Loblaw is best known for its grocery stores, but the company has been paying a lot of attention to its financial services division, which includes credit cards, a retail loyalty program and personal banking.
For the longest time, this unit was overshadowed by the much larger retail (grocery) unit. Before the company adopted international financial accounting standards, it reported consolidated revenue and income, which merged its retail results with its financial services results and made it hard to track what was happening in the smaller unit. That changed in the first quarter of 2011.
More important, Loblaw has made doubling down on financial services part of its corporate strategy. The only problem with this plan is that the division's profits have plunged this year. Loblaw reported third quarter earnings Wednesday morning, and at this point in 2010, financial services had made $55-million before tax. This year that figure is just $17-million.
Don't worry, management says, this is all part of the strategy.
On a conference call earlier in July, former president and deputy chairman Allan Leighton said that the lower earnings should be expected for "the second half of the year and well into next year." To bulk up the business and attract new customers, Loblaw needs to spend a lot of money on things like marketing and building more banking pavilions in its stores.
"I think you should see this certainly for the next 12, 15 months; and then we should start to see some payback from that," he added.
At least the unit isn't in the red, and revenue is actually growing, driven by more credit card transactions. While a growing credit portfolio may seem like cause for concern in a shaky economic environment, Loblaw isn't worried. Its customers' credit card balances haven't moved much and loss rates are going down. The company is simply generating more revenue because customers have increased the volume of purchases, so Loblaw makes more interchange income.
As for its loyalty reward program, management said on Wednesday's conference call that it is still evaluating how to best tie the program to credit cards.
While Loblaw hopes to ramp up in financial services, retail still dominates its business model. Operating income from retail was more than $1-billion last quarter, against operating income of $54-million from financial services.
Tim Kiladze