A relentless consumer shift to shopping for groceries in discount stores such as No Frills rather than higher-priced traditional supermarkets is pushing retailers to convert more outlets to low-cost formats.
Loblaw Cos. Ltd., the country’s largest grocer, has seen the shift to its discount stores such as No Frills and Real Canadian Superstores from what it calls “market” or traditional supermarkets. At the same time, consumers are buying more low-cost private labels – or “control brands” – including its President’s Choice and No Name products, as Loblaw beefs up its house-brand offerings. Private labels can generate higher profit margins for retailers by reducing marketing and other costs.
“Many of the retailers are moving to more discount formats," Sarah Davis, president of Loblaw, said on Wednesday after it released its first-quarter results, which included relatively soft food sales growth at stores open a year or more. “We’re happy to have a bit of a switch over to control-brand items.”
Retailers are closely monitoring consumer spending habits amid softness in the economy and a sluggish end to 2018 and beginning to 2019 amid harsh winter weather and rising consumer debt levels.
Still, Loblaw and other major grocery executives have said generally they hadn’t noticed a significant drop in spending as consumers faced steeper food prices, especially for fresh fruit and vegetables, over the past several months.
Produce led the rise in food inflation in March, with shoppers paying 15.7 per cent more for fresh vegetables and 8.6 per cent more for fresh fruit compared with March, 2018, according to Statistics Canada.
Eric La Flèche, chief executive of Metro Inc., said last month the grocer had lowered some prices to offset spikes in prices of some produce items. “Yes, there are some increases in certain categories,” he told analysts. “We’re not seeing a huge shift in behaviour. Our mix of promotions adjust to that.”
Sobeys Inc., the country’s second largest grocer, is rushing to convert about 25 per cent – 65 outlets – of its existing Safeway and Sobeys stores in Western Canada to its FreshCo discount format, which it already operates in Ontario.
“Our FreshCo banner is performing at a level that, honestly, it’s never performed at before,” Michael Medline, CEO of Sobeys, said in March after the company revamped some of its stores revamps to focus more on lower prices.
Loblaw reported first-quarter same-store sales at outlets open a year or more – a key retail measure – rose 2 per cent in its food business. That compares with Metro’s same-store food sales growing 4.3 per cent in its latest quarter while those at Sobeys gained 3.9 per cent in its latest reported quarter.
Loblaw’s own food inflation was “slightly lower” than the national 3.3-per-cent inflation rate in the quarter, the company said. That implies a 1-per-cent “real” same-store sales decline, said Irene Nattel, a retail analyst at RBC Dominion Securities.
She said Loblaw’s same-store sales performance was disappointing for a second quarter in a row despite overall “solid” results.
Michael Van Aelst, a retail analyst at TD Securities, asked Loblaw executives on a conference call if they were comfortable with no real volume sales growth when rivals were reporting gains in what the industry refers to as “tonnage.”
“If we maintain flat to slightly positive tonnage market share without adding significant new real estate, I think we are comfortable with that,” Ms. Davis replied. Loblaw is trying to avoid chasing unprofitable sales, she said.
Loblaw’s drugstore same-store sales, which includes its Shoppers Drug Mart chain, rose 2.2 per cent with pharmacy sales growing 1.2 per cent and non-pharmacy sales up 3.1 per cent.
Loblaw’s sales performance was pinched by Easter falling in the second quarter, health-care reforms and a general-merchandise pricing shift, chief financial officer Darren Myers said.
The company’s first-quarter profit fell to $198-million, or 53 cents a share, from $377-million, or 98 cents, a year earlier. Revenue rose to $10.66-billion from $10.34-billion.
On an adjusted basis, it earned a profit from continuing operations of 78 cents a share compared with 81 cents a year ago. Analysts expected Loblaw’s adjusted profit to be 80 cents a share on revenue of $10.59-billion, according to Refinitiv.
The retailer said it will pay a quarterly dividend of 31.5 cents per share, up from 29.5 cents.