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Morningstar | E-Commerce Efforts Not Enough to Offset Ongoing Headwinds for No-Moat George Weston

George Weston is a holding company with two reportable segments: Weston Foods, which operates bakeries in the United States and Canada, at 4% of sales; and Loblaw, Canada's largest food retailer, contributing 93% of sales. The company has a controlling stake in Loblaw and consolidates results, giving Weston significant influence over its operations. And while we believe Weston's bakery business boasts well-known brands and benefits from its distribution scale, its contributions to consolidated results don’t have much bearing on the firm’s competitive positioning. As such, we believe that Loblaw’s lack of sustainable competitive advantage remains the dominant reason behind the overall firm’s inability to secure an edge. Loblaw is the largest grocery chain in Canada and owns four of the top 10 brands, including Canada's number-one (President's Choice) and number-two (no name) private-label brands. In addition, around 25% of sales are derived from pharmacy after its 2014 Shoppers Drug Mart acquisition. As a way to enhance shareholder return, Loblaw has spent two decades purchasing prime real estate, through its 65% interest in Choice Properties that represents 3% of sales.While we think this tie-up enhances its scale, Loblaw, and ultimately George Weston, compete against well-capitalized wide-moat companies like Walmart and Costco, which should continue to constrain profitability for the company over the next decade. Beyond this, several Canadian provincial governments have cut generic drug prices in 2018-19, which does not bode well for overall profitability. Lastly, the combined entity is set to face an increased minimum wage in at least two of its markets, Ontario and Alberta, which may further constrain profitability if it cannot find efficiency offsets or pass higher prices on to consumers, which could prove difficult in this competitive arena.