Loblaw Companies LTD (L)

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Loblaw Companies Limited (TSE:L, FRA:L8G) is a major food retailer in Canada that also sells clothing (Joe Fresh Style), pharmaceutical products and financial services. In addition to its function as grocer it packages and sells brand name competitive products under its own private labels; no name and presidents choice. It is well placed for further growth in the near future; being consumer and service oriented as well as diverse in terms of the market it serves has helped it remain a leader in Canada (BC chain T&T supermarket which was acquired in the summer of 2009, is Canada's largest Asian supermarket chain. T&T was formerly run by Taiwanese immigrants who established it in1993). Though it operates only in Canada a it competes against companies which also operate abroad (Alimentation Couche-Tard, Wal-Mart).^[1] Competition from Sobeys has intensified since it expanded store size and extended hours of operation. In Ontario and Quebec Loblaws competes directly against Metro Inc's Metro & Food Basics (there are about twice as many Metro stores in Ontario as there are in Quebec). 13+ million Canadians shop at Loblaws stores every week. The grocery chain has a 40% market share in Canada (November 2010 interview with Galen Weston, Lang & O'Leary Exchange, CBC). In 2010 Loblaw Companies accounted for 31% of Canadian food sales.^[1]

Store size grew steadily in the 7 years leading up to 2010 (21.7% for corporate stores and 23.3% for franchised stores)^[2][3] Business is run more efficiently due to the use of a new transport management system to schedule shipments (11 seconds to schedule them compared to 7 hours without it). In 2009 19 mllion square feet of its retail space was refurbished. In the 1970's Loblaws had 100 locations.

Contents 1 Company Overview 1.1 Financial data 1.2 2011 second and third quarters 1.3 2011 second quarter 1.4 2011 first quarter 1.5 Recognition as an employer 2 Subsidiaries by ownership, area served, size 3 Competition 3.1 Sobeys 4 Other graphs 5 References

Loblaws is 63% owned by Toronto based George Weston LTD (WN) a company named after its Canadian founder whose family (beginning with Garfield Weston, owns 60% of George Weston LTD) presided over most of Loblaws growth after acquiring it in 1947 from Theodore Loblaw. Having business managed by Galen Weston who is also chairman of Selfridges (UK), Brown Thomas (Ireland) and Holt Renfrew (Canada) and owner of such bakery names as Wonder Bread and Boboli appears to have benefited the grocery business as it has provided management with better marketing experience and tools.

Company Overview

With over 1,400 direct/indirect locations (1,046 corporate and franchised stores per 2012 February annual report) and 135,000 employees across Canada it oversees the largest grocery store business in the country in terms of total square footage and sales (roughly 2X Sobeys). As of December 2011 56% of locations (584) are corporately owned.^[4] Loblaws Companies operates under different names in different parts of Canada; In the maritimes (ns, nb, nfld, pei) it is known as Atlantic Superstore, while in Ontario and Quebec it is Dominion, Zehr's, No Frill's, Provigo and recently the Real Canadian Superstore. While most stores are franchised some are corporately owned. In total there are 26 names/22 banners (fewer divisions because some of those are part of the same division for example Fortino's corporate management is under Zehr's) through which Loblaws markets itself. They are Atlantic Cash & Carry,Atlantic Superstore,Atlantic SuperValu, Axep, Dominion, Entrepôts Presto / Club Entrepôt, Extra Foods, Fortinos, Freshmart, L'intermarché, Loblaws/Loblaw Great Food, Lucky Dollar Foods, Maxi/Maxi & Cie, NG Cash & Carry, No Frills, Provigo, The Real Canadian Superstore/Loblaw Superstore, Real Canadian Liquorstore, Real Canadian Wholesale Club, Red & White Food Stores, SaveEasy (formerly Atlantic SaveEasy), Shop Easy Foods, SuperValu, T&T Supermarket, Valu-Mart, Your Independent Grocer, Zehrs, operating under the Zehrs Markets, Zehrs Food Plus and Zehrs Great Food banners.

In terms of size among North American grocers Loblaws ranks just behind Kroger with a market cap of over $12 billion.^[5]

Margins at Loblaw Companies (sales less merchandise costs) improved in 2008 due to changes in merchandise costs attributable to the more popular no name and presidents choice labels. A rise in the Green Leaf products business (organic) has more recently raised margins which were being hit by rising food costs and intense competition. The last time negative earnings were recorded was 2006.

In the discount and ethnic market Loblaws competes directly with FreshCo (Sobeys) and Food Basics (Metro Inc.) (ethnic consumers are expected to represent 1 in 3 Canadians in 2031, FreshCo's popularity has made Sobey's eager to replace Price Choppers with it). In the province of Ontario (Canada) 35% to 40% of the grocery shopping is in the discount market making brands like No Frills invaluable to future growth. In the discount and ethnic market Loblaws' No Frills and T&T Supermarket also compete with Metro's Food Basics.^[6]

Financial data

In May 2011 Loblaws warned that, despite a steady showing in the first three months of the year (net earnings up 17.39% or 10 cents per basic share up to 58 cents a share/revenue down 0.6%) operating income for the full 2011 fiscal year could decline noticably due to investments in information technology and supply chain infrastructure.^[7] Despite price deflation revenue has been stable for not only the last couple years but quarters also.^[8] Loblaws accounts for 31% of Canadian food sales.^[1] Increased competition (especially from sobeys which recently acquired thrifty foods, expanded deeper into Ontario, and has begun keeping many of its stores open 24 hours) and consumers strongly rejecting price increases has made it difficult for the company to increase revenue and gross profit recently however in the long run profit has improved due to lower fuel costs and more disciplined vendor management. An extra selling week and the sale of the company's food service business in the last quarter of 2008 caused slight (1-2 %) percentage decreases in quarterly revenue the following annual periods. Investment in the company's new information technology and supply chain as well as asset impairment costs contributed to reduced operating income in 2009.^[9] 2009 also saw decreased debt despite higher capital expenditures. Sales growth was opposed by lower volumes of food sold.^[10]

It's banking division, presidents choice financial a joint venture with CIBC has 2.3 million customers and was ranked best by JD Power and Associates in 2009 in terms of customer satisfaction among mid size banks.^[11]

Steady from 2007 to 2008, ebitda rose sharply since (12% growth in 2009 and remaining at that level through to mid 2010, prior to 2009 ebitda was stable since the end of 2006 when it fell 16% on the year) even though revenue fell half a percentage point (mostly due to one less week of reporting). All other indicators in 2009 and 1hfy10 remained steady except for total assets which rose the year leading up to mid 2010 (total assets were up 8.26%, the biggest increase in years (in 2005 total assets were valued at $13,761 million only 1.3% less than in 2008). With long term debt remaining stable the result was an increase in shareholders equity up 9.1% in the year leading up to interim 2010.

Margins at Loblaw Companies (sales less merchandise costs) improved in 2008 due to changes in merchandise costs attributable to the more popular no name and presidents choice labels. A rise in the Green Leaf products business (organic) has more recently raised margins which were being hit by rising food costs and intense competition. The last time negative earnings were recorded was 2006.

The net income, revenue, earnings before tax (ebitda), assets, operating income, shareholders equity and debt for loblaws and Canadas other major grocers and food retailers are shown and compared in the competition section.

2011 second and third quarters

Revenue was $16.841b up 1.2% from 2q10 & 3q10 ($16.646b), ebitda $1143m up 7% from $1068m, profit $433m up 14.6% from $378m. In the last two reported quarters (as of Dec 1, 2011) Metro Inc experienced revenue, ebitda and profit are up 1.8%, down 2.9% and down 1.1% respectively while at Empire-Sobeys they are up 6.1%, 6.3% and 7.5%.

2011 second quarter

Second quarter revenue was 0.1% higher reaching $7.278 billion on stronger retail sales though that was counteracted by reduced revenue from president's choice financial services which is undergoing expansion/investment from Loblaws (for the half total sales were down $32m to $14.15 billion). Retail food sales made up 98.33% of consolidated revenue during the quarter ($7.157b up from $7.146b) & for the half ($13.914b down from $13.937b). Same store sales declined by 0.3% over the 24 week half (-0.4% in the 12 week quarter) possibly the result of higher food price; In Canada the national food inflation in the 2Q of 2011 was 4.0% up significantly from 0.3% in 2010.^[12]

Financial Services Though revenue fell by only 1.6% in the quarter to $121m (-3.7% in the half to $236m) operating income (-62.5% in the qtr to $12m/-46.4% in the hlf to $31m) and ebit (-91.7% in the qtr to $2m/ -81.1% in the hlf to $7m) fell significantly. Higher customer payment rates (stricter credit management policies) discouraged customers from using the services as much.

2011 first quarter

Earnings were strong up 23% in the quarter to $162-million, or 56¢ a share, compared with $132-million, or 45¢ a share the year before however revenue fell 0.6% to $6.9B (same store sales down 0.1% because of flat food sales and lower sales in drugstore, apparel and general merchandise. Net income was up 8.8% to $197m (lower income taxes & reduced net interest expense).

Recognition as an employer

Noted as a top Canadian employer, top 90 employer in Toronto, 2010 top employer for young people by sources such as the Financial Post, eluta. Benefits to working for the company include tuition subsides, a variety of career prospects within the company, maternity and parental leave benefits, fully paid 18 month training program.^[13]

Subsidiaries by ownership, area served, size

corporate run	# stores	area served	size	corporate run	# stores	area served	size	franchised	# stores	area served	size
Provigo	300+	ont,que	large	RC Superstore	110	ont.	large	No Frills	175	7 prov	midsize
Maxi	108	que,ont	18large 90small	Loblaw Great Food	77	ont,que	large	Extra Foods	78	west	large
Zehrs	43	ontario 26cities	large	AtlSuperstore	54	Maritimes	large	Value-Mart	62	ont	midsize
T&T	20	bc,ont	small					Extra Foods	78	west	large
Dominion	12	maritimes	small	Liquorstore	34	alberta	small	Freshmart	54	east	midsize
SuperValue	22-30	west	midsize	Wholesale Club	34	24west 8ont,2atl	large	Independent Grocer	52	ont	midsize
								SaveEasy	48	36 nb,ns 12 nfl,pei	midsize
								Fortinos(1988)	20	ontario	midsize

In terms of grocers, at the end of 2009 there were more than 800 corporately run stores and over 567 franchised locations (the corporately owned stores were as much as 2-3 times larger (on average) than those franchised). Product brands include presidents choice and no name (two most popular by sales in 2009/2010), Green, Blue Menu, Organics, PC Financial as well as its newest Joe Fresh Style which has become one of Canada's top 3 recognizable apparel brands. The recently acquired T&T Supermarket division (ethnic products) is important to the company's future growth since immigrants represent Canada's largest growing customer segment.

• Marketing the company continues to market itself on value much like Wal Mart; Zehrs campaigns under the slogan 3000 prices lowered, RC Superstore:prices rounded down, No Frills:Won't be Beat, Maxie & Cie:1000 Ways to Save

Competition

Despite losing market share in the long term to Wal Mart and Sobeys/Empire Company LTD (EMP.A) (led the industry in same store sales growth in the past six years including 1.7% growth in the first quarter of 2012), Loblaws has maintained steady growth more recently increasing market share over its Canadian based counterparts (up to 40%, Sobeys-Empire also records earnings growth from its non food business which includes real estate, Crombie Reit, and other investments, Sobeys recently divested its stake in Wajax Income Fund).^[14] Unique ideas such as using liquid nitrogen to improve the binding of flavour to frozen food sauces and vegetarian meals focussed on different health aspects has helped its brands stay competitive with ones like Our Compliments marketed by Sobeys.^[15] Some other ideas that has made it popular among Canadians is its Green label which offers products such as phosphate free detergent. Unlike many of Sobey's brand name products a lot of the juice sold under Loblaws' brand names isn't made with preservatives (like sodium benzoate).

Provigo Canada's 3rd leading grocer in 1997 (when Loblaws sales were about $14 billion or about half what they were in 2006) was acquired by Loblaws in November 1998 for CAD $1.74 billion^[16] (the subsidiary currently oversees 190 supermarkets and discount stores in Quebec and serves over 340 locations of other stores).

Fiscal Year Data

Comparison with Competitors 2009

Company	# of locations	Average Store Size (Square Feet)	# of Employees	Net Profit Margin (%)	locations added during year
Couche Tard[17]	5878 (2010)	2-2500	53,000	1.8 (2010)[18]	435[19](2010 FY)
Metro inc.	827	32,600-41,800 (351 grocery stores)[20]	65,000	3.17[21]	na
Sobeys	1300	about 42,000[22]	85,000	1.95[23]	na
A&P	436	13,950[24]	42,200	(-)10.77[25]	na
Loblaws	1400	29,700-62,300[3]	139,000	2.13[26]	na

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Sobeys

Competition from Sobey's has been intensifying especially in Atlantic Canada and Ontario where Sobey's has diversified its brands to include IGA, Foodland, Thrifty Foods, Price Choppers (79 locations in Ontario), FreshCo (57 locations all opened in fiscal 2011 with plans to add even more in 2012) and Lawtons Drug Stores. FreshCo is Sobey's response to No Frills, a discount food chain advertising itself as a discount store with a strong fresh presence that appeals to ethnic customers (ethnic consumers are expected to represent 1 in 3 Canadians in 2031). FreshCo's popularity has made Sobey's eager to replace Price Choppers with it. In the province of Ontario (Canada) 35 to 40% of the grocery shopping is in the discount market making brands like No Frills invaluable to future growth. In the discount and ethnic market Loblaws' No Frills and T&T Supermarket also compete with Metro's Food Basics.^[27] In addition to Superstore, Empire's 286 unit strong Sobeys brand also competes directly with Loblaws' corporately run banners Provigo (over 300 units, run by Loblaws since 1998), Maxi (108 units), Great Food (77 units) and Zehr's (43 units).

Other graphs

As shown in the graph, gross profit at Loblaw Companies (sales less merchandise costs) changed significantly around 2007/2008 due to changes in merchandise costs attributable to the more popular no name and presidents choice labels. A rise in the Green Leaf products business (organic) helped stem the smaller margins coming from rising food costs/ intense competition. The last time negative earnings were recorded was 2006.

References

1. ↑ ^{1.0 1.1 1.2} Canada food retailer to make purchases in Taiwan (August 6, 2011).
2. ↑ 2003 annual information (2003).
3. ↑ ^{3.0 3.1} Loblaws 2009 Annual Report (2010-03-12).
4. ↑ Loblaw Companies 2011 Annual Report (February 2012).
5. ↑ valuecruncher. Retrieved on 2010-08-06.
6. ↑ Sobeys takes on Loblaws/Weston to court discount and ethnic (2010-05-19).
7. ↑ Loblaw warns investments to hurt income in 2011 (May 4, 2011).
8. ↑ Loblaw seeing price deflation (2010-07-22).
9. ↑ Loblaw Companies Limited Reports 2009 Fourth Quarter and Fiscal Year Ended January 2,2010.
10. ↑ LOBLAW COMPANIES LIMITED 2009 ANNUAL REPORT (2010).
11. ↑ TD Canada Trust and President’s Choice Financial Rank Highest in Customer Satisfaction with Retail Banks in Canada (2009-08-13).
12. ↑ Loblaw Companies Limited 2011 2Q Report (July 21, 2011).
13. ↑ Chosen as one of Canada's Top 100 Employers, Greater Toronto's Top Employers and Financial Post's Ten Best Companies to Work For for 2010 (2009-11-02).
14. ↑ How Sobey's is taking on Loblaws (2010-06-23).
15. ↑ The secrets behind Canada's largest supermarket (March, April 2010).
16. ↑ cases in strategic systems auditing (1999).
17. ↑ Macs Couche Tard Annual and Quarterly Reports (2010).
18. ↑ Couche Tard Financials (2010).
19. ↑ Couche Tard Information from third party (2010).
20. ↑ Metro Inc Annual and Quarterly Reports. Retrieved on 2010.
21. ↑ Metro inc. Financials Third Party Source (2010).
22. ↑ cranston celebrates grand opening of sobeys (2009-11-01).
23. ↑ Sobeys 2009 Annual Report (2010-05-01).
24. ↑ A&P stock information from Businessweek.
25. ↑ A&P Financials supplied by third party (2010).
26. ↑ Loblaws Financials Third Party Source. Retrieved on 2010.
27. ↑ Sobeys takes on Loblaws/Weston to court discount and ethnic shoppers (2010-05-19).