'Disruptive' Wal-Mart shaking up food retailers: Loblaw

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There's a flight to the bottom in food retailing.

Grocers are shifting to discount formats and offering more price promotions in response to pressures from Wal-Mart Canada Corp., which is rapidly stepping up its fresh-food business. The discount chain's presence is leaving little room for supermarket retailers such as giant Loblaw Cos. Ltd. to gain sales.

The retail marketplace, especially in food, "is pretty tough," Galen G. Weston, executive chairman of Loblaw and scion to the controlling Weston family, said on Tuesday in a rare investor presentation.

Mr. Weston, who is the face of Loblaw in its advertising but not generally in the investment community, is feeling the heat after five years of upheaval at Loblaw at the hands of Wal-Mart's food expansion. The business was in such a bad state when Mr. Weston stepped into the top job in 2006 that he recalled a photo a year earlier showing a supermarket with empty shelves, reflective of how rattled the company had become that it couldn't do the basics of getting products to stores on time.

Since taking management control of the company, Mr. Weston's team has shaken up the business, lost top leaders and reshaped operations with a focus on new systems that can get products to market promptly. It has shifted increasingly to discount retailing, with two-thirds – or $20-billion – of Loblaw's revenues now in the low-price arena. But sales growth remains challenged.

"You don't see much growth coming from any of us other than those who are putting in new footage [retail space]" he told an annual Scotia Capital conference. "We do have what I would consider to be a disruptive entrant in the marketplace – in the fresh-food segment in particular – and that is Wal-Mart, the great retail bogeyman ... [It]is a real and material force, has been for 15 years. But their presence in the market today really is having an impact on the fresh business."

The system overhaul is on target and within budget, but still not complete with the work and potential disruptions to continue until mid-2012, Mr. Weston said. "We think our performance is okay," he said. "We're holding our own, by and large, in a pretty difficult market environment."

There have been many bumps along the retailer's road to recovery. In the second quarter, Loblaw sales dropped below the overall market performance after it underwent another major reorganization. "Certainly we had some wobbles," he said. "People new in their jobs, perhaps not being as aggressive or on the mark when it came to dealing with the customers ... Given our asset base, we should be able to do better as our execution, our consistency and our store standards improve."

The current leadership transition, involving Spanish native Vicente Trius replacing Allan Leighton as president – both former Wal-Mart and discounter veterans – is going well, Mr.Weston said. The company remains committed to growth opportunities in key areas of the ethnic market; health and wellness products; its financial services; and its Joe Fresh Style apparel, which will open its first U.S. stores this fall.

Reflecting on the chaotic days when he stepped into the top office, he said his team made some mistakes but he wouldn't have done it less quickly or aggressively. "We are so good today at responding to unanticipated circumstances. We were so bad at it before and this world is speeding up, not slowing down."

His major takeaway: "Every period of change needs to be followed by a long period of stability and evolution. The upheaval is over." Still, "it was a painful period of revolution." What is more, "the days of 5, 10, 15 per cent sales growth are not going to return to the Loblaw organization" in its core business.