Recently, Loblaws announced the closure of 52 stores across the country. More than a few observers were surprised when the company did so as it simultaneously posted a respectable profit. It might even 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.
The primary reason for this move is that financials are not allowing the food-retail giant much room to breathe. In the second quarter of this year, Loblaws 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 its top line is growing with the help of acquisitions such as Shoppers Drug Mart in 2013, maintaining the profit margin is becoming more of a challenge; in the same period for 2014, for example, it reported a loss of more than $400 million. It is for this reason that companies close food stores every year.
In Loblaws’ case, 10 to 15 stores on average are mothballed annually. In light of its purchase of the Shoppers empire just 20 months ago, 52 stores does not represent a major case of corporate retrenchment; indeed, it comprises scarcely two per cent of all stores combined. In other words, with this move, the company carries on its quest to streamline costs by means of scrapping unprofitable stores.
Second, the timing is right for the company. It is expected that many of the affected outlets will be smaller Shoppers stores. After months of research into its new division, it appears that Loblaws has decided how it wants to support its 1,253 stores nationwide.
These measures are a small part of a much bigger picture, however. Loblaws is not the only chain recalibrating its assets. Sobeys and Metro, the other two major food distribution players in the country, are also supporting profitable stores as they shut down stragglers.
Overall, what we are seeing is a much more nimble, proactive sector than in the past, all thanks to market demand, which has become increasingly complex and challenging to predict.
In essence, a major 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. This has changed, however.
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 to 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 into 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. These and other companies are increasing their food footprint in a way that significantly affects the top Canadian grocers’ ability to grow at will, and in so doing, increasing their market share at a far faster rate than companies such as Loblaws.
Grocery e-tailing is a new and emerging competitor in the sector. For example, Amazon is demonstrating a growing interest in food retail with its expansion of its AmazonFresh division, which is committed to selling more fresh products online.
In Canada, both Loblaws and Walmart are exploring their options by operating their own “Click and Collect” systems in Toronto and Ottawa.
More than ever, companies in the food sector have recognized such exciting opportunities and potential threats as a call to action, and in the long run, Canadian consumers will benefit from their belated entry into the fray. In the meantime, however, there still remains a human face to store closures.
Over the next year, numerous employees will be affected by Loblaws’ announcement. Let’s hope they realize that the failure to close 52 stores this year might have led to many more closures in the future, and many more layoffs.
Sylvain Charlebois is a professor at the University of Guelph’s Food Institute.
