A No Frills store in Toronto. The discount banner's parent company, Loblaw, opened five new discount locations in the first quarter.Fred Lum/The Globe and Mail
Canada’s largest grocery retailer is rejecting cost-increase requests from vendors, even as rising fuel prices spurred by the Middle East conflict are putting pressure on the cost of transporting food to store shelves.
“We are fighting back on price increases from our suppliers,” Loblaw Cos. Ltd. L-T president and chief executive officer Per Bank said during a conference call Wednesday to discuss the company’s quarterly results. “So, so far, we are not seeing any price increases due to that reason.”
The Globe and Mail first reported last month that suppliers such as Maple Leaf Foods Inc., Tree of Life and Unilever PLC were informing grocers of their plans to apply fuel surcharges or overall cost increases.
Loblaw is not alone: Metro Inc. MRU-T also said last month that it is pushing back on such requests, and Sobeys parent Empire Co. Ltd. told The Globe that it had also declined a supplier’s fuel surcharge.
Rising gas prices have also dealt a blow to consumer confidence, which has led shoppers to make different choices in the grocery aisles – not only shopping at discount stores more often, but also trading down to cheaper cuts of meat.
People are swapping out minced beef for steak, for example, Mr. Bank said. And Loblaw has seen double-digit declines in sales of its President’s Choice “Free From” brand of chicken – which advertises meat raised without the use of antibiotics, but sells at a higher price than other chicken options.
Loblaw has continued to benefit from expanding its No Frills and Maxi discount stores, with five new locations opened in the first quarter. The Brampton, Ont.-based retailer has targeted 30 to 40 new discount store openings per year. Off-price chains, which also include Real Canadian Superstore, are outperforming its full-price stores, and the company reported an increase in both the traffic to its stores and the amount customers purchased during each visit during the quarter, which ended March 28.
Competition has been heating up as retailers seek to win customers who have been consistently shifting their spending to discount stores in recent years, as a response to food inflation. Grocer Metro Inc. has also said its Food Basics and Super C discount chains are growing, and last month reported that customer traffic had increased because of new store openings.
The solid growth in Loblaw’s first-quarter food sales “likely moderates some investor fears” about that competitive pressure, Bank of Nova Scotia analyst John Zamparo wrote in a research note on Wednesday.
Executives reported that they are working on strategies to cut down on construction costs for these new stores, such as by using semi-assembled panels that could speed up the process. Building stores more quickly and cheaply could allow Loblaw to put discount locations in smaller cities and towns, while still achieving the return on investment needed to justify those builds, Mr. Bank said.
“The accessibility to discount stores will increase, and that’s basically solidifying our strategy,” he said on the call.
Loblaw reported a 6.8-per-cent increase in adjusted first-quarter profit and boosted its dividend paid to shareholders on Wednesday.
Loblaw’s net earnings available to common shareholders jumped to $594-million or 50 cents in diluted earnings per share in the first quarter, compared to $503-million or 42 cents per share in the same period last year.
The earnings numbers were affected by a number of factors, including lower amortization of assets related to the acquisitions of Shoppers Drug Mart and Lifemark, the sale of the Wellwise business and property last year and fair-value adjustments on fuel, investments and foreign currency contracts. Adjusted net earnings amounted to $609-million or 52 cents in diluted earnings per share, compared to $570-million or 47 cents per share during the same quarter last year.
Loblaw also announced that it will increase its quarterly dividend paid to shareholders by 10 per cent, to 15.5 cents per common share.
First-quarter revenue grew by 4.2 per cent to $14.7-billion.
Same-store sales – an important measure of sales growth in existing store locations, rather than growth tied to new store openings – rose by 2.4 per cent in the company’s grocery stores, and by 4.1 per cent in its Shoppers Drug Mart chain and other drugstores. Drugstore sales were driven by strength in prescription drug sales and health care services. That included accelerating sales of GLP-1 drugs such as Ozempic and Mounjaro.
Loblaw has been expanding its network of drugstores, with more than 30 on track to be built in 2026 and eight opened during the quarter.
E-commerce sales grew by 20.3 per cent in the quarter, driven by growth in delivery orders as well as success with third-party delivery partnerships with services such as Uber Eats. Those partnerships continue to expand: Following the end of the first quarter last month, Toronto-based delivery service Skip also announced a new partnership with Loblaw.