“Eating out is costing more, as are tomatoes for some strange reason. Here’s the good news. Bread is cheaper. But one thing is clear though: 2018 is turning into a very challenging year for the food industry.”
Dr. Sylvain Charlebois
Recent StatCan numbers indicate that grocers are in trouble. Food inflation is now above 2% for the first time since April 2016. This is typically good news for grocers as it gives more room for them to increase margins. But given major headwinds affecting the industry, grocers will need to get even more creative to reassure investors.
Loblaw has reason to be particularly worried, having posted underwhelming 4Q results last week. Food retail sales dropped by 1.2% and total revenues slipped by 0.9%. Despite strong Shoppers Drug Mart sales, company executives indicated that reforms affecting the price of generic drugs will impact profits. But it is higher wages that seem to be the big worry for the company, as provincial governments are exploring options, figuring out how an economy with a $15/hour minimum wage would work. In fact, StatCan numbers may be suggesting where things are headed with minimum wage increases.
It may too early to tell, but Ontario minimum wage hikes likely pushed menu prices higher in January, especially in fast food, where most of the income earners are paid minimum wage. And this likely just the beginning. After a 22% hike on January 1st of this year, Ontario’s minimum wage is due to increase again to $15/hour on January 1, 2019. Alberta will join the $15/hour club in October of this year, and British Columbia intends to pass the $15 mark in 2021. Other provinces like Quebec and Nova Scotia are thinking about following suit. The $15 campaign will not go away any time soon. Obviously, most people don’t object to the concept that people should earn a decent living. The challenge with Ontario, though, is how quickly wage hikes are being implemented. A 32% increase in 12 months is simply irresponsible. Restaurants, and many of them are family-owned businesses in regions across the province, will have a hard time coping.
The grocery business is also being affected by higher minimum wages, but indicators are subtler. Here’s one example. The price of tomatoes, one of the most popular produce items, jumped by more than 30% in one month. It’s hard to tell, but this was likely an effect of minimum wage increases, as it is unusual to see any fruit or vegetable price increase by even 4% in one single winter month. Even imports have a critical impact as the value of the Canadian dollar remained relatively stable against the U.S. greenback. Margins are typically much higher in this section of the store.
2018 is turning into a very challenging year for grocers, especially Loblaw. Results we saw last week from Loblaw are indicative of what is to come. For the Brampton-based giant, it is a godsend to see food inflation rise again, so that it can tweak certain price points, and increase margins without most people noticing. Loblaw will need to get creative — very creative — in order to continue to deliver over the next few quarters. Results indicate that store traffic is an ongoing issue, so converting store sales to online activity will be critical, especially with what is on the horizon.
Meanwhile, in the U.S., Amazon is continuing to create havoc in the grocery landscape. Bloomberg just reported that two grocers, Winn-Dixie parent Bi-Lo and Tops Friendly Market, could declare bankruptcy this month. This is likely due to the ominous shakedown in the grocery industry caused by Amazon and its newly acquired Whole Foods subsidiary. This is only the beginning, and Amazon is slowly capturing more market share in groceries, destroying historically well-established players one by one, as it did in other sectors like bookstores. Loblaw is realistically concerned that Amazon will make its way into Canada — a further threat to this major grocer.
But there is still hope. Higher menu prices may slow down the food service sector’s string of successes in recent years. As food and labour are a restaurant’s highest expenses, this may be an opportunity for a grocer like Loblaw to commit more seriously to both ready-to-eat and ready-to-cook spaces. Increasing food retail sales will become more and more difficult. While menu prices go up, exploiting the nexus between food service and retailing may give Loblaw an advantage. This could be Loblaw’s next move, but they clearly need to think differently about how to grow the business.
Interestingly though, while posting its 4Q results, Loblaw made no mention of it $25 gift certificate campaign, launched because of its self-confessed involvement in the bread price-fixing scheme in December. Nonetheless, StatCan numbers confirmed what many suspected. Bread prices are dropping across the country. BMO stated earlier this year that bread prices were down 2.5% since December, after Loblaw made the disclosure. According to StatCan, bread prices dropped 1.7% in January alone. In fact, it seems most bakery products are cheaper than they were a month ago. This may be a sign that grocers are trying to make amends with the public, since the story has garnered so much attention. It is unclear whether the aggressive discounting we have seen in many stores will continue — only time will tell.
Dr. Sylvain Charlebois
Dean, Faculty of Management