Loblaw says tariffs, other costs could increase food prices by year’s end

New tariffs on some food products could translate into higher prices at the register for Canadian shoppers by year's end, say executives from Loblaw Companies Limited, which released its second-quarter earnings report Wednesday morning.

The Brampton, Ont.-based grocery and pharmacy retail company reported net profit was down 86.1% from the same time last year, dropping to $50 million. Excluding the $3.9-billion purchase of Canadian Real Estate Investment Trust (CREIT), Loblaw’s adjusted net earnings were down 5.6% to $421 million, or $1.11 per share.

The company's food retail division saw modest growth with same-store sales increasing 0.8%, excluding gas bar operations, while drug retail same-store sales at Shoppers Drug Mart grew 1.7%.

The retail market is challenging, said Galen G. Weston during a call with analysts, and "competitive pressures remain intense and anticipated headwinds remain significant. In this environment, we delivered value to customers, grew same-store sales, improved share and controlled costs. It was a good quarter."

But more challenges lie ahead as the company prepares to grapple with increased transportation costs, a lower Canadian dollar and the impact of new tariffs imposed by the Canadian federal government as of July 1 on $16.6 billion of U.S. imports. This, in addition to the existing challenges listed above, could result in an "acceleration in retail price inflation in the back half," said Weston.

"When you take the planned headwinds that the industry faced in 2018, add these incremental headwinds, we see a very strong possibility of an accelerating retail price inflation in the market," he said.

Chief financial officer Darren Myers reminded analysts that it was still early days, and difficult to estimate what the financial impact of the tariffs might be. He said the company was monitoring the situation and waiting to see how suppliers would respond, but ultimately, "it's going to be up to the customers on what they choose to do and there will be alternatives for them."

The company said it remained committed to promotional effectiveness, process improvements and efficiencies. During the call, president Sarah Davis provided additional insight and context about strategic priorities for the business.

Self-checkout

Davis said the company had been upgrading its self-checkout software, which was "improving scan rates and customer satisfaction" and instances requiring assistance from a staff member had declined more than 50%. "This tells us that customers like the convenience," she said. Penetration is also on the rise, she said, sitting around 25% to 26% of transactions.

PC Optimum

Davis said the company's confidence in the performance of its PC Optimum loyalty program was " particularly strong." Six months after launch, the program boasts 13.5 million active users and they "are swiping, earning and burning points at a remarkable clip," she said. "Penetration rates or the per transaction use of loyalty has surpassed 70% in important categories of our business." Soon members can also collect and redeem points at more than 1,800 Esso gas stations when PC Optimum replaces Aeroplan miles later this summer.

Shoppers Drug Mart

The company's retail pharmacy chain added 20 enhanced food sections in the second quarter, bringing the total to 68. Davis said it was on track for nearly 100 by the end of the year. Stores with an established, enhanced food offering are seeing a fresh item in more than 25% of customer baskets, she said. Shoppers Drug Mart recently opened a 16,000-sq.-ft., three-storey location in Toronto’s Yonge-Dundas Square, which Davis said was a "creative application of both enhanced food and enhanced beauty." Approximately one third of the upper level has been devoted to food, including 16 ft. of refrigeration. The area is also equipped with self-checkout stations.