Sylvain Charlebois is a professor at the University of Guelph's Food Institute.
Loblaw Cos. Ltd. announced the closing of 52 stores across the country this week, surprising more than a few observers by doing so while simultaneously posting respectable profits. Although it struck some as a kind of corporate oxymoron, the economic picture in this sector made the company's decision to close a cluster of stores appropriate.
The primary reason is that Loblaw's financials are not giving the retail giant much room to breathe. The company posted a $186-million second-quarter profit and more than $10-billion in revenue. But as the country's largest private employer grows, its margin of error gradually shrinks. Even if acquisitions are helping grow Loblaw's top line, maintaining the profit margin is becoming more of a challenge. In the same period for 2014, for example, it reported a loss of more than $400-million.
Companies close food stores every year for this reason. In Loblaw's case, 10 to 15 stores a year get mothballed. In light of its purchase of the Shoppers empire just 20 months ago, 52 stores does not represent a major case of corporate retrenchment. It's simply streamlining.
It is expected that many of the affected outlets will be smaller Shoppers stores. After months of research into its new division, it appears that Loblaw has decided how it wants to support its 1,253 stores across the country. We are witnessing many changes at Shoppers, and more are on their way. In order to get store design right, to sell food alongside cosmetics and health products, it's crucial to eliminate unprofitable stores and generate operational cash.
These measures are a small part of a much bigger picture. Sobeys and Metro, Canada's other top food distribution players, are also supporting profitable stores by shutting down stragglers. Over all, it's a much more nimble, pro-active sector than in the past – all because of market demand, which has become increasingly complex and challenging to predict. It requires exceptionally effective intelligence, and companies are trying harder to listen to what the market is telling them. With the right assessments, grocers can quickly cut bait and move on.
In essence, a major paradigm shift has shaken the food industry. The sector long resisted using technology and innovation to the extent seen in other sectors. But Loblaw and others are now investing millions in logistics to become more effective cost managers, allowing them to increase margins. Food distributors are gradually catching up with new technology and new strategies for reaching consumers.
And it's about time. Non-traditional food retailers such as Costco and Wal-Mart have recently made impressive gains. These and other companies are increasing their footprint and market share in a way that significantly affects the top grocers' abilities to grow at will. As well, smaller convenience stores, such as Quebec's Couche-Tard, are converting pump volume into lucrative in-store volume at a remarkable pace, and many of these sales are in food.
Grocery e-tailing is another emerging competitor. For example, Amazon is demonstrating a growing interest with the expansion of its AmazonFresh division, which is committed to selling more fresh products online. Some online orders are even now being delivered by drones as part of a pilot program. In Canada, both Loblaw and Wal-Mart are exploring their options with "click and collect" systems in Toronto and Ottawa. Everyone now recognizes such potential threats as a call to action.
In the long run, consumers will benefit from the big grocers' belated entries into this fray. In the meantime, there remains a human face to consider. Over the next year, numerous employees will be affected by the Loblaw closings. But the failure to take these measures may have led to many more closings and layoffs in the future.