EUR 850.00 For Business Accounts Only

Morningstar | Loblaw's Digital Investments Continue but Not Enough to Generate a Competitive Advantage

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. Between 25%-30% of sales are derived from pharmacy after its 2014 Shoppers Drug Mart acquisition, which should bring ample cross-selling opportunities for its private-label products over the near to medium term. Loblaw is diversified, operating through four different formats and 25 banners, allowing it to target a wide range of consumers, geographies, and glean insights from each respective segment.Despite these strengths, Loblaw hasn’t been able to garner strong profitability, most directly shown in its return on capital that barely clears its cost of capital. We attribute these hardships to the competitive environment in which it operates, the low-switching-cost grocery industry, and a value proposition not able to protect economic profits. The company strives to bolster traffic by using its loyalty program, but results suggest competition may be too much to fully capture the benefits one would expect.Shoppers Drug Mart enhanced Loblaw’s scale (garnering synergies totaling around 3% of sales) and brought a higher operating margin business into the mix, but we believe the competitive threats posed by well-capitalized competitors like Walmart and Costco will continue to constrain profitability for the company over the next decade. Beyond this, several Canadian provincial governments cut generic drug prices in calendar 2018 with pressure continuing in 2019, which does not bode well for Loblaw’s profitability. Lastly, the firm is facing an increased minimum wage in at least two of its markets, Ontario and Alberta, which may further hinder profitability if it cannot find efficiency offsets or pass higher prices on to consumers, which may prove difficult in this competitive arena.