We review Loblaw’s fourth quarter performance and the outlook for the year ahead.
Loyalty launch adds $211m to costs
Loblaw’s fourth quarter retail sales fell by 1.2% to $10.7bn, reflecting the divestment of its gas bar business. Excluding this impact, sales improved around 2.1%. Food retail same-store sales were up 0.5%, while drug retail saw a 3.6% improvement. Operating income in the quarter was down 85.7% to $56m, impacted by costs associated with the launch of its new loyalty program, PC Optimum. The retailer also saw an impact of $107m related to the Loblaw Card Program which forms part of the company’s actions to address its role in a price-fixing arrangement involving certain packaged bread products.
For the full year, retail sales increased by 0.6% to $45.6bn, with operating income up 18.2% to $2.2bn.
Source: IGD Research
Sacrificing volume to deliver profitable sales growth
Despite the impact on profitability, the business continued to drive positive same-store sales across both food and drug retail, with the latter delivering a significantly stronger performance. Volume was impacted in the quarter as the retailer chose not to undertake unproductive promotions, focusing on maintaining stable margins. It will aim to manage this by operating within a volume trading range but expects to be at the lower end of that range this year.
Mitigating cost headwinds with range of measures
The Canadian market remains highly competitive, with promotional intensity increasing, as retailers face several cost headwinds. This year, Loblaw expects labour costs to increase by $190m, following changes to the minimum wage, while operating income will be impacted by $250m due to healthcare reform. Plans have been put in place to mitigate these impacts, including restructuring activities, increased supply chain handling fees and initiatives to improve processes and efficiencies. Recently it expanded its Scan and Go pilot in Toronto and plans on expanding self-checkouts within the Shoppers Drug Mart network.
Scaling up ecommerce programs
The retailer will continue to invest in scaling up its ecommerce operations. Following the launch of home delivery in partnership with Instacart at the end of last year, this will be expanded to additional cities. It is also adding critical mass to its click and collect operation, adding around five stores each week, building on the 300 which were in place at the end of the year. This year it will undertake capital expenditures of around $1.3bn, including $1bn in its retail segment, broadly in line with last year. Most of this will be directed towards remodels, with space growth remaining flat.
Loyalty programs performing ahead of expectations
Although the launch of the PC Optimum program impacted profitability, the retailer is seeing a strong response to the program in the first few weeks. The retailer views its personalised program as a significant competitive advantage, particularly given the ability to have a single view of its customers across all it retail stores, services and digital platforms. Its recently launched pilot subscription program, PC Insiders, is also tracking ahead of expectations. The business is focusing on understanding which elements of the proposition resonate most with customers and the impact on shopping behaviour.
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Stewart Samuel, Program Director, IGD Canada: based in Canada, Stewart heads up all of IGD's research and coverage on Loblaw. He is also responsible for shaping IGD's research program across North America. Contact Stewart at [email protected] for further insight on the region's markets, channels and retailers. Follow Stewart on Twitter: @Stewart_IGD