A look at the looming downside for Canada's big grocers

If supermarket margins fall, share prices will likely follow

Canada’s Big Three grocery chains–Sobeys, Metro and Loblaw–have had to lower their prices in recent years as competition has intensified. Now their stock prices could fall as well.

A report issued Wednesday by BMO retailing analyst Peter Sklar says that the combination of tough competition, little food inflation and a stronger U.S. dollar driving up procurement costs could start to drive down the Big Three's margins.

If profits were to fall, grocery share prices would likely tumble as well.

In his report, Sklar came up with a "downside scenario" in which he estimated that Loblaw's share price could fall by 24% to $32, Metro’s by 30% to $44 and Sobeys’ parent, Empire Co, by 39% to $44.

“With already intense competitive activity expected to continue, an absence of food inflation, a strong U.S. dollar (which increases procurement costs), and a cautious consumer, we believe the major Canadian incumbent grocery players–namely, the three publicly traded grocers Loblaw, Sobeys and Metro–will have a tough hill to climb in the foreseeable future,” Sklar wrote in his report.

Sklar thought that Loblaw would face the least downside risk because of its takeover of Shoppers Drug Mart and investment in the Choice Properties REIT.

Read the full story here.

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