Loblaws gears up for grocery price war in a low-inflation environment

The head of Canada's largest grocer says it's prepared to duke it out in a price war with its rivals in order to stay competitive in a low-inflation environment.

"Price wars are generally not something that we look forward to but we will certainly be ready if the marketplace heats up," said Galen G. Weston, president at Loblaw Companies Ltd., during a call with analysts Wednesday.

Weston said the company, which owns various banners including Loblaws, No Frills, Real Canadian Superstore and Shoppers Drug Mart, is actively fighting back against rising food prices by going straight to their suppliers.

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"After two years of over $1 billion in cost increases from our largest suppliers and related higher retail prices across the country, we have asked this group to support us in our initiative to lower prices for our customers," he said.

Earlier this month, Loblaw sent a letter to its suppliers notifying them it will be applying an automatic 1.45 per cent price deduction on all shipments it receives beginning Sept. 4.

The letter also stated that the grocer will reject any future cost increases from suppliers unless they are related to higher input costs such as fuel charges or foreign exchange.

Additionally, the letter noted that Loblaw will assume that suppliers agree to the price decrease if the shipments continue past this deadline.

A company spokesman would not comment on whether the grocery owner has received any type of response.

During the call, Weston said Loblaw will "invest" the savings back into the customer, but would not elaborate if this means customers will necessarily see lower food prices at its supermarkets.

"We think we're competitively a very potent organization. We believe that we have formats that are uniquely well-positioned in each of the core markets and that when we make investments, we'll make them in places that will deliver a sustainable advantage versus our competitors," he said.

Last week, Statistics Canada reported that inflation for food softened to 1.3 per cent in June, after being above three per cent for 18 straight months prior to May. This was highlighted earlier this year when customers were shocked to see the price of cauliflower spike towards $10 per head.

Revenue up, but profit lower

Loblaw said for it to continue to deliver earnings growth, it needs to increase sales volume as competition heats up among traditional grocers like Metro and Sobey's, and big-box retailers like Costco and Walmart.

On Wednesday, the company reported that its net profit dropped by nearly 15 per cent in the second quarter from a year earlier, even though it had higher revenue.

Loblaw's net income was $158 million or 39 cents per share for the period ended June 18. That's down from $185 million or 44 cents per share a year ago. It attributed the reduced profit to higher interest expenses and financing charges.

However, its overall revenue was up $196 million or two per cent, rising to $10.7 billion from $10.5 billion a year earlier.

Notably, revenue grew faster at Shoppers Drug Mart owing to success from increased food offerings in its drugstores. The chain also continued to benefit from its health, beauty and cosmetics divisions, and from the Canadian departure of U.S. retailer Target last year.

Loblaw also said it's still looking for a buyer for its network of 212 gasoline-filling stations, which were put up for sale in May, but would only sell if the price was right.