Dr. Sylvain Charlebois: What StatCan and Loblaw numbers are really telling us

March 29, 2018 rbudd Leave a Comment

“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

Dr. Sylvain Charlebois
Dean, Faculty of Management

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
Dalhousie University
February 2018

Dr. Sylvain Charlebois: Baking The Numbers

February 1, 2018 rbudd Leave a Comment

“As shocking as it was, most will eventually forget Loblaws’ admission of price-fixing. Let’s hope the industry doesn’t.”

Dr. Sylvain Charlebois

Dr. Sylvain Charlebois
Dean, Faculty of Management

It was indeed the most surprising food story of the year. Most Canadians were stunned and dismayed to learn that our country’s number one grocer and carrier of our nation’s most trusted brand, President’s Choice, was caught up in a price-fixing scheme with bread maker Weston, owned by the same company. The scheme lasted 14 years, from 2001 to 2015. As a result, Loblaws fired several people involved and then turned itself into Santa Claus by giving a $25 gift certificate to millions of Canadians who may have been affected. The Competition Bureau, in return, offered not to lay criminal charges — a precious gift for a company for whom image and brand is everything.

Any supply chain-related issue is complicated to understand. But in layman’s terms, what was happening between Loblaws and Weston was inexcusable. For more than a decade, Weston’s pricing scheme for its bakery products gave an unfair advantage to Loblaws, while disadvantaging other food retailers. The strategy was not so much about getting more money out of consumers, at least not recently, but more about managing margins. Bread is often used as a loss leader, an item sold at a lost to increase traffic in a store. In fact, according to Statistics Canada, a standard loaf of bread is cheaper today than it was back in 2013.

But if we go back in time, bread prices have indeed fluctuated. A decade ago, the price of some bakery items doubled over just a few months. In 2007 and 2008, when commodity prices exploded due to the ethanol effect, the price for a bushel of wheat reached unprecedented levels. Higher input costs were used as a backdrop for the narrative, to justify enormous price hikes. But American consumers also experienced a similar phenomenon, so higher bread prices at the time was not just unique to Canada. Many countries were affected.

Loblaws did the right thing by coming forward, but several questions have cropped up as details emerged. Firstly, the length of time: for 14 long years, two of the largest players in the business altered market conditions, just because they could. Many wonder why it took so long for the company to realize it had a problem. In the grocery industry, a week is already an eternity, let alone 14 years. Most food businesses are literally always a recall away from closing. Quality assurance and ethics are central to most businesses, including Loblaws. Knowing this, it is challenging for Canadians to believe the company had only just become aware of the issue. The case for plausible deniability at Loblaws is weak at best.

Secondly, the people involved: it is likely that over several years, more than just a few employees were a part of this. Numerous employees have come and gone, moving on to other positions, probably in the food industry. There is therefore a possibility that the culture of collusion and price-fixing may have spread beyond the company’s walls, that the movement of human capital, over time, may have created an industry-wide problem. A scary thought.

When considering these factors, we can conclude that Loblaws’ coming out is just the beginning. The Competition Bureau is also investigating Sobeys, Metro, Wal-Mart, Giant Tiger, and even bread producer Canada Bread Co. If price-fixing in bread was real, it is quite conceivable that similar schemes could exist and affect prices in other parts of the grocery store. Therefore, this matters to all Canadians. The $25 gift card is just window dressing, embedded in some public relations framework to save face. What is at stake is consumer trust and how the industry can maintain its social license to operate. Without this, everything becomes more challenging: growing revenues, supporting communities, innovating, partnerships, loyalty programs — everything.

Independent grocers have the most to win out of this mess. They just cannot do what Loblaws and Weston admitted to doing for 14 years. They don’t have the market power. But it is doubtful Canadians have the stamina or the discernment to punish the company by withholding their shopping dollars. Habits are heard to break, especially with food.

As surprising as Loblaws’ admission may be, the market is cruelly fickle. Despite breaking the law, most will have forgotten about Loblaws’ mea culpa within weeks — perhaps even days, given the time of year. These cases are inherently complicated. Case in point: most have forgotten that Hershey admitted doing the same thing, just a few years ago.

For Loblaws, this incident won’t be as damaging as the Joe Fresh facility disaster in Bangladesh in 2013, which killed more than 1000 people. Not even close. But now, Canadians have the right to doubt and second guess anything. The fact that bread, a main food staple, was targeted by the Bureau’s investigation, could give us hope for change. Everyone can understand the association of terms like “bread” and “price-fixing”, however complicated the situation may be. Most Canadians will understand that it is wrong, plain and simple. Let’s hope the industry learns from this, too.

Dr. Sylvain Charlebois
Dean, Faculty of Management
Dalhousie University
December 2017

Sylvain Charlebois: Retail Bogeyman Keeping Grocers up at Night

December 21, 2017 rbudd Leave a Comment

“Loblaw is playing defense against the boogeyman of retailing. But if they play their cards right with home food delivery, they will be able to deliver much more than food to Canadian homes.”

Dr. Sylvain Charlebois

Dr. Sylvain Charlebois
Dean, Faculty of Management, Dalhousie University

Loblaw is the latest grocer to commit to offering home delivery. Starting in December, the number one food retailer in Canada is looking at deploying this strategy from coast to coast. It intends to deliver food at home, for a fee of course –an ambitious plan indeed. After spending millions in making many of its stores cathedrals where food is adulated, like the Maple Leaf Gardens store in Toronto, serving up President’s Choice in people’s homes now seems to be good enough.

Basically, the socioeconomic fundamentals that have supported large, big-box stores are weakening rapidly. Real estate is not cheap, growing same-store-sales is difficult these days and finding good labour to cover large spaces is challenging. In fact, as higher minimum wages are adding more pressure, grocers need to think of ways to make their equity and human capital work more efficiently. What’s more, a good portion of the Canadian population will become less independent to some degree. By 2025, more than 8 million Canadians will be 65 or older. And if you add Canada’s unpredictable — and sometimes horrid — weather, these indicators point to one thing: the bricks-and-mortar model is becoming much less appealing for a growing number of Canadians.

Our modern lifestyle is also a factor. Quite simply, time-strapped consumers are looking for convenience. Those who can’t or don’t want to cook are also are looking for quick fixes, and that is exactly what the food retail industry is trying to offer. Grocers are increasingly attempting to chase down the money that is showing up at their doorsteps less and less often.

As a result, we are continuing to witness the slow death of the traditional grocery store. For one thing, an increasing portion of our budget is dedicated to eating outside the home. At almost 30% of all of money spent on food, Canadians are on track to breaking a new record this year. Secondly, most of us are online, shopping for anything and everything. And yes, food is part of that portfolio. About 5 years ago, barely 1% of our food purchases were made online. Today, some unofficial estimates suggest that number is now close to 4%. We are progressively catching up to the Americans, who are at 7%. And given Walmart’s recent results, online grocery shopping is expanding. Walmart’s online sales in the U.S. grew by almost 50% last quarter, a lot of which was food sales. Canada is seeing similar trends.

Even though grocers’ balance sheets in Canada are in fairly good shape, Amazon — the boogeyman of retailing — has become a legitimate threat since it took over Whole Foods this summer. Amazon is not just a business killer — it destroys entire sectors. The bookstore was its first victim, and since its acquisition of Whole Foods, we can assume that the grocery store is in Amazon’s sights. It is all about digital transformation for Amazon. It is redefining how the food industry and consumers make transactions in a digitalized, borderless world.

Among scalable home delivery businesses, Grocery Gateway was really one of Canada’s pioneers. For years, this fleet owned by Longo Brothers delivered food products in the GTA, while barely making a profit. In fact, Longo’s acquired Grocery Gateway back in 2004 from a failed dot-com project, a victim of the bubble in that industry. For 13 years, the competition stood back and did nothing, for fear of cannibalizing a fellow market grocer. Several questioned the sustainability of operating a full fleet of trucks while at the same time charging a hefty premium of 15-20% on an order of 50$. But Grocery Gateway learned from this, and is now expanding. For Longo’s, it was about running a good business. For Loblaw, it is about fighting the Amazon effect, which is why we are about to see an evolution in home food delivery.

Leveraged by data, connecting food retailing with homes can be powerful. In some U.S. cities, Walmart is currently delivering food directly to the consumer’s fridge. Imagine coming home and everything is already done for you. But in 10 or 15 years from now, in a revolutionary digital world, there is no limit to what we can do with home food delivery.

As an example, we could even see companies owning the food we receive, and only pay for the food we use and consume. Food in concession, so to speak. Food waste?No problem. Leftovers can be credited, resold on our behalf, and used for something else. Zero waste. Similar gains can be achieved on the nutritional front. Consumers could be wearing a portable device automatically telling their fridge it is time to get replenished to satisfy a customizable diet. The “fitbitization” of our food could allow for companies to deliver to our fridges and cupboards the food we need to better our health. Home delivery makes grocers face up to a more informed consumer. All the data consumers need is readily available online, where they can also shop at their own pace. It makes consumers more rational, so impulse buying would be nearly impossible –a scary thought for many food companies out there. In return, grocers will need to embrace precision retailing practices in order to match higher expectations. All of this becomes more conceivable with home food delivery.

A blend between a digitalized food retailing industry and our homes can seem incredible, and this is only the beginning. Grocery Gateway was more of an experiment. Loblaw, and likely others, may be playing defense for its long-term survival, but the opportunities are endless.

The Amazon effect is real, and it is here to stay and is keeping most grocers up at night, including Loblaw. Well, at least, Loblaw had the foresight of acting now before it is too late.

Dr. Sylvain Charlebois
Dean, Faculty of Management
Dalhousie University
November 2017

Sylvain Charlebois: The puzzling probe into Canada’s alleged bread cartel

December 7, 2017 rbudd Leave a Comment

The puzzling probe into Canada’s alleged bread cartel

File 20171105 1055 1yynse8.jpg?ixlib=rb 1.1 — Loaves of fresh-baked bread line the shelves at a bakery.
THE CANADIAN PRESS/AP-Douglas C. Pizac

Sylvain Charlebois, Dalhousie University

A bread cartel is alive and well in Canada. Or is it?

Canada’s Competition Bureau is investigating major grocery chains for evidence of retail price fixing.

Loblaws, Sobeys, Metro, Wal-Mart and other companies have acknowledged the ongoing investigation. The outcome of the inquiry will likely not amount to much, but it does raise the question: Why is bread is being targeted by the bureau?

Demonstrating beyond a reasonable doubt that grocers are colluding to keep retail prices artificially high is almost impossible. Several attempts have been made in the past, with mixed results.

The average grocery store carries well over 30,000 different products, and prices can be affected by an array of factors: Commodity prices, energy and labour costs, new food safety and packaging regulations among them. These and others factors can all influence price points in many categories more or less simultaneously. An intentional collusion to falsely inflate profit margins would be hard to prove.

Historically, bread prices have been quite stable, with the exemption of 2008 and 2009, when prices jumped almost 50 per cent in a single year for all bakery products.

On the whole — unlike prices for fruits, vegetables and even meat products — bread has been immune to fluctuating prices for some time. In fact, Canadians have access to the most affordable food basket in the world.

Canadian food prices are relatively low

After the United States, Ireland and a few other countries like Singapore, Canadians spend less on food relative to their income than most countries in the world.

Nonetheless, since we live so close to the United States, where food quality is generally questionable but amazingly cheap, we often believe our own food prices are unfairly high. Prices are indeed higher here than in the United States, but much lower than in many places around the world.

In the last month alone, food retail prices have dropped in Canada, including bakery products. So, to suggest that food prices are inflated in Canada is somewhat far-fetched. And if Canadian consumers are paying too much for bread due to price-fixing schemes, the evidence isn’t readily apparent.

At the centre of this investigation, however, is a much deeper problem that lies in the food supply chain.

For years now, grocers have engaged in an open war with food processors, with grocers trying to position themselves as protectors of the public interest by pushing vendors to lower prices in order to remain competitive.

For the past few years, tensions between grocers and vendors have been at an all-time high. Major grocers have demanded price cuts from suppliers, causing a domino effect on the entire industry.

Small grocers complain

So, it’s not surprising to learn that independent grocers, through an industry association, passed along their concerns to the Competition Bureau. Consumers have barely noticed the conflict. Until now, that is.

Almost by design, the Competition Bureau may be trying to communicate to the market that grocers are on watch for squeezing processors.

As a food staple, bread is an appealing target. The bureau could have selected any food product, but bread’s status as a staple makes it an obvious choice — a clear majority of Canadians eat bakery products almost daily and, as a result, its price is an ongoing concern.

Everyone loves bread. That’s why Canada’s Competition Bureau might have chosen it to make a point to big grocers about their treatment of food processors.
(Shutterstock)

It was chosen for a reason: To make an otherwise dreary, obscure, supply-side issue more imperative to the daily lives of consumers.

Publicly traded companies extorting each other is less of a political or PR concern than allegations that grocers are allegedly gouging consumers. The investigation will likely not yield material results, but bread is clearly the best medium through which the bureau can send its message.

It’s not likely any grocer will be accused or arrested any time soon, but the Competition Bureau investigation could potentially restore peace within the food industry family.

Probe could bolster the food sector

A vibrant food sector is not possible without a strong food-processing sector, and making sure all make a decent profit within the food industry is difficult.

Nonetheless, consumers can only benefit if all sectors, from farm to table, succeed over time: we end up with a greater variety of decently priced, high-quality, innovative food products. Ultimately, and without sending anyone to prison, this investigation could strengthen the food sector.

Grocers know better than to engage in a doomed strategy of quotas and illegal price-setting activities. The mere spectre of a grocery cartel would not only be bad business, it threatens to tear up the social contract with the Canadian public that they adhere to every single day.

Consumers can expect to see deals being made within the industry in the days ahead.

Food shoppers will almost certainly experience rebates in the bakery section as grocers rush to reassure their customers that a bread cartel in Canada is nothing more than a myth.

Sylvain Charlebois, Professor in Food Distribution and Policy, Dalhousie University

This article was originally published on The Conversation. Read the original article.

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The puzzling probe into Canada’s alleged bread cartel

Canadian food prices are relatively low

Small grocers complain

Probe could bolster the food sector