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LOBLAW EXECUTIVES CALL OUT SUPPLIERS FOR ‘OUTSIZED COST INCREASES,’ AS GROCERS
FACE ANGER OVER FOOD INFLATION

Susan Krashinsky RobertsonRetailing reporter
Published 6 hours agoUpdated 1 hour ago

The Loblaw logo is seen in this file image. The retailer said adjusted profit
rose 10 per cent in the most recent quarter.DADO RUVIC/Reuters

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Executives at Loblaw Cos. Ltd.


are calling out multinational consumer packaged goods companies for “outsized
cost increases” on products, an accusation that one industry representative said
is untrue and an attempt to deflect anger grocers have faced for not doing
enough to fight food inflation.

Loblaw reported that its adjusted profits grew by 10 per cent in the first
quarter, as grocery prices continue to rise and sales of high-margin drugstore
items such as beauty products and over-the-counter medicines remain strong.

On a call to discuss the company’s quarterly earnings on Wednesday, chief
financial officer Richard Dufresne said that so far this year, suppliers have
increased Loblaw’s product costs by nearly $1-billion, which is lower than the
increases seen in the same period last year but still more than double historic
norms. Prior to the pandemic, it was normal for Loblaw to see roughly
$400-million in cost increases from suppliers in an entire year; in the 2022
fiscal year, those increases totaled more than $2-billion, he said.

“We wanted to call it out because it is one of the big drivers of cost inflation
that we are seeing,” Loblaw chairman and president Galen Weston – who faced
questions on the subject along with other grocery CEOs before a House of Commons
committee in March – said on the call Wednesday. Cost increases seem to be out
of line with commodity prices, he said.

But Michael Graydon, chief executive of Food, Health and Consumer Products of
Canada – which represents manufacturers, including multinational suppliers –
said that commodities are not the only factor in price increases, adding that
costs for distribution, packaging and labour all continue to rise.

“I see this as an attempt to deflect some of the public criticism of these
organizations’ profits,” Mr. Graydon said. “The grocery industry has been the
bad guy, in regards to inflation discussions. … I’m not sure that it’s fair that
they take all of the responsibility from a public perspective. But I think this
is just an attempt to deflect the messaging to camouflage very good
performance.”

Large suppliers have reported an increase in prices. Last week, for example,
both Coca-Cola Co. and PepsiCo – a company that has clashed with Loblaw in the
past over price hikes – reported revenue and earnings that beat analysts’
expectations, partly driven by higher prices.

“We are definitely seeing more inflationary cost pressure from the large
multinational CPGs than we would have expected at this time, based on what’s
happening in the commodity cost environment,” Mr. Weston said.

Canada’s largest grocer, like others in the industry, has seen profits grow as
sales have gone up – driven partly by food inflation, which has begun to
moderate but is still outpacing the general rate of inflation.

Loblaw reported on Wednesday that its internal food inflation measure was
“generally in line” with the consumer price index for food purchased from
stores, which Statistics Canada uses to measure food inflation and which
averaged 10.5 per cent over the quarter ended March 25. On the call, Mr. Weston
said that Loblaw has not been passing on all its cost increases in the form of
higher prices.



The Brampton, Ont.-based grocer reported that while overall profits are going
up, its profit margins on food sales have been decreasing slightly as costs
remain high – and that growth in its total profit margins is due to strong sales
in “front store” categories such as makeup and cold medicines at its Shoppers
Drug Mart chain. The company does not provide separate gross margin numbers for
its grocery and drugstore retail businesses.

In March, the leaders of Canada’s biggest grocery retailers told the House of
Commons committee that grocers are not profiteering amid inflation.

“Retail prices have not risen faster than our costs,” Mr. Weston said during his
appearance. On Wednesday, the company reported that costs in its food retail
business are still increasing faster than prices. Grocers have said that for
months, they have faced unprecedented levels of cost-increase requests from
suppliers.

Suppliers have also pushed back on the notion that they are benefiting from
inflation. “I know it’s an inconvenient truth, but we have not been profiteering
in any way, shape or form,” Unilever plc chief executive Alan Jope said on a
conference call last week to discuss the packaged-goods giant’s earnings, adding
that the company had only passed on three-quarters of its cost increases to its
customers.

The Loblaw executives pointed the finger at large suppliers at a time when the
industry is working on the final stages of a code of conduct to govern the
relations between retailers and product vendors. That code is intended to make
negotiations more predictable and to create guidelines for the sector.

Loblaw’s net earnings available to common shareholders decreased in the quarter
because they compared with a period in the prior year when the company recorded
a one-time contribution of $11-million resulting from a favourable court
decision in a tax matter. Loblaw reported net earnings of $418-million, or $1.29
per share, compared with $437-million, or $1.30 per share, in the same quarter
in 2022. Excluding that prior-year benefit and adjusting for other items,
adjusted net earnings rose by 10 per cent.

Loblaw’s revenue grew by 6 per cent to nearly $13-billion in the 12 weeks ended
March 25, compared to the same quarter the prior year. Same-store sales – an
important metric that tracks sales growth not related to new store openings –
grew by 3.1 per cent at the company’s grocery stores and 7.4 per cent at its
drugstores.

The company will soon undergo a leadership transition, as Mr. Weston plans to
step back from day-to-day operations by early next year. European retail
executive Per Bank will take over as president and CEO of the grocery retailer;
however, Mr. Weston will remain chair of Loblaw’s board and chair and CEO of
parent company George Weston Ltd. In that role he will remain closely involved
in overseeing the strategic direction at the family-controlled company.

In his dual role at Loblaw and George Weston, Mr. Weston received a $1.2-million
raise in 2022 after consultants hired by the company determined he was
underpaid. That brought Mr. Weston’s total compensation to $11.79-million last
year.

Loblaw has also benefitted from a shift to discount stores as Canadians look for
a break on their grocery bills. Discount banners such as No Frills, Maxi and
Real Canadian Superstore make up roughly 60 per cent of the company’s store
network. Grocers have also seen a boost from growing sales of house-brand
products, which come with higher profit margins; sales of private-label items
are growing at double the rate of name brands, Mr. Dufresne said on Wednesday,
with the company’s No Name brand selling particularly well.

E-commerce sales fell by 1.1 per cent, compared to a period in the prior year
when COVID-related lockdowns boosted online orders.


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Data as of 03/05/23 2:45pm EDT

Loblaw CO
L-T-3.12%
PE22.38
YieldN/A
AnalystsBuy


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