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February 25, 2016

Data suggests Shoppers Drug Mart cannibalizing Loblaw sales

Results released this morning suggest that Loblaw’s Shoppers Drug Mart subsidiary may be cannibalizing some of its parent’s sales. Loblaws’ revenues rose by 2.3% during the fourth quarter, a pace far slower than food price inflation, which is running above 4%. That means that in real terms, volumes actually shrank.

However same store sales at Shoppers Drug Mart, which Loblaw’s acquired in 2013, rose by 5.0% during the quarter ended January 2,
2016. Also revealing was a disclosure by Galen Weston, Loblaw’s executive chairman, during a conference call with analysts, that sales of its President’s Choice and no-name brands at Shoppers (which the company claims are replacing sales of less profitable brands) have now hit the $1 billion mark. “We are very encouraged (by food sales) in Shoppers,” said Weston. “The margins are quite good. These are small stores in highly convenient locations.”

However the scale of the disparity between Shoppers Drug Mart’s rising sales and stagnant real growth in Loblaw’s stores, suggests that at least part of the pharmacies’ increases are being siphoned away from Loblaw itself.

Weston “surprised” at ability to pass on price increases
Weston noted that he was “surprised,” at Loblaw’s customers’ willingness to accept price increases passed on due to rising costs of imported goods. There are several reasons for overall sluggishness in Loblaw’s food retail same store sales performance, which at 2.4%, was also lower than the rate of food inflation, which suggests that those particular outlets are losing market share.

For one, overall retail square footage at the chain fell during the quarter, due to store closures. Loblaw has targeted increasing square footage by 1% per year over the long term. However the company’s decision to slash capital expenditure budgets by $200 million this year, raise questions about just how soon that will occur.

Loblaws also continues to struggle in an incredibly tough grocery environment, in which, Costco in particular, with its 10 million Canadian members, continues to chip away at traditional grocers’ market shares.

Momentum in pharma
Loblaws is responding in a variety of ways to the new threats. The company’s Live life well strategy, to deliver higher quality food, particular in the fresh segment is one example. Efforts to boost credit card sales are also generating results. Credit card receivables rose by 6% during the quarter to $2.8 billion. Loblaws announcement late last year that it will sell beer at 19 of its Ontario stores, should also help drive traffic into those outlets.

However the company’s biggest momentum is in its pharma arm. For example food sales trials in 30 Shoppers Drug Mart stores in Regina and surrounding urban areas are going well. Data analytics stemming from customer use of Shoppers Drug Mart’s Optimum cards are also making it easier for the company to better target promotions.

Longer-term, the increased popularity of food sales in the small pharmacies, where a disproportionate part of the traffic is made up of seniors, a growing segment of the population, may provide a hint that the grocery industry’s efforts to expand average store sizes during the past decade, may be peaking out.

Peter (at) peterdiekmeyer.com

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peter@peterdiekmeyer.com

Peter Diekmeyer Communications Inc.