What StatsCan and Loblaw numbers are really telling us
Recent numbers from Statistics Canada indicate that grocers are in trouble. Food inflation is above 2% for the first time since April 2016. This is typically good news for grocers as it gives more room for them to increase margins. But given major headwinds affecting the industry, grocers will need to get even more creative to reassure investors.
Loblaw has reason to be particularly worried, having posted underwhelming fourth-quarter results last week. Food retail sales dropped 1.2% and total revenues slipped 0.9%. Despite strong Shoppers Drug Mart sales, company executives indicated reforms affecting the price of generic drugs would impact profits. But it is minimum wage increases that seem to be the big worry for the company. In fact, Statistics Canada numbers could be indicating where things are headed with minimum wage increases.
It may too early to tell, but Ontario minimum wage hikes likely pushed menu prices higher in January, especially in fast food. And this likely just the beginning. After a 22% hike on Jan. 1, Ontario’s minimum wage is due to increase again to $15/hour next year. Alberta will join the $15/hour club in October of this year, and British Columbia intends to pass the $15 mark in 2021. Other provinces such as Quebec and Nova Scotia are thinking about following suit. The $15 campaign will not go away any time soon. Obviously, people don’t object to the concept that people should earn a decent living. The challenge with Ontario, though, is how quickly wage hikes are being implemented. A 32% increase in 12 months is simply irresponsible.
The grocery business is also being affected by higher minimum wages, but the indicators are subtle. Here’s one example. The price of tomatoes, one of the most popular produce items, jumped by more than 30% in one month. It’s hard to tell, but this was likely due to minimum wage increases, as it is unusual to see any fruit or vegetable price increase by even 4% in one single winter month. Even imports have a critical impact as the value of the Canadian dollar remained relatively stable against the U.S. greenback. Margins are typically much higher in this section of the store.
This year will be challenging for grocers. Results we saw last week from Loblaw are indicative of what is to come. For the Brampton-based giant, it is a godsend to see food inflation rise again, so that it can tweak certain price points and increase margins without most people noticing. Loblaw will need to get creative -- very creative -- in order to continue to deliver over the next few quarters. Results indicate store traffic is an ongoing issue, so converting store sales to online activity will be critical.
Meanwhile, in the U.S., Amazon is continuing to create havoc in the grocery landscape. Tops Friendly Market recently filed for bankruptcy and Winn-Dixie parent Bi-Lo is rumoured to be doing the same. This is likely due to the shakedown in the grocery industry caused by Amazon and its newly-acquired Whole Foods subsidiary. Amazon is slowly capturing more market share in grocery, destroying historically well-established players one by one, as it did in other sectors such as bookstores.
But there is hope. Higher menu prices may slow down the food service sector’s string of successes in recent years. As food and labour are a restaurant's highest expenses, this may be an opportunity for grocers to commit more seriously to both ready-to-eat and ready-to-cook spaces. Increasing food retail sales will become more and more difficult. While menu prices go up, exploiting the nexus between food service and retailing may give Loblaw an advantage. This could be Loblaw’s next move, but they clearly need to think differently about how to grow the business.
During its quarterly call with analysts, Loblaw declined to comment on bread price-fixing. Nonetheless, StatsCan numbers confirmed what many suspected. Bread prices are dropping across the country. BMO stated earlier this year that bread prices were down 2.5% since December, after Loblaw admitted its role in the pricing scandal. According to StatsCan, bread prices dropped 1.7% in January, and it seems most bakery products are cheaper than they were a month ago. This may be a sign that grocers are trying to make amends with the public, since the story has garnered so much attention. It is unclear whether the aggressive discounting will continue -- only time will tell.
