Loblaw and Metro expect grocery prices to start declining

Two major grocery chains say food prices, especially meat, are coming down from their recent highs as the industry continues to grapple with falling food prices.

"During the quarter, we saw the grocery market shift from an inflationary environment to a deflationary one," said Galen G. Weston, executive chairman and president of Loblaw Companies Ltd. in a conference call with analysts after the company released its third-quarter earnings.

The "biggest force" behind the shift is the industry cycling through last year's high inflation, he said.

Rising prices

It's tough for inflation to climb if the prior year was quite high, noted Loblaw spokesman Kevin Groh, as was the case during the company's third quarter last year when food inflation reached nearly four per cent, said.

Weston said that during the high inflationary period, the company noticed shoppers were switching to purchasing less expensive items.

"We're reducing prices to see if we can draw the customer back in," he said, adding that Loblaw is seeing a reasonable degree of success with the strategy.

Metro Inc.ended its fourth quarter with lower inflation than when the quarter began, CEO and president Eric R. La Fleche said in a conference call with analysts following the company's earnings release but he wouldn't call it deflation just yet.

There's little price increase in produce, he said, and meat has come down in price year-over-year.

The average retail price of one kilogram of pork chops, for example, is down from $13.16 in Sept. 2015 to $12.55 this past September, according to Statistics Canada. One kilogram of ground beef, meanwhile, dropped from $12.96 to $12.40 during the same time period.

Metro has taken advantage of falling food prices to generate some in-store inflation, La Fleche said.

"Pricier cuts of meat ... which were less affordable a year ago, are now more affordable," he said, noting that the company has already seen the amount of beef including costlier cuts that customers buy increase.

Profit up

Metro and Loblaw remain positive about managing a deflationary environment, with both companies reporting increases in profit for their most recently completed quarters.

Metro's fourth-quarter profit increased by 10 per cent compared with a year ago.

The Montreal-based company said it earned $145.0 million or 60 cents per diluted share for the 12 weeks ended Sept. 24. That's compared with a profit of $131.7 million or 52 cents per diluted share a year ago.

Sales in the quarter totalled nearly $2.93 billion, up from $2.83 billion in the same quarter last year. Same-store sales grew 2.8 per cent.

For its full financial year, Metro said it earned $586.2 million or $2.39 per diluted share on $12.79 billion in sales. That's compared with a profit of $519.3 million or $2.01 per diluted share on $12.22 billion in sales in the previous year.

Loblaw reported an increase in its third-quarter profit compared with a year ago, helped by improved sales and lower restructuring charges.

The corporate parent of the Loblaws grocery chain and Shoppers Drug Mart says it earned $419 million attributable to common shareholders or $1.03 per diluted share in the quarter. That's compared with a profit of $166 million or 40 cents per share in the same quarter last year.

Excluding restructuring and other one-time charges, Loblaw says it earned $512 million or $1.26 per share for the quarter, up from $408 million or 98 cents per share last year.

For the 16 weeks ended Oct. 8, the company reported $14.14 billion in revenue compared with nearly $13.95 billion in the same quarter in 2015.

Same-store sales at its grocery stores improved 1.4 per cent, excluding gas bar sales. Shoppers Drug Mart same-store sales gained 2.8 per cent as same-store pharmacy sales increased 1.6 per cent and same-store front store sales grew 3.9 per cent.