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Loblaw, Metro pressuring food suppliers as profit soars

A shopper leaves a Loblaw grocery store in Ottawa, Ontario, Canada, February 14, 2019. REUTERS/Chris Wattie
Loblaw, Canada's largest grocery retailer, saw total sales surge 8.3 per cent annually to $17.4 billion in the quarter ending Oct. 8. (REUTERS/Chris Wattie)

Loblaw (L.TO) and Metro (MRU.TO) each reported growth in sales and profit on Wednesday and say they are pushing back against suppliers' continued price increases as food inflation remains high in Canada.

Loblaw, Canada's largest grocery retailer, saw total sales surge 8.3 per cent annually to $17.4 billion in the quarter ending Oct. 8, while its profit jumped 29 per cent to $556 million. Same-store food sales, a key metric in the retail industry that excludes sales at newly opened stores, increased 6.9 per cent in the quarter, while drug retail sales jumped 7.7 per cent.

Total sales at Metro in the quarter ending Sept. 24 grew 8.3 per cent annually to $4.4 billion, "mainly due to higher inflation in this quarter", the company says. Net earnings in the quarter increased 9.4 per cent to $219 million, when adjusted for the impact of an impairment charge related to withdrawing from the Air Miles loyalty program and the amortization of Jean Coutu intangible assets.

The rise in profit and revenue comes as food prices continue to run hot in Canada, raising the pressure and scrutiny on Canadian grocery retailers. Grocery store prices jumped 10.1 per cent year-over-year in October, Statistics Canada reported on Wednesday, a slight slowdown from the 41-year highs reported the month before.

'The company is not taking advantage of inflation'

Both Loblaw and Metro say they have faced increased costs from food distributors, but add that they are pushing back against price hikes.

"We have seen unprecedented cost increases from our suppliers this year and we continue to receive new cost increases," Loblaw chief financial officer Richard Dufresne said on a conference call with analysts following the release of earnings on Wednesday.

"Part of our job is to evaluate these and push back where they do not make sense. We have done that vigorously over the last two years and will continue to do so going forward. Our objective is to make sure that our (prices) on the shelf do not rise faster than supplier costs."

Loblaw reported a gross margin of 30.8 per cent in the quarter, up 10 basis points from the same quarter last year. Gross margin is the amount of profit made on goods measured as a percentage. The company said the increase was driven by sales in higher margin items like cosmetics and over-the-counter drugs. Dufresne said Loblaw's gross margin for food has stayed "essentially flat" as inflation has soared.

"This gives us the confidence to categorically say that retail prices are not growing faster than costs and the company is not taking advantage of inflation to drive profit," he said.

Metro reported a gross margin of 20.4 per cent in the quarter, and while it also did not disclose specific figures, it said food margins were down slightly while the pharmacy margins were up.

Metro's chief executive Eric La Flèche says that while inflation is expected to moderate, the outlook for prices remains uncertain as the company continues to receive requests from its suppliers for price increase in February.

"We're negotiating hard with our suppliers to mitigate that. We want them to justify that and we're pushing back because there is resistance for sure from customers," La Flèche said.

"If the vendors want to keep their volumes, the cost increases will have to moderate."

The Competition Bureau of Canada launched an investigation in October to study grocery store competition in Canada in the wake of soaring prices. The federal agriculture committee is also digging into grocery store profits, with testimony expected from the heads of the country's biggest grocery store chains, including Loblaw, Metro and Empire (EMP-A.TO). 

With food prices soaring, both retailers said customers are increasingly turning to discount stores, such as Loblaw's No Frills and Metro's Food Basics.

"We're seeing a lot more Mercedes and Range Rovers in the parking lots in those (discount) stores than would have been the case before," chairman and president Galen Weston told analysts.

"Who knows how many of those customers will ultimately stay in the discount format, but that discount growth has been has been prevalent across our industry... the discount formats are successfully converting higher income customers."

La Flèche said the shift from conventional stores to discount brands is driving the company's sale growth, and that customers are increasingly turning to private label brands that feature lower prices.

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

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