Customers walk into a Loblaws grocery store in Toronto.Abhijit Alka Anil/The Globe and Mail
In recent years, Loblaw Cos. Ltd. L-T has benefited from inflation-weary shoppers turning to its No Frills and Maxi discount stores to save on groceries. But at the company’s Shoppers Drug Mart stores, where prices are not as competitive, customers have been pulling back.
Starting this weekend, Loblaw will begin attempting to address that by reducing prices on more than 400 food items sold at the drug stores by roughly 10 to 15 per cent, chief executive officer Per Bank announced on Wednesday.
“The shift to value and discount of course has a slight impact on the food sales in our Shoppers Drug Mart stores,” Mr. Bank told analysts on a conference call to discuss the company’s third-quarter earnings.
While drug store sales benefited from strong demand for beauty products, shoppers have been spending less on food and household items sold at the front of the store. The Brampton, Ont.-based retailer has also been phasing out some electronics products from its Shoppers Drug Mart stores, further dampening sales.
Same-store sales – an important metric that tracks sales growth not tied to new store openings – fell by 0.5 per cent at the front of the stores, offset by a 6.3-per-cent increase in pharmacy and health care services. That drove total same-store sales growth of 2.9 per cent in Loblaw’s drug stores in the quarter ended Oct. 5.
Sales at the company’s grocery stores also grew, thanks to higher customer traffic at No Frills and Maxi, as well as at the Real Canadian Superstore chain – where prices tend to be lower than at conventional stores but not as deeply discounted as the other two banners.
Canada’s largest grocer reported its adjusted profits grew by 6.7 per cent in the third quarter.
The rate at which food prices are rising has been slowing since reaching double-digit highs early last year. But after the cumulative price increases of the past few years, shoppers are still left with much higher grocery bills overall.
That has led to a sustained shift in shopping behaviours: Even those who continue to shop at Loblaw’s conventional grocery stores are buying more house-brand products, particularly from the discount No Name line. Others have switched to discount stores altogether, a perk for Loblaw, which has a higher percentage of such stores in its network compared to some rivals.
Purchasing data from the company’s PC Mastercard show that in general, people are buying more groceries than they were at this time last year, while spending less dining out at restaurants, chief financial officer Richard Dufresne said on Wednesday’s call.
While people are buying fewer items during each grocery trip, the growth in traffic has been significant: This fiscal year, Loblaw will report the largest increase in a decade in tonnage – a term for the volume of items sold at stores – Mr. Bank said on the call.
The company has been expanding its discount locations, and opened 25 new stores in the quarter. It is also testing two new No Name stores that pare down prices further by lowering operating costs: The stores carry a narrower assortment of products and do not have refrigerators, meaning that shoppers have to go elsewhere for items such as meat and dairy.
In previous quarters, Loblaw has made a point of saying that its internal measures of food inflation show its prices have been either in line with, or lower than, Statistics Canada’s Consumer Price Index for food purchased from stores. In the third quarter, however, Loblaw reported that its internal food inflation was higher than the CPI, which was up 2.3 per cent. The company does not specify its internal numbers.
Same-store sales grew by 0.5 per cent at the company’s grocery stores in the quarter, as customers visited stores more often but bought fewer items during each trip. Year-over-year sales growth was affected by the timing of the Thanksgiving holiday shopping surge, which occurred in the third quarter last year but fell within the fourth quarter this year. Excluding that timing issue, the company reported that food same-store sales grew by approximately 1.3 per cent in the third quarter.
E-commerce sales were up 18.5 per cent.
However, Loblaw missed analysts’ estimates for quarterly revenue, as demand has slowed for non-essential products such as household items. The company’s revenue grew 1.5 per cent in the third quarter, to $18.5-billion. That fell below analysts’ expectations of $18.6-billion, according to the consensus estimate from S&P Capital IQ.
Loblaw reported net earnings available to common shareholders of $777-million or $2.53 per share, compared to $621-million or $1.95 per share in the previous year.
A previous charge related to a commodity tax matter at President’s Choice Bank was reversed during the quarter, after Loblaw won a legal appeal. That change positively affected the company’s net earnings by $125-million, offset by the amortization of assets related to Shoppers Drug Mart and the Lifemark chain of clinics.
Including those and other adjustments in the same quarter the previous year, adjusted net earnings available to common shareholders were $767-million or $2.50 per share in the third quarter, compared to $719-million or $2.26 per share in the prior year.