After Loblaw cuts, pundits look at causes, and effects

Retail experts and analysts weighed in yesterday to the news that Loblaw Companies will chop about 700 jobs.

Some saw the cuts as a sign the company is reducing “inflated” costs within its system, as one analyst put it.

Others, however, saw it as another sign that food retailers’ margins are being squeezed by higher wholesale pricing and that Loblaw is attempting to offset those rising costs and improve profitability.

‘The move could make sense as a purely cost cutting control exercise given the economic environment, sluggish industry volumes, and the competitive environment,” Credit Suisse analysts David Hartley and Daniel Battiston wrote in a note, pointing out that other retailers–Tim Hortons, Shoppers Drug Mart and HBC–have also cut their workforce.

BMO analyst Peter Sklar, on the other hand, described the layoffs as “potentially negative” and probably point to deteriorating industry conditions combined with tougher competition for Loblaw’s stores from Walmart Supercentres and, starting next year, Target.

“We note that in recent quarters, Loblaw has been reporting both declining tonnage combined with a deteriorating gross margin trend, whereas both Metro and Sobeys have been able to maintain modestly positive tonnage trends while effectively holding their gross margins,” Sklar wrote in an analyst’s note.

Loblaw announced Tuesday that it was cutting some 700 jobs, mostly management and administrative positions at its Toronto-area head office.

“We’re managing costs where it makes sense by reducing administrative expense,” Loblaw president Vicente Trius said in a statement.

The company has about 135,000 full-time and part-time employees across the country, but some the 700 job cuts amount to about 10 per cent of its head office and administrative staff.

The retailer didn’t say how many staff will remain in its head office in Brampton west of Toronto after the cuts and refused to provide a breakdown about what percentage of its management and administrative staff was affected.

Loblaw said the job notices would begin going out Tuesday and that the cuts should be complete within three weeks.

The move will result in a one-time expense of $60 million, to be recorded in the fourth quarter of its financial year.

There was speculation whether the cuts have anything to do with efficiency improvements from Loblaw’s ongoing implementation of an SAP system as well as IT improvements.

The company has sunk billions into SAP and technology programs over the past six years.

“We have asserted that Loblaw has upwards of $400 million in inflated costs in its system (half from depreciation) that should roll-off or be redeployed towards revenue enhancing opportunities in the next three years,” Hartley and Battiston wrote.

“Perhaps today’s announcement of cost savings measures is the first shoe to drop in the process of repatriating lost profitability or growth,” they added.

Sklar, however, did not expect savings from SAP productivity gains to take effect until the system is in place across Loblaw’s entire operation, sometime closer to the end of 2014.

CIBC analyst Perry Caicco, meanwhile, said the cuts could hurt Loblaw’s performance over the next year. “The recent history of the company suggests that some of these job cuts will be replaced by equally expensive outsourcing, and that the company will struggle to re-assign eliminated roles in a productive fashion. In other words, we believe the risk of poor head office execution and service to stores will be high for at least 12 months,” he wrote in a note published in the Toronto Star.

Loblaw operates in an intensely competitive market against other Canadian grocery chains, such as Sobeys and Metro, as well as other retailers that offer food as part of their lineup–including Walmart

Minneapolis-based Target Corp is set to enter the fray next year as the U.S. retail gain begins opening the first of 124 stores across Canada starting in March and April.

Those stores also plan to have a grocery offering, with frozen, dairy and dry grocery products being supplied by Sobeys under a deal announced last fall.

Loblaw has been going through a series of operational restructurings for several years, as it introduced more non-grocery merchandise items, adopted new store formats and reworked its distribution and information technology systems.

Toronto retail consultant Ed Strapagiel said that putting in new systems and making them work in a very large and complex environment like Loblaw however is not without risks. “It takes considerable time and investment to get it right. But there may be much choice, as the new competition has excellent systems in the case of Walmart, or is able to come in and start with state of the art technology like Target.”

Commenting on the cuts, he added: “The food business has had decreasing margins for some time, due to wholesale price increases. Grocers have not been able to pass these along fully due to consumer resistance and a high competition. But grocers, or any retail business for that matter, can endure a margin squeeze for only so long. And looking down the road, with Walmart expanding and Target coming in, things are only going to get tighter.”

Strapagiel said that the only alternative is to reduce other operating expenses and increase efficiency, namely by using technology instead of labour. “This is exactly what Loblaw is doing, and they’ve had this initiative in place for several years.”

George Condon, consulting editor for industry publication Canadian Grocer, said he also wasn’t surprised by Tuesday’s announcement.

“With the increasing competition in square footage of grocery space from Walmart, and next year from Target, everybody is concerned about their profit margins and Loblaws would clearly like to make sure that they have some manoeuvring room,” Condon said.

Asked if he thought Loblaws was a bit top heavy on the management and administrative side, Condon replied that “there seems to be an awful lot of people out there at their head office in Brampton.”

“I have no idea what a top heavy retailer would look like, but it seems to me they had more than enough people to do the work that they’re doing.”

Meanwhile, he noted that the grocery chain had been “a little bit slow to recover from the problems it had four or five years ago” involving supply chain issues and other problems and “had to do something” to shore up its competitive position.

“They’ve been trying to fix it for the last five years and the last two years they’ve made some progress,” he said.

Condon said the company’s new president appears to be optimistic going forward “but I’m not too sure they’ve fixed everything just yet.”

Among other things, he said very few Loblaws stores offer a “really exciting consumer experience.”

“That’s one of the things that I think shoppers are looking for these days. They’re looking for something really unique and fun.”

And while there are a number of exceptions, including the company’s Maple Leaf Gardens store in downtown Toronto, “a lot of their other stores are . . . kind of looking and feeling a bit dated.”

“There (also) seems to be a current trend in Canada and in the United States for smaller, neighbourhood stores and I think Loblaws is kind of stuck with a few too many superstores,” he added.

Earlier this month, Canadian retailers Shoppers Drug Mart and the Hudson’s Bay Co., announced job cuts as both companies try to trim costs amid major competitive and regulatory changes in the Canadian marketplace.

HBC laid off 210 employees in Toronto as the company moves its information services department to the United States in a move to slash spending.

Meanwhile Shoppers confirmed it will cut 80 jobs – some at the head office and others at regional offices – as it looks for ways to offset the effect of generic drug reform in several provinces to its bottom line.