E-Commerce and COVID-19 Related Costs Took a Bite Out of Loblaw’s Revenue Gains Last Year but Company Sees Strong Grocery Sales in First Half of 2021 

Loblaw Cos. Ltd finished 2020 strong. On February 25, the company released its year-end financial update where revenue rose by almost 10% in 2020 and online sales roughly tripled. But there were problems, too, and added costs that come with such growth.

Loblaw warned that this year’s revenue growth “will be challenged” to hit last year’s heights, but it still expects sales to remain elevated through the first half of this year. Asked on a conference call with analysts whether Loblaw will use sales promotions to help it keep its share of household spending as the “food-from-home pie” starts to shrink, Company president Sarah Davis said she was happy with the company’s current pricing. She also noted that hundreds of millions of dollars in safety costs will disappear if the pandemic retracts.

Loblaw also detailed its ability to help hasten a return to normal if public health authorities call upon the chain’s 1,300 pharmacies to assist with distributing COVID-19 vaccines. “Our supply chain can deliver vaccines the day we receive them and we can administer one million shots per week,” Davis said, adding that some of its pharmacies in Alberta will start offering vaccines in the first week of March. 

Loblaw reported that 2020 sales rose to $52.7 billion, from $48 billion in 2019 (though 2020 had an extra week). Revenues reached $12.4 billion in the fourth quarter, up $818 million, or 7.1%, over the previous year.

Same-store food sales, an important gauge of year-over-year growth in retail, grew by 8.6% in the fourth quarter, which RBC Dominion Securities Inc. analyst Irene Nattel said was “a nice uptick” compared to 6.9% growth in the third quarter.

In a research note, Nattel was also impressed by Loblaw’s progress in narrowing the sales gap between its full-service and discount stores. Loblaw noticed the shift away from discount retailers such as No Frills earlier in the pandemic, which it attributed to public health suggestions to only shop once a week — an easier feat at a traditional, full-service supermarket. The shift, however, was particularly troubling for Loblaw since 60% of its business is in the discount category.

The most striking change last year was the 178% jump in Loblaw’s e-commerce sales. It sold $2.8-billion worth of goods through e-commerce as consumers let go of their long-held skepticism toward online grocery shopping.

“The rise of digital retail has been dramatic,” Davis said. “We know this is where retail is headed, but it creates a challenge. Online grocery is a higher cost channel. So we are taking steps to manage margin impact over the medium term while maintaining our leadership position.”

The growth in online sales dragged down Loblaw’s operating income by $100 million, and its diluted net earnings per share by 20 cents. The ongoing shift from in-store to online is expected to be “a headwind to profitability over the medium term,” the year-end report cautioned.

“It’s just a higher cost to serve,” Loblaw chief financial officer Darren Myers told analysts. “The lion’s share of it is all the labour costs, the depreciation, all the costs that go into fulfilling an online order.”

The company reported net earnings of $1.19 billion in 2020, up from $1.13 billion in 2019. Loblaw during the year spent roughly $445 million in “COVID-19 related costs,” including safety measures, and $180 million in pay bonuses.

At the start of the pandemic last spring, Loblaw was praised for increasing frontline staff wages by $2 per hour, but was subsequently criticized when it — along with its two top competitors — cancelled the bonuses on the same day in June 2020. In 2020, Loblaw also used “a significant portion” of its retail cash flow to reward its shareholders, buying back $888-million worth of shares, according to the annual report.

Later in the year, Loblaw courted controversy again by raising suppliers’ fees. The move followed a similar move by Walmart Inc., which outraged the Canadian manufacturing sector by mandating higher supplier fees to help cover the cost of ramping up Walmart Canada’s e-commerce and distribution operations. Manufacturing advocates have also criticized Loblaw for reinstating fines when suppliers come up short in fulfilling orders, even though factories are operating at lower capacity due to sick employees and safety protocols during the pandemic.

Source: Financial Post
Source: Globe and Mail

Empire (Sobeys parent company) reports third-quarter profit and sales up from year ago despite third quarter pay outs of $9 million in bonus pay due to pandemic.

Michael Medline, CEO of Empire Company Ltd., one of Canada’s biggest supermarket chains, is positioning the company as Canada’s “fair but tough” grocery retailer, reinstating pay bonuses for front-line workers and refusing to unilaterally impose fee increases on suppliers. 

The Stellarton, N.S.-based grocer recorded a 10.7% increase in same-store sales, excluding fuel, in its third quarter ending Jan. 30. That momentum continued into the current quarter, with sales up 9% in the first five weeks. Yet Empire cautioned that sales results could appear skewed going forward as it approaches the one-year mark of the pandemic.

Many shoppers stockpiled food and household goods at the onset of the COVID-19 outbreak due to fears around supply chain reliability and other uncertainties, resulting in an unprecedented 18% increase in same-store sales in the fourth quarter of last year. “The company has begun to lap the period when significant stock up activity was experienced in stores,” the grocer said in a release. “Sales in the fourth quarter compared to last year will be less meaningful as they will not provide a full indication of underlying performance.”

E-commerce sales grew by 315% in the quarter. This is compared with a period last year when Sobeys had not yet launched Voilà in the Greater Toronto Area. It has since expanded to Hamilton, Barrie, Kitchener, Waterloo and Guelph. “When we achieve scale, we expect to have the most profitable approach to grocery e-commerce in Canada,” Medline said.

Grocery chains offered workers so-called hero pay increases of $2 an hour at the outset of the pandemic in recognition of their essential role and the risk of working with the public. The retailers faced public outcry last June, however, when those bonuses were cancelled despite ongoing record profits. But Empire reintroduced the pay bump for front-line employees in stores and distribution centres during the latest wave of lockdowns.

The company paid out an extra $9 million in bonuses for workers in impacted areas, Empire said. “We’ve kept our commitment to offer our front-line and distribution centre teammates a lockdown bonus, even while much of the industry did not do so,” Medline said. “To us, it was certainly the right thing to do.”

Metro Inc. provided its front-line workers with gift cards ranging from $75 to $300 at a total cost of about $8 million in its latest quarter, the company said in an email. Loblaw Companies Ltd. did not immediately respond to questions about whether it had reinstated a bonus during the most recent lockdowns or other measures.

Meanwhile, grocery retailers have also come under fire in recent months for imposing fee increases on suppliers. But Sobeys refused to follow in its competitor’s footsteps, indicating that it would take a different approach. “I believe our strong margin performance this quarter shows that you don’t need to send unilateral letters to your suppliers to do well in this business,” Medline said. 

“We try to treat our supplier partners with respect and transparency. We believe that a values-driven approach garners better results for both sides,” he said. “It doesn’t mean we’re not talking. We are. But we negotiate the right way.” 

Overall, Empire’s third quarter profit increased to $176.3 million from $120.5 million a year earlier amid higher sales. In addition to pandemic shopping trends, Empire said the jump in sales was also driven by the expansion of its FreshCo banner in Western Canada and Farm Boy banner in Ontario. The gains were partially offset by lower fuel sales and temporary store closures in Western Canada pending conversion to FreshCo.

Source: Globe and Mail
Source: Toronto Star
Source: Financial Post