Loblaw’s store closures a smart long-term move

Loblaw's closure of 52 stores is an indication of a major paradigm shift shaking the industry

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Sylvain CharleboisRecently, Loblaw announced the closure of 52 stores across the country, a surprise to some as the company simultaneously posted a respectable profit.

It might strike observers as a kind of corporate oxymoron. But with the sector’s economic picture, coupled with potentially disruptive dangers looming, the decision to close a cluster of stores was appropriate.

Its financials are not allowing the food retail giant much room to breathe. In the second quarter of this year, Loblaw posted a $186-million profit, and generated more than $10 billion in revenue. However, as the largest private employer in the country grows, its margin of error gradually shrinks.

Even if their top line is growing with the help of acquisitions like Shoppers Drug Mart in 2013, maintaining the profit margin is becoming more of a challenge. In the same period for 2014, for example, Loblaw reported a loss of more than $400 million.

In Loblaw’s case, 10 to 15 stores annually on average are mothballed. In light of its purchase of the Shoppers Empire just 20 months ago, 52 store closures do not represent a major case of corporate retrenchment; indeed, it comprises scarcely 2 per cent of all stores combined. It is streamlining costs by scrapping unprofitable stores.

The timing is right for the company. After months of research into the Shoppers division, it appears that Loblaw has decided how it wants to support its 1,253 stores nationwide. More changes to Shoppers are on their way. To construct the right store design to sell food alongside cosmetics and health care products, eliminating unprofitable stores to generate sufficient operational cash is a crucial strategy.

These measures are a small part of a much bigger picture. Sobeys and Metro, the other two major top food distribution players in the country, are also shutting down stragglers. These moves create a much more nimble, proactive sector in response to increasingly complex and challenging market demand.

Companies are taking more time to better appreciate what the market is telling them. With the right assessment, grocers can quickly cut bait and move on.

In essence, a major paradigm shift has shaken the industry, and the timing could not have been better. Whether industry culprits want to admit it or not, the food sector has historically erred on the side of tradition, and had become dangerously set in its ways.

It has resisted utilizing technology and embracing innovation to the extent that we have seen in other sectors of our economy. Companies like Loblaw, however, have now invested millions in logistics to become more effective cost managers, allowing them to increase margins.

Running a grocery chain in the second decade of the 21st century requires a radically different skill set, as well as a fresh state of mind. Food distributors are gradually catching up with new technology and new ways of reaching out to consumers, who have long since incorporated such things as social media, farmers markets, and other means of food procurement in their everyday lives.

And it’s about time: non-traditional food retailers such as Costco and WalMart have recently made impressive gains in the food sector, and are increasing their market share at a far faster rate than companies like Loblaw. As well, smaller convenience stores like giant Couche-Tard is converting pump volume into lucrative in-store volume at a remarkable pace, and many of these sales are in food.

Grocery e-tailing is an emerging competitor in the sector. For example, Amazon is demonstrating a growing interest in food retail with its expansion of its AmazonFresh division, which sells fresh products online. Some online orders are even being delivered by drones as part of a pilot program. In Canada, both Loblaw and WalMart are exploring their options by operating their own “Click and Collect” systems in both Toronto and Ottawa.

More than ever before, companies in the food sector have recognized such exciting opportunities and potential threats as a call to action. In the long run, Canadian consumers will benefit from their belated entrée into the fray. In the meantime, there remains a human face to store closures.

Over the next year, numerous employees will be affected by Loblaw’s announcement. Let’s hope they realize that the failure to close 52 stores this year may have potentially led to many more closures in the future, and many more layoffs.

Dr. Sylvain Charlebois is senior director of the agri-food analytics lab and a professor in food distribution and policy at Dalhousie University.

Sylvain is a Troy Media Thought Leader. Why aren’t you?

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