Amazon ‘threat’ on Loblaw’s radar

Whole Foods acquisition one of several challenges facing Canadian grocery giant

Loblaw’s business is being challenged by rising competition, the lingering effects of food deflation, minimum wage hikes and drug reform, but none of the threats seemed to loom as large in the grocery company’s secondquarter conference call as the potential impact of Amazon’s acquisition of Whole Foods on the industry.

In the food retailer’s first set of quarterly results since Amazon made its groundbreaking US$13.7billion purchase announcement in June, Loblaw chief executive Galen Weston said the retailer remains confident about its current online sales model, a “click-and-collect” platform that allows customers to pick up online orders in the parking lots at 140 stores across Canada.

But it could be inevitable that home delivery, a much costlier option in the low-margin universe of food retail, is on the horizon.

“Our job is to meet customers’ needs, and customers tell us what they want,” Weston told analysts. “To the extent that delivery needs to become part of that, we are certainly open to considering it.”

Loblaw is taking stock of the “very compelling threat that omnichannel, and particularly Amazon, represents to Canada,” he added. “We did the same level of assessment when Walmart was arriving in the Canadian market as many as 15 years ago.”

The country’s largest grocery and pharmacy retailer saw its shares fall about four per cent on Wednesday, though it more than doubled net earnings in the period ended June 17 to $358 million, or 89 cents per share, compared with profit of $158 million (39 cents) a year ago.

Adjusted earnings were $1.11 per share, beating average analyst estimates of $1.10 per share, according to Thomson Reuters. Revenue rose 3.2 per cent to $11.08 billion and same-store sales, a key measure of retail performance, were up one per cent.

But Loblaw warned of “significant regulatory headwinds” heading into 2018 amid government measures to lower drug prices further in Quebec, and what Weston called “aggressive” increases in the minimum wage planned for Alberta and Ontario that will make “a meaningful impact on the operating costs of our retail businesses.”

Loblaw estimates the proposed wage hikes will increase its labour costs by $190 million next year.

“There is a ton of uncertainty in grocery retail right now,” said Brittany Weissman, retail analyst at Edward Jones. “Amazon sent shockwaves through the grocery industry when they announced that acquisition. Everyone knew e-commerce in grocery was something that the industry would eventually adapt to, but I think this has accelerated (traditional grocers’) need to figure it out earlier.

“There are a number of questions and people don’t know the answer to — how big will click and collect get, what does this mean for Canada, and what does this mean for grocery longer term? With all of these regulatory issues, this is another headwind for Loblaw to battle against.”

Whole Foods operates only 13 stores in two Canadian provinces, British Columbia and Ontario, but observers believe the impact of Amazon’s deal could alter the grocery industry in North America.