From Weston to Bank: Analyzing Loblaw's succession plan
Loblaw Companies Ltd. appears to be undertaking efforts to protect its brand against allegations of profiteering from higher prices, but experts say the communications moves may be “too little, too late,” now more than a year into mounting customer frustration with high food costs.
In an earnings release on Wednesday, the company noted that profit growth of over 30 per cent was due to “lapping a prior year charge.” It also highlighted that retail gross margins declined marginally in both food and drugs as Loblaw was impacted by double-digit supplier cost increases that were “not fully passed on to consumers.”
“Suggestions of grocer profiteering just don’t add up,” Loblaw CFO Richard Dufresne said on a Wednesday earnings call with analysts.
Dufresne said the increases in supplier costs followed similar increases from the previous year. He said cost increases have come from “all tiers” of the company’s supplier base, but more so among larger global brands.
WHAT DO EXPERTS SAY?
The company’s statements came over a year into an inflationary cycle that has driven up food costs for Canadians. Inflation is starting to slow overall, but has remained elevated for grocery items.
University of Toronto marketing professor David Soberman said Loblaw is trying to “minimize the negative impact” of public discourse on higher food prices.
“They’re (Loblaw) obviously, I would say trying to put lipstick on a pig,” Soberman, the Canadian national chair in strategic marketing at the Rotman School of Management, said in an interview with BNNBloomber.ca on Wednesday.
“I think that Canadians are pretty upset about the profits that major supermarket chains have been registering recently in Canada, given the high inflation rates. The fact that their profits have gone up faster than inflation, I think is quite upsetting.”
University of Guelph food economist Michael von Massow said in an interview with BNNBloomberg.ca Loblaw has done a poor job at communicating about the increased costs it has experienced over the past year.
“The strategy to come out and try and get ahead of it as they're announcing these things, and talking more explicitly about the reasons for some of these profit numbers, was a smart thing to do, and perhaps it might be too little too late,” he said Thursday, adding that the statements from the company appear credible.
As Loblaw pushes back directly on grocer profiteering narratives, von Massow said the business is being impacted by macro conditions. He said there are many reasons behind price increases, “and if grocers have played any role at all, it has been a very small role.”
“I think the factors that are affecting food price inflation still exist,” von Massow said.
According to von Massow, people are looking for easy answers behind price increases at grocery stores.
“It’s frankly easy to blame the person or the organization that we're paying as we go through the checkout and so it's not surprising that Canadians have felt that way,” he said.
Despite Loblaw’s highlighting double-digit growth in supplier costs, Soberman said the company is not being transparent about the exact nature of the increases.
“They're (Loblaw) also not providing us very detailed information… where are the percentages? What are the actual increases? Why don't you give us this information by category and tell us what you're actually doing?” he said.
In a statement to BNNBloomberg.ca Friday, Catherine Thomas, a Loblaw spokesperson, said the business will continue to “fight back against inflation,” while providing customers with the value, selection, care and freshness that they expect.
“The idea that grocery store profits are driving inflation has been proven incorrect. We are working to keep the prices our customers pay as low as possible, while not passing along record increases in costs from our suppliers,” she said.
“As proof of this fact, our food margins are down again this quarter – meaning the costs from our suppliers are growing faster than our prices.”
Soberman said that increases in energy and raw materials costs have brought about higher prices for the global brands that act as suppliers.
“Global brands themselves have had to deal with grain prices that have increased faster than inflation and energy prices that have increased faster than inflation. So with that as a backdrop, it's not surprising that they've increased their prices,” he said.
However, Soberman said that Loblaw is attempting to redirect negative sentiment.
“It's trying to deflect, ‘Don't be mad at Loblaw’s, be angry with Heinz, be angry with Procter and Gamble, being angry with Lever Brothers, that's kind of the message,” he said.
Soberman said it is interesting to see Loblaw move the conversation toward its own profits and showcasing that profits haven't risen as much as some may believe.
Amid higher costs for food, Soberman said there is a “perverse positioning here,” in that lower-performing supermarkets have a “stronger marketing story to tell about how they are fighting inflation for their consumers.”
He said worse performing supermarkets could be insulated from criticism by pointing to competitors with higher profits.
“This actually puts the firm that does the worst in a good position in terms of the message it could send,” he said. “People are going to be most angry and most upset with the supermarket chain that has had profits increase the most in this inflationary environment.”
PUBLIC SENTIMENT AND WHAT COMES NEXT
Amid higher costs for food, public sentiment toward grocers has been unfavourable among a sizable group of Canadians.
In April, survey results from Dalhousie University’s Agri-Food Analytics Lab found that one in three Canadians believed the main reason behind higher food costs was price gouging by Canadian grocers.
If inflation stays high, Soberman said he believes “public outcry” will continue.
“There seems to be some evidence that there's (a) slowing of inflation. And I think that's going to mean that probably you're going to see a slowing in the rate at which supermarket profits are increasing,” Soberman said.
As a result, he said he predicts that negative public sentiment toward grocers will “attenuate or become less strong over time.”
In June, the Competition Bureau released a study on Canada’s grocery sector, saying it needs more competition in order to keep food prices down and give consumers more choices.
The study said that concentration in the industry has risen in the past few years and that grocery companies have increased margins on food sales.
Despite the findings, von Massow said the Competition Bureau’s report “ignored completely” the fact that larger companies benefit from economies of scale and economies of scope.
“If we broke up these large companies, or if we introduce more competition, it doesn't necessarily mean that the benefits of more competition will outweigh the costs of economies of scale,” he said.
With files from the Canadian Press