Grocery's new food paradigm

Recently, Loblaws announced the closure of 52 stores across the country.

More than a few observers were likely surprised when the company did so as they simultaneously posted a respectable profit. It might even strike observers as a kind of corporate oxymoron.

The company has yet to report which ones they are targeted, but with the sector’s economic picture, coupled with potentially disruptive dangers looming, the decision to close a cluster of stores was appropriate.

The primary reason for this move is that financials are not allowing the food retail giant much room to breathe. In the second quarter of this year, Loblaws posted a $186m profit, and generated over $10b in revenue. However, as the largest private employer in the country grows, its margin of error gradually shrinks.

Even if their top line is growing with the help of acquisitions like Shoppers in 2013, maintaining the profit margin is becoming more of a challenge; in the same period for 2014, for example, they reported a loss of over $400m. It is for this reason that companies close food stores every year.

In Loblaw’s case, 10 to 15 stores annually on average are mothballed. In light of its purchase of the Shoppers Empire just twenty months ago, 52 stores does not represent a major case of corporate retrenchment; indeed, it comprises scarcely 2% of all stores combined. In other words, with this move the company carries on its quest to streamline costs by means of scrapping unprofitable stores.

Second, the timing is right for the company. It is expected that many of the affected outlets will be smaller Shoppers stores. After months of research into their new division, it appears that Loblaws has decided how it wants to support its 1,253 stores nationwide. We are witnessing many changes to Shoppers now, and more are on their way. In order to construct the right store design to sell food alongside cosmetics and health care products, eliminating unprofitable stores to generate sufficient operational cash is a crucial strategy.

These measures are a small part of a much bigger picture, however.

Loblaw is not the only chain recalibrating their assets. Sobeys and Metro, the other two major top food distribution players in the country, are also supporting profitable stores as they shut down stragglers.

Overall, what we are seeing is a much more nimble, proactive sector than in the past, all thanks to market demand, which has become increasingly complex and challenging to predict. Doing so requires exceptionally effective market intelligence, and companies are taking more time to better appreciate what the market is telling them. With the right assessment, grocers can quickly cut bait and move on.

In essence, a major paradigmatic shift has shaken the industry, and the timing could not have been better. Whether industry culprits want to admit it or not, the food sector has historically erred on the side of tradition, and had become dangerously set in its ways. It has resisted utilizing technology and embracing innovation to the extent that we have seen in other sectors of our economy.

This has changed, however; companies like Loblaws have now invested millions in logistics to become more effective cost managers, allowing them to increase margins. Running a grocery chain in the second decade of the twenty-first century requires a radically different skill set, as well as a fresh state of mind. Food distributors are gradually catching up new technology and new ways of reaching out to consumers, who have long since incorporated such things as social media, farmers markets, and other means of food procurement in their everyday lives.

And it’s about time: non-traditional food retailers such as Costco and Wal-Mart have recently made impressive gains in the food sector. These and other companies are increasing their food footprint in a way that significantly affects the top Canadian grocers’ ability to grow at will, and in so doing increasing their market share at a far faster rate than companies like Loblaws. As well, smaller convenience stores like giant Couche-Tard is converting pump volume into lucrative in-store volume at a remarkable pace, and many of these sales are in food.

Grocery e-tailing is a new and emerging competitor in the sector. For example, Amazon is demonstrating a growing interest in food retail with its expansion of its AmazonFresh division, which is committed to selling more fresh products online.

Some online orders are now being delivered by drones,= as part of a pilot program. In Canada, both Loblaws and Wal-Mart are exploring their options by operating their own “Click and Collect” systems in both Toronto and Ottawa.

More than ever before, companies in the food sector have now recognized such exciting opportunities and potential threats as a call to action, and in the long run, Canadian consumers will benefit from their belated entrée into the fray. In the meantime, however, there still remains a human face to store closures.

Over the next year, numerous employees will be affected by Loblaw’s announcement. Let’s hope that they realize that the failure to close fifty two stores this year may have potentially led to many more closures in the future, and many more layoffs.