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Loblaw job cuts underline retailer's new reality

Loblaw Companies Limited Executive Chairman Galen G. Weston answers shareholders questions during their annual general meeting in Toronto May 3, 2012.

MIKE CASSESE/REUTERS

Loblaw Cos. Ltd. is slashing 700 jobs or about 10 per cent of its head office and administrative staff, amid stiffening competition and the grocer's final stages of a massive information-technology overhaul.

The job cuts underline the pressures that Loblaw and other grocers are under as discount titan Wal-Mart Canada Corp. races to add more stores – and more groceries – while U.S. rival Target Corp. prepares its Canadian launch next year with its own food offerings.

In the fast-changing retail landscape, Loblaw has responded by shifting more resources to its popular discount chains, including No Frills and Superstore, which today represent roughly two thirds of its $31.2-billion of annual sales – a move that bites into margins and forces the retailer to operate more efficiently.

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The company has poured about $2.3-billion into its technology and supply chain in the past five years, generating savings that today open the way for Loblaw to eliminate 700 jobs, which will result in a one-time $60-million charge in its fourth quarter.

"It's probably overdue," said Kenric Tyghe, retail analyst at Raymond James. "They are finally in a position to do it. They are doing it ahead of the arrival of new competitors, which would speak to the systems integration."

Since late 2006, Loblaw has focused on transforming its business into a more efficient and profitable operation after a botched restructuring in previous years to take on Wal-Mart. But the heavy investments have been slow to show up in results – and aren't expected to play out until the end of 2014.

Loblaw has struggled with deteriorating gross margins over the past year, and executive chairman Galen G. Weston has warned the investments will hurt profits in 2012. In contrast, rivals Metro Inc. and Sobeys, owned by Empire Co. Ltd., have been able to effectively maintain their gross margins in the past year, Bank of Montreal analyst Peter Sklar said.

Shares of Loblaw have flatlined for years, reflecting the company's lacklustre results. But the stock jumped nearly 2.5 per cent to $34.72 on the Toronto Stock Exchange Tuesday on the cost-cutting move.

Loblaw, the country's largest grocer, has been spending an average of about $1-billion a year from 2008 to 2012 on capital expenditures, and roughly half – $2.3 billion – has been poured into IT and supply chain enhancements, spokeswoman Julija Hunter said. The annual spending is expected to drop to $850-million to $900-million a year in the next few years, the company has said.

For all the investments, "most of the benefits related to IT are still anticipated," Vishal Shreedhar, retail analyst at National Bank Financial, said in a note on Tuesday. Loblaw's "earnings power is significant because substantial benefits related to the renewal are yet to be realized."

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Loblaw, which will report its third-quarter results on Nov. 14, has not disclosed expected savings from the job cuts, which will be completed in the next three weeks. Mr. Shreedhar estimated that the reductions could add 13 cents to 15 cents to annual earnings per share. But Loblaw could instead use the savings to help it become more competitive – and lower prices – rather than to bolster the bottom line, he suggested.

Loblaw, meanwhile, faces the dilemma of little sales growth in the estimated $109.4-billion Canadian grocery sector, according to market researcher IGD Services (Canada) Inc. Industry sales growth dropped to 1.4 per cent last year from 5.2 per cent in 2008, its figures show.

It forecast sales upticks of between 2.5 per cent and 4 per cent in each of the next few years, driven mainly by inflation and population increases. "Retailers will be fighting harder than ever to gain market share," said Stewart Samuel, IGD's development manager for North America.

In the tight environment, Loblaw also is counting on gains from its Joe Fresh fashions, financial services, health and wellness products and international foods.

"We are confident that we are moving at the appropriate speed, have the right team and a plan that would get us to our 2014 finish line with little to no disruption to our customers," Vicente Trius, a Wal-Mart veteran who became Loblaw president last year, told analysts this summer.

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About the Author
Retailing Reporter

Marina Strauss covers retailing for The Globe and Mail's Report on Business. She follows a wide range of topics in the sector, from the fallout of foreign retailers invading Canada to how a merchant such as the Swedish Ikea gets its mojo. She has probed the rise and fall (and revival efforts) of Loblaw Cos., Hudson's Bay and others. More

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