Loblaw `will be challenged' to match revenue growth after a record year
Grocery chain still expects elevated sales while it sees headwind with online shift
The story around Loblaw Cos. Ltd. hasn't changed all that much for almost a year: The supermarket chain, like its competitors, has stayed in a rare pandemic sweet spot, allowed to stay open as sales soared to record levels, mostly due to the lockdowns that left consumers little choice but to stock their pantries and eat at home.
Loblaw's year-end financial update on Thursday showed more of the same. Revenue rose by almost 10 per cent in 2020 and online sales roughly tripled. But there were problems, too, and added costs that come with such growth.
Company president Sarah Davis said, “2020 was complicated, with many shifts in dynamics.”
Canada's largest grocer during the year faced national criticism over how much it pays its staff and how it treats suppliers — issues that drew scrutiny from the federal government — as well as mounting costs to constantly sanitize its stores and ramp up its e-commerce operations to meet unprecedented demand.
But the industry's sales gains aren't expected to persist at the same dizzying level once vaccines are widely rolled out, restrictions ease and people can finally eat someone else's cooking.
Loblaw on Thursday warned that this year's revenue growth “will be challenged” to hit last year's heights, but it still expects sales to remain elevated through the first half of this year.
Asked on a conference call with analysts whether Loblaw will use sales promotions to help it keep its share of household spending as the “food-from-home pie” starts to shrink, Davis said she was happy with the company's current pricing. She also noted that hundreds of millions of dollars in safety costs will disappear if the pandemic retracts.
“We feel like we're actually in a very good position to meet the changes in consumer demand,” she said.
Loblaw also detailed its ability to help hasten a return to normal if public health authorities call upon the chain's 1,300 pharmacies to assist with distributing COVID-19 vaccines. Loblaw owns Shoppers Drug Mart, as well as grocery chains such as No Frills and Valu-Mart.
“Our supply chain can deliver vaccines the day we receive them and we can administer one million shots per week,” Davis said, adding that some of its pharmacies in Alberta will start offering vaccines next week.
She said Ontario, Manitoba and Saskatchewan have signalled plans to include Loblaw pharmacies, “but we have not been given the rollout strategy across all the provinces or the timing yet.”
Loblaw reported that 2020 sales rose to $52.7 billion, from $48 billion in 2019 (though 2020 had an extra week).
Revenues reached $12.4 billion in the fourth quarter, up $818 million, or 7.1 per cent, over the previous year.
Same-store food sales, an important gauge of year-over-year growth in retail, grew by 8.6 per cent in the fourth quarter, which RBC Dominion Securities Inc. analyst Irene Nattel said was “a nice uptick” compared to 6.9-per-cent growth in the third quarter.
In a research note, Nattel was also impressed by Loblaw's progress in narrowing the sales gap between its full-service and discount stores.
Loblaw noticed the shift away from discount retailers such as No Frills earlier in the pandemic, which it attributed to public health suggestions to only shop once a week — an easier feat at a traditional, full-service supermarket. The shift, however, was particularly troubling for Loblaw since 60 per cent of its business is in the discount category.
“We hate losing market share and so we did invest to win some of that share back,” Davis said.
The most striking change last year was the 178-per-cent jump in Loblaw's e-commerce sales. It sold $2.8-billion worth of goods through e-commerce as consumers let go of their long-held skepticism toward online grocery shopping.
“The rise of digital retail has been dramatic,” Davis said. “We know this is where retail is headed, but it creates a challenge. Online grocery is a higher cost channel. So we are taking steps to manage margin impact over the medium term while maintaining our leadership position.”
The growth in online sales dragged down Loblaw's operating income by $100 million, and its diluted net earnings per share by 20 cents. The ongoing shift from in-store to online is expected to be “a headwind to profitability over the medium term,” the year-end report cautioned.
“It's just a higher cost to serve,” Loblaw chief financial officer Darren Myers told analysts. “The lion's share of it is all the labour costs, the depreciation, all the costs that go into fulfilling an online order.”
The company reported net earnings of $1.19 billion in 2020, up from $1.13 billion in 2019.
Loblaw during the year spent roughly $445 million in “COVID -19 related costs,” including safety measures, and $180 million in pay bonuses.
At the start of the pandemic last spring, Loblaw was praised for increasing front-line staff wages by $2 per hour, but was subsequently criticized when it — along with its two top competitors — cancelled the bonuses on the same day in June 2020.
Top executives from Loblaw, Metro Inc. and Empire Co. Ltd., Sobeys's parent company, were all summoned in front of a parliamentary committee to explain their decision to cut the bonuses.
Driving recently invited four leading experts in the world of electrification and emissions reduction to its Road to Reduced Emissions roundtable. As you might suspect, there were some areas of vehement disagreement on the road forward, but there were also some very surprising topics of agreement, enough that even a skeptical Motor Mouth might start to feel (unusually) optimistic.
We talked with Stephen Beatty, vice-president and corporate secretary for Toyota Canada and one of the people responsible for bringing the Prius to Canada 20 years ago, Doron Myersdorf, chief executive of Israeli startup StoreDot, which claims to have perfected the five-minute battery, Don Romano, president and chief executive of Hyundai Canada, and Daniel Breton, chief executive of Electric Mobility Canada and a former minister of the environment for Quebec, the province with the most aggressive pro-electric vehicle regulations in the country.
I think many, if not most, of us would agree reducing the automobile industry's carbon footprint is absolutely essential for the survival of the business. For those still condemning global warming as a hoax, understand that, for the automotive industry at least, that ship has sailed.
Automakers, according to a 2019 estimation by Reuters, had pledged more than US$300 billion to electrification research. That number may have easily doubled in the interim. Whatever the number, the automotive industry is dedicated to at least the partial electrification of its fleet. The question is no longer whether we should reduce automotive tailpipe emissions, but rather what is the most effective way to accomplish that seemingly enormous task?
Basically, there are two camps. On one side are state and provincial governments — typified by California in the United States, and Quebec in Canada — that are pushing the sale of zero-emissions vehicles (essentially electric vehicles and plug-in hybrids or PHEVs). Not only do they incentivize consumers — Quebec sweetens the purchase of an EV up to $8,000, and that's on top of the $5,000 the federal government offers — they also mandate automakers sell a minimum number of plug-ins. The fines for not selling enough PHEVs can reach millions of dollars. Tesla, for instance, is expected to make more than US$1 billion this year selling regulatory “credits” to automakers that are not selling enough of their own battery-powered cars in various jurisdictions around the world.
Many automakers — certainly Toyota's Beatty espouses this theory — would much prefer these same governments set a CO2 reduction target and let the automakers determine the technology best suited to reducing their carbon footprints. As Toyota points out, the CO2 emissions saved by the 16-million hybrids it has sold worldwide far exceeds the carbon reduction by any electric-vehicle automaker, even Tesla.
Others claim that if the government would get behind a national infrastructure program — Hyundai's Romano espouses mandating all gas stations have at least one fast charger — consumer incentives and punishing automakers for not selling enough EVs would be all but unnecessary. As Romano points out, his head office has four fast chargers and he constantly sees tow trucks hauling in EVs — not necessarily Hyundais — whose owners fell short of finding a charging station.
Both sides have reasonable arguments. On the one hand, zero-emissions vehicle (ZEV) mandates are easily gamed. For instance Ford could meet its ZEV mandate obligations in Quebec by having its new Mach-E and plug-in Escape represent, say, 10 per cent of it sales. But if the other 90 per cent are all F-150s and Explorers, there hasn't been much of a CO2 reduction. (Apologies to Ford, I'm just using it as an example.)
On the other hand, Toyota may be correct that a plug-in Prius has a smaller overall carbon footprint than a long-range Tesla — mainly because of the emissions released in the production of huge 100-kilowatt-hour batteries — but it's tough to argue that replacing a Ram with a Rivian won't be good for the environment.
What's surprising, however, is that almost everyone on the panel agreed that a ban of pure gasoline-powered cars is unnecessary. As long as the definition of “electrified” includes hybrids, PHEVs, EVs, and fuel-cell vehicles, both Romano and Beatty think pure gas-powered cars will disappear from their fleet well before the 2035 deadline being proposed.
Where there seems to be vehement disagreement is the notion that automakers are somehow dragging their feet on selling emissions-reducing automobiles. It's laughable, says Romano, that stockholders would allow automakers to spend all those hundreds of billions of dollars developing EVs and then allow them to hold back on selling these same EVs to consumers.
According to Toyota, much of this misinformation comes from a report prepared by Dunsky Energy Consulting for Transport Canada, which found it “can be very challenging to find a PEV, as only 33 per cent of dealers in Canada have at least one PEV in stock.” But, as Beatty points out, the original Dunsky report was done right after the federal government had initiated its $5,000 incentive for the purchase of an electric vehicle. Throwing money at consumers and then decrying automakers for not having enough supply to meet the sudden demand is hardly fair.
And while it's true some plugin vehicles are still in short supply, the problem going forward will likely be demand, not availability. As Romano points out, Hyundai, for one, has plenty of Kona EVs on dealer lots waiting for Canadian homes.
And, seriously, who would dare denigrate Toyota's commitment to reducing its carbon footprint? The company started selling hybrids long before greenhouse gases were a cri de guerre. Of the 16-million hybrids it has sold worldwide, more than 252,000 were in Canada.
Toyota is now almost five years ahead of its plan to sell 5.5-million electrified cars annually — of which one million will be ZEVs — by 2030.
By 2050, the world's largest automaker is also promising to reduce the average CO2 emissions from its new vehicles by 90 per cent (compared with 2010) and promises that all its production plants will produce zero emissions as well.
Perhaps even more importantly, the targets automakers are challenged to meet — be they for ZEV sales or actual emissions targets — need to be fixed. The bane of automotive product planning is the changing goalposts of governmental regulation. The Trump administration, for instance, caused quite a bit of consternation when it rolled back the Obama 55-mpg mandate that had been the basis of automaker product planning all the way out to 2025.
Closer to home, Quebec's latest mid-cycle evaluation of its ZEV mandate seems to congratulate automakers for exceeding their targets, and then threaten them with accelerating regulations for doing so. Fining someone because they don't meet the targets you set but penalizing them with more stringent conditions when they do is simply poor public policy. It certainly isn't the most effective way to reduce automotive carbon emissions.
The most important consideration moving forward is the realization that the emissions-reducing technology that works in downtown Toronto — or even suburban Montreal — will not be suitable for, say, rural Saskatchewan or northern Alberta. Even downtown cores in different cities will require different solutions. Some urban centres will be hotbeds for pure electrification. Others — ironically, in ZEV-promoting Montreal — have street parking that is anathema to convenient plugging in, and plain-Jane hybrids would allow at least partial electrification.
Whatever the case, perhaps it's about time we all agree that automakers are now on board with the idea of reducing tailpipe emissions. How quickly and efficiently they do so will depend on the policies and regulations we saddle them with.