Loblaw Cos. Ltd. is racing to cut prices as grocery wars break out in Canada amid consumer resistance to food inflation.

Loblaw, the country’s largest grocer, reported a disappointing rise in its supermarket division’s sales in its first quarter as rival discount supermarkets dropped prices while Loblaw’s low-cost No Frills failed to quickly follow suit.

“Our promotional program was not as sharp as it needed to be,” Galen G. Weston, executive chairman of Loblaw, told analysts on Wednesday after the company reported overall improved first-quarter results.

At the same time, “the rest of the market was pushing very, very hard. … We’ve got some decisive but measured plans that are in place. Our objective is to close the sales performance gap to market over the balance of the year.”

Grocers increasingly are focusing on their discount formats as consumers look for bargains after months of food inflation in such categories as meat and fresh fruits and vegetables.

Major players such as Sobeys Inc. have been moving to drop prices on key items to woo price-conscious customers while discount giant Wal-Mart Canada Corp. has been slashing some of its grocery prices.

Keith Howlett, retail analyst at Desjardins Securities, warned this week of the possibility of “pricing skirmishes in the near term as Wal-Mart and Sobeys implement changes to their pricing.”

Eric La Flèche, chief executive officer of Metro Inc., the country’s third-largest grocer, said last month that pricing in categories such as meat has been “quite aggressive. … It’s very competitive out there.” Last fall, its Metro chain in Quebec reduced some prices. Even before that, it sharpened its pricing at its Food Basics discount banner. “If certain adjustments need to be made, we will make them.”

Loblaw’s latest misstep of not moving rapidly to lower prices resulted in disappointing same-store sales in its grocery division: Those first-quarter sales at stores open a year or more rose 2.6 per cent (excluding gasoline sales), compared with a 4-per-cent gain a year earlier. (In the most recent period, it benefited from the shift of Easter to the first quarter from the second quarter a year earlier.)

“We were a bit disappointed,” Mr. Weston said. In response, Loblaw is taking a “measured” approach to trimming prices for the remainder of the year rather than radically slashing them and creating “volatility by overreacting when you’re running a little behind.”

He said Loblaw is trying to find the right level of markdowns to entice more customers but at the same time not pinch the company’s bottom line. In its first quarter, Loblaw backed off too much from discounting “while our competitors ramped up significantly,” which “hit us harder than we anticipated,” he said.

Still, he noted that same-store sales at the company’s Shoppers Drug Mart division have been strong, jumping 6.3 per cent. Its Shoppers non-pharmacy same-store sales soared 8.2 per cent, helped by sales of more Loblaw foods in Shoppers stores.

Mr. Weston said consumers resisted higher food prices in the first quarter and the trend continues. As a result, shoppers are shifting to discount formats, such as Sobeys’ low-cost FreshCo chain, observers said.

“Our view is that that intensity is going to continue to increase,” he said. “We see inflation slowing down as the Canadian dollar continues to increase. We see consumer prices coming down in certain markets and in certain categories.”

Mr. Weston predicted the price gap in its conventional and discount chains will narrow as Loblaw moves to lower prices at both formats.

Peter Sklar, retail analyst at BMO Nesbitt Burns, forecasts that grocery prices will rise about 2 per cent to 3 per cent in 2016, compared with last year’s 4-per-cent jump.

Despite Loblaw’s disappointment, it reported that its first-quarter profit rose to $193-million, or 47 cents a share, from $146-million, or 35 cents, a year earlier. Sales grew to $10.4-billion from $10-billion.

Its adjusted profit was $338-million, up $37-million or 12 per cent – helped by increased cost savings.

Its common share dividend will rise to 26 cents a quarter, payable July 1, up 4 per cent from 25 cents. The results were in line with analyst estimates compiled by Thomson Reuters.

The Globe and Mail
Published Wednesday, May 04, 2016 7:30 AM EDT
Last updated Wednesday, May 04, 2016 5:29 PM EDT