disreputable price gouging or brilliant brand management? ” strategy
By Will Novosedlik
This year’s first quarter results are in, and for major Canadian retailers and their shareholders, the news is only good.
Canadian Tire Corp. reported a 15.66% year-over-year revenue increase. Sales specifically at CT stores increased 4.5%, Mark’s increased 17% and SportChek recorded a gain of 10.2%. As a result, the company increased its quarterly dividend by 25%.
On the grocery side, Metro posted a 5.3% increase in net income, while Empire Co. posted a 15.4% increase. But the biggest jump came from Loblaws, which blew the doors off its first-quarter 2021 results with a 40% increase in first-quarter 2022 profitability.
While investors are satisfied, customers and suppliers pay the price. Literally.
According to Toronto Star, the big elephant in the room on Loblaws’ quarterly analyst call was rising prices. No one said it out loud on the call, but the article noted that Canadians for Tax Fairness (CTF) called Loblaws’ profit gains “just more evidence that one of the main drivers of inflation is the increase in business prices”.
As a result, the CTF and the Canadian Center for Policy Alternatives have pushed for tougher regulatory rules on grocery prices, as well as “excess profit” taxes.
The surge in sales is partly attributed to the easing of pandemic mandates. People have accumulated savings over the past two years, so there is now a desire/pressure to spend. There is pent-up demand to get out of the house to do some real brick-and-mortar shopping, now that mask mandates have been lifted. But that doesn’t explain the dramatic increase in profits at Loblaws.
When asked what might have boosted its profits, Loblaws attributed it to gains in its pharmacy division, where sales rose 5.4% and margins are much higher than in its drugstore banners. ‘grocery store. But that barely explains 40%.
Doug Stephens, CEO of consultancy Retail Prophet, considers the problem: “There are only a limited number of levers a business has to generate profits. We saw a 2% increase in top tier sales at Loblaws and a 5.4% jump at Shoppers. Those two numbers alone aren’t enough to generate a 40% increase, so we have to look at the nature of those sales,” he says.
“A [factor driving the lift] could be the move to private label, which has higher margins than national brands. Another could be switching to cheaper banners like No Frills and Maxi (responsible for 60% of grocery sales at Loblaws), where you can buy many of the same products in a retail environment that has operating costs. much lower,” adds Stephens. “Then there are the services provided by Shoppers, which also contribute to higher margins. For example, Covid vaccinations alone would likely have generated almost pure profit, given how much Shoppers could have recouped in OHIP refunds. And going to Shoppers for a shot would increase foot traffic to the rest of the store.
Stephens also considers the cost of goods: “I’m not sure Loblaws can honestly say that the price increases were a necessary result of higher prices from its suppliers. Look at the standoff they just had with Frito-Lay. They push back hard. And given their size and importance, they can get away with it.
The consultant goes on to say that there have also been less expenses. Go from online sales to bricks and mortar. “When you buy items online from Loblaws, you essentially pay the same amount you would be charged if you were to walk into the store,” Stephens says. “The difference is that every single one of those online orders had to be handpicked and packed. You need staff to do that. Now that people are coming back to the store, you don’t need extra hands to do a little bit. more profits.”
Peter Rodriguez, founder of consultancy Brand Igniter, praises retailers for their recent gains, saying “the main driver of pricing and inflation is not cost. The driver is how much people are willing to pay. If people think my brand is better, for whatever reason, either as a discount banner or as a premium banner, I will charge more. I don’t see anything wrong with that. On the contrary, I applaud it as a business strategy.
Stephens agrees: “If you’re a marketer at Loblaws, you’d be crazy if you didn’t try to capitalize on some of the brand recognition and equity you have in the marketplace.
Perceived value may also explain the difference between Loblaws’ superior results and those of its competitors. David Kincaid, founder of Level5 Strategy believes that “Loblaws has built a very strong house brand with PC. It is very popular with customers. This brand strength creates more opportunities for price elasticity. This needs to be emphasized.
These comments highlight the importance of brand perception. On the one hand, a higher perceived value gives the brand owner greater influence over prices and costs. People are willing to pay more, and the brand can demand lower prices from its suppliers, which increases its profits. Rodriguez and Kincaid would call this good brand and operational management.
On the other hand, consumer perception is also influenced by inflation. They see it everywhere, from the gas pump to the grocery store, and when surrounded by it, it’s natural to feel like they’ve been taken to the cleaners. All of the operational levers mentioned above are under their radar.
“It’s not a problem that marketing communications can solve,” says Stephens. “But it will keep your PR team up at night.”