Two Canadian grocers reported growth in sales and profits in their latest quarters, as the sector continues to face scrutiny over food inflation and its impact on people’s ability to afford basic needs.
On Wednesday, Canada’s largest grocer, Loblaw Cos. Ltd. LT said its profits spiked by 29 per cent in the third quarter, which the company attributed primarily to growth in sales at its drugstores. Montreal-based Metro Inc. MRU-T reported that adjusted net earnings grew by 9.4 per cent in its fourth quarter.
Canadian grocery store operators have faced increasing public pressure as food prices have risen at a pace not seen in decades. On Wednesday, Statistics Canada reported that food prices jumped 10.1 per cent in October, a rate that slowed only slightly from 10.3-per-cent food inflation in September. The rising cost of food purchased from stores has outpaced overall inflation in Canada since last December.
Grocers have insisted that they are not profiting from an inflationary environment, and that they are also facing rising costs for everything from transportation to buying products from suppliers to stock their shelves. In September, the chief executive officer of Sobeys owner Empire Co. Ltd., Michael Medline, referred to such criticism as “reckless and incendiary attacks,” and said claims of “greedflation” were untrue.
Both Loblaw and Metro said their gross profit margins were roughly flat compared to last year, when inflation began accelerating. The retailers noted profits were helped by demand for high-margin products such as cosmetics, cough and cold medicines, and private-label products that have attracted shoppers searching for deals in the grocery aisle.
“In every quarter since inflation took off last summer, gross margins in food have been essentially flat,” chief financial officer Richard Dufresne said on a conference call with analysts on Wednesday. “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.”
Loblaw’s internal food inflation measures were similar to the increases tracked by the consumer price index, the company noted. Mr. Dufresne pointed out that food inflation in Canada is lower than in many G7 countries, but acknowledged “that is no comfort” to shoppers paying more for essentials.
Last month, the Competition Bureau launched a study of the industry, to explore how the government could improve competition in the sector. The bureau said it was not investigating any specific allegations of wrongdoing.
“We’re actively participating in the bureau’s study, and 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,” Loblaw chief executive officer and executive chairman Galen Weston said on the call. “We clearly feel strongly about what’s going on, and the actions that we’re taking to help mitigate food price inflation.”
Loblaw raised its forecast for annual earnings Wednesday, saying it expects adjusted earnings per share to grow in the high teens for this fiscal year, compared to an earlier forecast for growth in the mid-teens to high-teens. Retailer Walmart Inc. also raised its annual forecasts on Tuesday, as the company expects continuing demand for its groceries and discount products as inflation continues to affect shoppers’ habits.
Brampton, Ont.-based Loblaw reported net earnings available to common shareholders of $556-million or $1.69 a share in the 16 weeks ended Oct. 8, compared to $431-million or $1.27 a share in the same period last year.
Metro, meanwhile, reported that net earnings fell to $168.7-million or 70 cents a share in its fourth quarter – the 12 weeks ended Sept. 24 – compared to $194-million or 79 cents a share in the same period last year. However, Metro’s earnings were affected by a one-time asset-impairment loss owen to its drugstore chain Jean Coutu withdrawing from the Air Miles loyalty program this spring, as well as amortization of some Jean Coutu intangible assets. Excluding these factors, Metro’s adjusted net earnings grew 9.4 per cent compared to the same period last year, to $219.4-million or 92 cents a share.
Both companies said they continue to grapple with supplier requests for cost increases, which are putting further pressure on prices. Manufacturers have acknowledged they are passing on higher commodity and transportation costs. Earlier this month, for example, Kellogg Co. raised its full-year sales and profit forecasts, saying that North American shoppers have continued to buy its products as prices have gone up.
Loblaw and Metro executives both said they are negotiating with suppliers to mitigate those increases.
“We want them to justify that, and we’re pushing back,” Metro CEO Eric La Flèche said on a conference call, adding that in some cases Metro has absorbed cost increases rather than passing them on in the form of higher prices. “There is resistance, for sure, from customers…so if the vendors want to keep their volumes, the cost increases will have to moderate.”
Retailers say they have seen customers buying more private-label products and flocking to discount grocery stores in response to inflationary pressures. The trend is not limited to low-income customers: Mr. Weston noted that lower-priced stores such as No Frills and Real Canadian Superstore are “seeing a lot more Mercedes and Range Rovers in the parking lots” than in previous years.
Those discount stores helped to drive overall sales growth. Loblaw reported its total revenue increased by 8.3 per cent in the quarter, to $17.4-billion. Metro’s sales also grew by 8.3 per cent in its fourth quarter, to $4.4-billion, which it said was mainly due to inflation.
Loblaw last month announced a temporary price freeze on its house-brand No Name products until the end of January, but the move was met with skepticism, as it promoted the retailer’s own private-label products. Mr. Weston confirmed on Wednesday that the price freeze led to stronger house-brand sales. At the time of the freeze announcement, Metro said that it is common practice in the industry for retailers to refuse requests for cost increases from suppliers ahead of the holidays – which raised questions about whether Loblaw was attempting to promote a move that it would have quietly made anyway. Loblaw denied this.
Same-store sales – an important metric that tracks sales growth not tied to new store openings – rose by 6.9 per cent at Loblaw’s grocery stores and 8 per cent at Metro’s food banners. The Loblaw-owned Shoppers Drug Mart chain reported a 7.7-per-cent increase in same-store sales, while Metro, which owns Jean Coutu, said drugstore same-store sales increased by 7.4 per cent.
Loblaw said e-commerce sales increased by 3 per cent, but did not break out the difference between food and drugstore online sales. Metro said that online food sales rose by 33 per cent compared to last year, owing to added capacity as it has expanded delivery offerings through third-party companies as well as the availability of store pickups for online orders. On a same-store basis online sales were relatively flat, Mr. La Flèche said.