Photographer: Brent Lewin/Bloomberg

Canadian Grocers Now Face a Wage Spike Amid Their Price War

  • Loblaw sees $152 million in extra costs, looks for savings
  • Sales beat estimates helped by pharmarcies, additional day

Companies waging a food price war in Canada are now facing a new hurdle: an upcoming spike in wages.

Loblaw Cos., the nation’s largest grocer, said on Wednesday it’s looking for new ways to save money as it faces C$190 million ($152 million) in additional costs next year from planned minimum wage increases in some provinces, adding to the impact of a new plan by the Quebec government to tamp down drug prices.

“These are big numbers so we are going to have to move outside the realm of our expected plan to close the gap,” Loblaw Chief Executive Officer Galen G. Weston said on a conference call to review quarterly results. “We have a lot of work ahead of us as we are still assessing the extent to which we can mitigate these headwinds.”

Loblaw shares dropped on the report, pulling other grocery stocks lower. Loblaw fell as much as 4.9 percent, and was down 3.8 percent to C$68.75 at noon in Toronto, the second-biggest decline among 248 stocks on the S&P/TSX Composite Index. Rival Metro Inc. dropped 2.2 percent and Empire Co. Ltd. fell 1 percent.

Weston said Loblaw is ready to be “as competitive as necessary” to maintain its position even amid the rising wages and price declines.

Loblaw and rivals including Wal-Mart Stores Inc. and Metro have used promotions and discounts to get customers to buy more goods and cushion the impact of a prolonged bout of food deflation. Canada’s central bank this month said the increased competition may have in turn pushed prices down more, though it expects the compounding effect to dissipate early next year.

Tops Estimates

Same-store food sales were little changed in the second quarter from a year earlier, leaving out the effect of a later Easter holiday, the Brampton, Ontario-based company said. Including Easter, earnings and sales for the quarter beat analysts’ estimates, also aided by growth at Loblaw’s Shoppers Drug Mart pharmacy chain.

Earnings rose to C$1.11 per share, excluding some items. That beat the C$1.10 average forecast of analysts. Revenue increased 3.2 percent to C$11.1 billion, compared with an estimate of C$11 billion.

In Ontario, Premier Kathleen Wynne is raising the minimum wage by 32 percent over the next 18 months, moving to C$14 an hour in January and C$15 a year later, from today’s C$11.40. The C$15 mark will also be reached by October 2018 in Alberta, after a planned increase this year.

Significant Jump

Weston said the increases are “the most significant in recent memory.” The company will accelerate the costs savings plan it already had in place, such as making more manual processes digital and using predictive tools to better target discounts, though it needs to more.

It also faces a new threat after Inc. last month agreed to buy Whole Foods Market Inc., which has locations in Canada. A heftier Amazon could experiment with food-delivery services in a country where grocers have preferred a “click-and-collect” approach, where clients order online and pick up groceries at the store. Loblaw shares have lost 8.8 percent since the June 16 Amazon announcement.

Weston said the grocer will have 200 stores offering “click-and-collect” services by the end of the year and is open to considering delivery.

“There’s been lots of speculation about retailers of one sort or another over the years taking over the world -- that hasn’t happened yet,” he said.“ It’s because the retailers who are facing those threats respond.”

— With assistance by Aoyon Ashraf

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