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Loblaw sees more customers turn to discount stores amid 5% inflation rate

·4 min read
BRAMPTON, ON - JULY 16: STOCK PHOTOS. No Frills Grocery Store.  Toronto Star/Rick Madonik Rick Madonik/Toronto Star        (Rick Madonik/Toronto Star via Getty Images)
A spike in food inflation means more Loblaw customers are turning to the company's discount brands like No Frills. (Rick Madonik/Toronto Star via Getty Images)

Loblaw Companies Ltd. (L.TO) saw sales increase in the last quarter of the year as Omicron-related lockdowns saw Canadians eating at home and higher inflation drive up prices.

Canada's largest grocery retail chain expects inflationary pressures to continue through 2022 as supply chains remain volatile. Loblaw says inflation at its stores hit 5 per cent in the 12-week period ending Jan. 1, in line with the most recent January Consumer Price Index (CPI) level of 5.1 per cent.

"The five per cent in the quarter is significant and there continues to be pressure as we look forward, especially over the next couple of months. This is a result of ...very real cost pressure all the way through the value chain," Loblaw executive chairman and president Galen Weston said on a conference call with analysts on Thursday.

"When it comes to the customer, we're not seeing a ceiling that's being reached by consumers in terms of prices at retail. However, they are becoming increasingly price-sensitive, there is no question about that."

The spike in food inflation means customers are increasingly turning to the company's discount brands like No Frills, which Loblaw says benefited from "the return of price-sensitive customers" in its most recent quarter. At the same time, the company's conventional brands, such as Loblaws and Zehrs, saw strong performance in part because of promotions. Loblaw also says it is seeing increased engagement in its PC Optimum loyalty program, which Weston says provides "substantial value" for customers who engage in the program proactively.

While some customers are trading down from their usual purchases – for example, buying chicken and pork instead of beef – Weston says the company is not seeing behavioural changes that would be typical of a 5 per cent inflation. He says that is in part due to the pandemic, which saw people shift away from discount brands as they ate at home.

"It's not as extreme as you might expect it to be, but it is there and it is manifesting itself most explicitly in the growth of discount," he said.

"That has been particularly notable in the last couple of months... we've really seen that surge."

Weston says the company will continue to monitor the supply chain situation while ensuring its retail prices remain competitive.

But the efforts to rein in costs appear to have strained Loblaw's relationship with at least one supplier.

Frito-Lay Canada, one of Canada's biggest food manufacturers, halted shipments to Loblaw stores after the grocer refused to accept a price hike. The situation has left the chip and snack food aisle of many Loblaw stores less full than usual or stocked with the retailer's house brands, President's Choice and No Name.

When asked by an analyst about how Loblaw is managing its relationship with vendors, chief financial officer Richard Dufresne says the company has a team of experts that analyzes the costs of items, including input costs related to packaging, labour, transport and the price of raw ingredients.

"Using their analysis, we're well-positioned to assess the requests that are sent our way," Dufresne said.

"Also, we deal with a large number of vendors and this provides us with a very strong perspective on what's happening on cost increases. That's how we're dealing with this at the moment."

Loblaw says its fourth-quarter profit more than doubled compared with a year ago, boosted by a one-time gain related to a Supreme Court decision on a tax case. The grocery and drugstore giant says its net earnings totalled $744 million or $2.20 per diluted share for the 12-week period ended Jan. 1, compared to a profit of $345 million or 98 cents per diluted share for the 13-week period ended Jan. 2, 2021.

Revenue totalled nearly $12.8 billion, down from nearly $13.3 billion a year earlier when the quarter included an extra week.

With files from The Canadian Press

Alicja Siekierska is a senior reporter at Yahoo Finance Canada. Follow her on Twitter @alicjawithaj.

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