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11/16/2022

Loblaw says supplier cost increases continue, shoppers turn to discount banners and private label in Q3

Grocer maintains its retail prices are not growing faster than supplier costs on quarterly call with analysts
Jillian Morgan
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Loblaw Companies Limited said it has few levers at its disposal to relieve inflationary cost pressures as “unprecedented” price increases from suppliers continue unabated.

During the grocery retailer’s third quarter earnings call today (Nov. 16), chief financial officer Richard Dufresne maintained the company’s food margins have been flat through the recent period of inflation.

“We have seen unprecedented cost increases from our suppliers this year and we continue to receive new cost increases,” Dufresne said. “Part of our job is to evaluate these and push back where they do not make sense. We have done that vigorously over the last two years and will continue to do so going forward. Our objective is to make sure that our prices on the shelves do not rise faster than supply costs… In every quarter since inflation took off last summer, gross margins on food have been essentially flat. This gives us the confidence to say categorically that retail prices are not growing faster than costs and the company is not taking advantage of inflation to drive profit.”

Chairman and president Galen G. Weston said the company was actively participating in the Competition Bureau’s study of grocery store competition in Canada, which runs until June 2023. 

“Our objective is to make sure that we share, in a transparent way, all the most relevant information and to make sure that the facts of what's happening in this inflationary environment are properly understood by all stakeholders,” Weston said. “We clearly feel strongly about, you know, what's going on, and the actions that we're taking to help mitigate food price inflation.”

Loblaw reported an 8.3% increase in revenue to $17.39 billion for Q3. Retail sales were up 8.2% to $17.13 billion, with food same-store sales increasing by 6.9% and drug same-store sales up 7.7%.

Discount banners such as No Frills and Real Canadian Superstore led sales growth, and a continued shift to private-label brands including President's Choice and No Name

In October, Loblaw locked in prices on all its No Name products until Jan. 31, 2023. Weston told analysts the response to the freeze has been “overwhelmingly positive.”

“In my time in the business, I haven't seen this kind of growth on an opening price point brand ever, so it's pretty significant,” said Weston. “One of the bigger reasons for that, we think, is we've got a broad assortment of No Name products in produce, which is one of the most acute areas for price inflation in the market right now.”

On the drug retail front, revenues for the quarter benefited from elevated sales of higher margin categories like beauty, and cough and cold, which showed double-digit growth.

“As the summer ended and Canadians returned both to the office and to school we saw a marked acceleration of sales in our beauty aisles,” Weston said. “As a high-margin category, this significantly benefited our results. Then as the weather cooled and people stayed indoors, all that extra social contact contributed to more respiratory illnesses than would be typical. The combination of COVID, RSV and flu brought more customers to our pharmacies, leading to all time highs in the sale of cough and cold meds and sustained growth in prescriptions.”

Dufresne said Loblaw was confident in its ability to deliver on its financial framework for 2023, and highlighted real estate as a key focus for next year. 

“As we said in the past, we've fallen behind from the square footage share in the market. And so we've embarked on a plan to accelerate our new store openings,” said Dufresne. “It will take until 2024 before we reach the cadence that we want to get to."

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