Loblaw sees more customers turn to discount brands as food inflation rises

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Loblaw sees more customers turn to discount brands as food inflation rises
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Canada's largest grocery retailer expects more customers will shop at its discount chains in the coming months as it continues to see food inflation rise. 

Loblaw Companies Ltd., which reported financial results for the 16-week period ending Oct. 9 on Wednesday, says it expects more customers to turn to its discount chains such as No Frills as rising costs and supply chain issues continue to persist in the post-pandemic recovery. 

"There is meaningful commodity price pressures... and then there's labour supply pressure and those two things are creating substantial challenges for our manufacturing base," Loblaw president and chairman Galen Weston said on a conference call with analysts Wednesday. Those challenges may result in higher prices and certain items being out of stock.

"What we expect is with the continued inflationary pressures and the continued journey to normal, pre-pandemic behaviour (that) the discount business will continue to build volume," Weston said, adding that sales at the company's discount businesses are close to surpassing sales at its conventional brands such as Loblaws. 

"It's basically a trend that's been continuing since the opening up of the country in mid-summer," he said. 

Inflation is on the rise in Canada, with Statistics Canada on Wednesday reporting the largest gain since February 2003. The Consumer Price Index (CPI) rose 4.7 per cent on a year-over-year basis in October, with prices up in all eight major components, including food. Meat products were up 9.9 per cent, while fresh or frozen beef climbed 14 per cent. Processed meat increased 8.5 per cent, which includes a 20 per cent jump for bacon.

Loblaw didn't disclose the rate of inflation it is currently seeing but says its internal measures of inflation were "slightly higher" than the average quarterly national food price inflation of 2.6 per cent as reported by the CPI. The company says it combines several metrics to measure food inflation, including CPI. Statistics Canada calculates food inflation by tracking price changes based on a fixed basket of goods that is adjusted for quantity and quality, and updated as consumer preferences change. 

On Wednesday, Weston described the inflation situation as "volatile", and said the company is seeing customers respond more to promotional activity than it did through the COVID-19 pandemic. 

"We are seeing a change in customers shopping more often in our discount businesses, and we are seeing the one-to-one promotional tools being deployed across the business performing much better today than they were in an environment when there was very little crisis sensitivity," Weston said. 

"Our strategy would indicate that we are more able to deploy promotions against specific price-sensitive customers with specific price-sensitive items than we would have been the last time we had this kind of inflation." 

Loblaw is not alone when it comes to dealing with food inflation. Metro CEO Eric La Flèche says food manufacturers are experiencing inflationary pressures and have started to pass along those cost increases to grocers.

"There are cost increases coming because of commodity issues, weather issues, and labour costs at the vendor end," he told analysts during a conference call on Wednesday.

"We're working hard to contain those costs and make sure that we are market competitive."

While it deals with inflationary pressures, Loblaw beat analyst expectations as revenue hit $16.05 billion, up from $15.67 billion last year. Loblaw's same-store sales, a key metric in the retail industry, were flat in the third quarter, increasing by 0.2 per cent, as more people ate outside their homes compared to 2020. At the same time, same-store sales at its drug retail business grew 4.4 per cent, driven by strong beauty sales as more people returned to workplaces and normal routines.

With files from The Canadian Press

Alicja Siekierska is a senior reporter at Yahoo Finance Canada. Follow her on Twitter @alicjawithaj.

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