Retail Memo: Loblaw's New President Charts A Course to Return the Grocer to Its 'Glory Days' of Being Canada's 'Best' as Well as Biggest Food Retailer

Loblaw Cos. Ltd., founded by Theodore Loblaw in 1919 as Loblaw Groceterias Ltd., has a long and storied history in Canada. Above is one of the very first Loblaw grocery stores, circa 1920-1921.

Canada's Loblaw Cos. Ltd., which has been having trying times of late with decreased sales and a dropping stock price, is adding 1,000 employees at store-level in its conventional supermarkets as part of a strategy to return the grocery retailer to its former past as Canada's premier food retailer.

Loblaw has named its strategy "Back to the Best," as a road map to the future which includes strategies and business practices designed to go "back to the future" to the days of food and grocery retailing when the retailer was Canada's most innovative as well as the nation's leading grocery chain.

As part of its "back to the best" strategy, Loblaw will hire more produce clerks, cashiers and other store-level workers for 20 of its stores in Ontario, Canada to start. Those 20 stores are in the process of getting a makeover and upscaling, which will result in expanded fresh produce and meat departments, along with new and expanded ready-to-eat and ready-to-heat fresh, prepared foods items. departments and in-store venues.

Fresh, prepared foods

As part of its expansion and upscaling in the fresh, prepared foods category, Loblaw recently hired Allan Leighton as its new president and deputy chairman.

Leighton is from the United States and is a veteran of North American food and grocery retailing, including having experience at Whole Foods Market, Inc., where he learned a thing or two about the fresh, prepared foods and produce categories.

President's Choice store brand

Loblaw also is in the process of improving, upscaling and expanding its long-popular President's Choice brand private label food and grocery product line.

President's Choice was essentially the first upscale store brand of premium, specialty, gourmet, natural and organic food and grocery products from a major food retailer in North America, when the brand was introduced in the stores over 20 years ago.

At its height, the President's Choice brand was so popular, Loblaw sold it to supermarket chains and wholesalers throughout the United States, who at the time didn't have their own upscale or premium store brands like they do today.

Loblaw has increasingly positioned the President's Choice brand as a "green" or sustainable brand, including reusable shopping totes and other related products under the brand banner, along with natural, organic, specialty and premium food and grocery products.

Increased competition, falling sales and stock value

Loblaw's sales, profits and stock share value have been falling over the last few years.

Additionally, increased competition from Wal-Mart Supercenters in Canada, on the price and value side, Whole Foods Market and Planet Organic Markets on the upscale, natural and prepared foods' fronts, have made the iconic supermarket chain less relevant to Canadian consumers than it has ever been before.

Increased first-quarter profits

The hiring of Leighton as president however seems to have invigerated Loblaw. The supermarket chains first quarter profit, which it reported on April 30, grew by a healthy 15%. This strong profit report gave the grocer's stock its biggest jump in two-decades following the 15% profit increase report.

The first quarter numbers were the first time the grocery chain had met stock analysts targets in a very long time. Loblaw Cos. Ltd. stock closed on April 30 at $31.83 share, which was up $2.28 on a per-share basis. Loblaw Cos. Ltd. had sales of $C.29 billion in 2007.

Leighton's new inititatives

Since taking over as president of Loblaw, Leighton has launched a series of other new initiatives with his management team in addition to the upscaling of the 20 Ontario stores, the increased focus on fresh produce and prepared foods, the revamping of the President's Choice brand, and the hiring of 1,000 new store-level employees, which is designed to beef-up the grocer's service levels, as detailed above.

These other additional new initiatives include:

>a chain-wide refocus on food, including merchandising much more locally-produced Canadian fresh produce, meats and other products. Local foods is a major consumer hot button in Canada. In fact, last year, Wal-Mart launched a major initiative in its Canadian Supercenters to bring in as much locally-produced meats, produce and grocery products as it can.

>A complete overhaul of Loblaw's discount supermarket format stores in Western Canada. Western Canada is where Wal-Mart is killing the supermarket chain's discount grocery store format stores with its Supercenters the most.

To compete with this challenge from Wal-Mart, Loblaw plans to remodel 25 of its Real Canadian Superstores and convert more of its discount format Extra supermarkets to its No Frills deep-discount format. Rather than open any new No Frills stores in Western Canada, which it had planned on doing in the past, the company will gain more of the stores by converting many of the Extra supermarkets to the deep-discount format.

>Leighton also plans to have the supermarket chain return to a more decentralized or localized purchasing and marketing program. The supermarket centralized those functions over the last two years or so and Leighton believes that process hasn't worked. The local approach--which makes good sense to us--allows the retailer to better tailor its stores to the particular region, community and even neighborhood they are located in.

Serious logistics problems, in-store out-of-stocks

One of Loblaw's biggest problems and weaknesses has been a failing purchasing, logistics and distribution system for its stores. Some analysts in Canada argue this problem has been caused primarily by the centralized purchasing and marketing system the retailer instituted about two years ago.

Other analysts, the majority, say it's merely a part of the grocer's long-deteriorating operations capacity and it's general malaise prior to Leighton assuming the president's position. Leighton was hand-picked by the Weston family, controlling shareholders of Loblaw Cos. Ltd., and they consider him a trusted advisor.

Getting products to the shelves is the most basic of functions for a food retailer, and Loblaw has lost numerous customers over its failure to do so.

At the April 30 press conference announcing the quarterly sales and profits numbers, Leighton told analysts and reporters that the situation is till not good, but it's far better than it was a year ago.

In-store tags flag out-of-stock items

Under Leighton's leadership, the food retailer has started to put green and pink tags on the shelves in all of its stores in order to flag out-of-stock grocery items. The tags tell shoppers when the product should be back in stock for example.

However, the tags offer a "good" and "bad" result. For example, a correspondent in Canada recently checked two Loblaw-owned supermarkets for Natural~Specialty Foods Memo. In one store there were 375 green and pink tags when he checked, meaning the store was out-of-stock on 375 items. The second store had 275 green and pink tags, slightly better than the first but still very poor.

Leighton said in the April 30 press conference that any store with less than 300 green and pink tags (meaning out-of-stock on less than 300 items store-wide) was being considered good by the supermarket chain at this point in time.

Grocery 101: Shoppers hate out-of-stocks

Shoppers tend to differ with that assessment though. A 62 year old, life-long Loblaw shopper named Joseph Chesterson in Western Canada recently told us he switched to a Wal-Mart Supercenter after being a regular customer for over 30 years.

"Why should I not shop at the Wal-Mart store, which has plenty of everything I need, rather than at the Loblaw's, which is always out of many of the things on my grocery list," he told us.

Another Canadian reader of Natural~Specialty Foods Memo, a professional woman and mother of two in her mid-forties, told us she and many of her friends no longer shop at Loblaw banner stores but rather at Wal-Mart for basics and at Whole Foods and Planet Organic for natural-organic, specialty and prepared foods.

Solving the logistics and out-of-stocks problem

To his credit, Leighton inherited the logistics and out-of-stocks' mess, and it was clear at the press conference it's priority one in solving to him.

Further, he was straight-forward about the problem still being present, saying it would be fixed but will take some time. This honesty will earn him lots of street credit with stock analysts and the Canadian business press, even though it will cause a continued loss of customers in the stores until its fixed.

High employee turnover in stores

In part, this also is the reason for the hiring of an additional 1,000 store-level workers. Canadian vendors tell us that often there's lots of grocery product in the stores back rooms but not enough employees to put the goods on the shelves.

These vendors and suppiers also tell Natural~Specialty Foods Memo Loblaw has had lots of staff turnover in the last couple years because of all the problems its had.

Leighton and Chairman George Weston admitted this was the case at the April 30 press conference. In fact, they said the retailer is instituting some new policies designed to reduce this employee turnover, including giving all store-level workers a 10% discount on any and all grocery purchases they make at the stores.

The grocer will need to do more than that to reduce staff turnover in our experience and estimation. But its a small start.

With Wal-Mart's rapid new Supercenter building program throughout Canada, Loblaw also has lost store-level employees to the chain.

Additionally, both Canada-based Planet Organic Markets and U.S.-based Whole Foods Market, Inc. are opening new stores in Canada. Both retailers offer attractive packages to store level employees, along with a more modern culture which is especially appealing to younger workers. As a result, Loblaw will have to sweeten its worker policies and benefits in order to not lose more staff members to these two popular natural foods retailers.

Still number one: But biggest isn't always best

Loblaw is still Canada's number one food and grocery retailer, with 1,100 corporate and franchised stores, 800 associate stores, and supplies almost 9,000 independent grocery stores. The company says it currently has about 139,000 employees in Canada.

The retailer operates ten retail banners: Loblaw's, Real Canadian Superstore, Atlantic Superstore, Dominion, Fortino's, Maxi, No Frills, Provigo, Zehrs, and Your Independent Superstore.

Loblaw Cos. Ltd. also operates the Real Canadian Wholesale divsion, which is a multi-banner club store operation that focuses on selling to foodservice, business-to-business and small retail business customers. The club and wholesale stores also are open to the public at large.

Loblaw, by virtue of its size, also still has the strongest store brand program in Canada with its President's Choice brand.

Loblaw Companies also is diversified at retail, offering Canadian consumers financial services, home, auto, travel and pet insurance, and mobile phone and Internet services.

The company's stores don't just sell food and groceries as well. Many of the banners are one-stop shopping venues and sell hard goods, general merchandise and soft goods, including Loblaw's own Joe's Fresh Style private label brand of clothing.

However, being the biggest hasn't proven it's the best in the last few years. And, with mega-retailer Wal-Mart, which is becoming very popular among Canadian consumers, growing rapidly in Canada, Loblaw and new president Leighton have to turn thing around fast.

At the April 30 press conference, Leighton said the companies turnaround is going to take at least five years to complete. Five years is a long time in food retailing, especially with Wal-Mart, the world's largest corporation and retailer, nipping at your heels.

Going forward

As a result, in our analysis, the food retailer has to show strong, continuous improvement in key areas like solving the out-of-stocks problem, increasing service-levels in its stores and other basic functions in the next year in order to not lose thousands more customers to Wal-Mart and other food and grocery retailers.

The road map Leighton has laid out seems to be a good step in this direction. However, the grocer must do numerous things all at the same time in order to show improvement. Most stock analysts believe the company has seen its bottom, and is now moving up. We tend to agree.

However, pleasing the stock market is only one part of the equation. Job-one is winning over lost customers, keeping current shoppers from defecting, and bringing in new customers, including those who remember the glory days when Loblaw was at the top of Canada's food retailing heap. "Back to the Best" seems an appropriate road map strategy then.