocking most of its general merchandise items. There are roughly 20 in Ontario. General merchandise staff at superstores has lower pay scales than their food counterparts.

2,000

Number of administrative positions relocated to the new head office in Brampton, Ont. About half of the general merchandise buyers based in Calgary didn't make the move. Other were distracted by house-hunting and family pressures caused by the mid-school-year disruption.

"It has to be said that probably we - I - went a little bit too fast. And, obviously, you learn from that."

John Lederer, Loblaw president

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