S w 9B04M082 1 LOBLAW COMPANIES LIMITED Ramasastry Chandrasekhar prepared this case under the supervision of Professor Charlene Zietsma solely to provide material for class discussion. The authors do not intend to illustrate either effective or ineffective handling of a managerial situation. The authors may have disguised certain names and other identifying information to protect confidentiality. Richard Ivey School of Business Foundation prohibits any form of reproduction, storage or transmission without its written permission. Reproduction of this material is not covered under authorization by any reproduction rights organization. To order copies or request permission to reproduce materials, contact Ivey Publishing, Richard Ivey School of Business Foundation, The University of Western Ontario, London, Ontario, Canada, N6A 3K7; phone (519) 661-3208; fax (519) 661-3882; e-mail [email protected]. Copyright © 2004, Richard Ivey School of Business Foundation Version: 2011-09-21 It was 8 a.m. on Wednesday October 1, 2003, when John A. Lederer, president of Loblaw Companies Limited, saw the following news item.2 Wal-Mart Canada Corp. is accelerating the pace of its expansion with plans for an undetermined number of Sam’s Club wholesale mega-outlets. Some industry insiders have speculated that the company will launch as many as 10 to 15 Sam’s Clubs next year to add to the first four it will open in Canada this fall. Many observers believe that setting up the grocery distribution network for Sam’s Club will be the first step to U.S.-based Wal-Mart Stores Inc eventually bringing its giant Supercenters, carrying a complete supermarket assortment, to Canada. Although Wal-Mart had entered Canada in 1994, it had been uncharacteristically cautious. Even a decade Use outside these parameters is a copyright violation. later, it had not expanded fully into groceries despite its own global experience that the addition of a grocery line in a store pushed the sales of the more profitable general merchandise upwards by over 30 per cent.3 Canada was Wal-Mart’s only overseas market in which it had not deployed its powerful Supercenter concept. The launch of its wholesale brand, Sam’s Club, suggested that the arrival of Supercenters in Canada was imminent. TIME-TESTED STRATEGY Authorized for use only by Aayush Sharma in MGMT 5333 at Mount Royal University from Oct 10, 2017 to Dec 31, 2017. It was time for Loblaw to take a fresh look at its own strategy. The strategy had worked so far: Loblaw was the market leader in Canadian grocery, with a market share in excess of the combined market shares of its four nearest competitors, and it was the 24th largest grocery retailer in the world (see Exhibits 1 and 2). 1This case has been written on the basis of published sources only. Consequently, the interpretation and perspectives presented in this case are not necessarily those of Loblaw Companies Limited or any of its employees. 2www.globeandmail.com/reportonbusiness/retail, accessed October 9, 2003. 3Kevin Libin, “The Last Retailer in Canada,” Canadian Business, March 18, 2002, p.38. Page 2 9B04M082 The Loblaw strategy was both consistent and transparent, listing the following elements in the company’s annual reports:4 Use the cash flow generated in the business to invest in the future. Own real estate to maximize flexibility for future business opportunities. Use a multi-format approach to maximize market share over the longer term. Focus on food but serve the customer’s everyday needs. Create customer loyalty and enhance price competitiveness through a superior control label program. Implement and execute plans and programs flawlessly. Constantly strive to improve the value proposition. The strategy was driven by two objectives: driving down costs through size and operational efficiencies, and differentiating both its products (by pioneering its President’s Choice brand and other private label brands) and its stores (by following a multi-banner, multi-format approach). INDUSTRY OVERVIEW Growing at an average rate of four per cent, food retailing was a $66.8 billion business in 2002 (see Exhibit 3). The rate of growth was impressive in light of two factors: Canadians paid the lowest prices for food in the world, and food inflation was less than two per cent per annum.5 Grocery retailers also occupied four of the top 10 retailer rankings in Canada in 2002. A broad spectrum of competitors prevailed in the Canadian grocery sector — from stand-alones with limited market presence to integrated firms involved in manufacturing, importing, wholesaling and retailing. They also operated at various levels: local, regional and national. The presence of high levels of discount stores and private labels and the high degree of market concentration had made Canadian grocery rank among “the most advanced grocery markets in the world.”6 Canadian grocery stores often co-operated on the supply side even as they competed on the demand side. Smaller stores pooled up with large buying groups to negotiate volume discounts from suppliers. Integrated 7 firms sold to independents. Retailers owned wholesalers and vice versa. Such interactions made Canadian Use outside these parameters is a copyright violation. grocery a fertile area for mergers and acquisitions. By contrast, Loblaw’s approach was characterized by an equal focus on organic growth. CONSUMERS Grocery shoppers were creatures of habit. They went to the same store to buy the same goods and services at almost the same time and day of a shopping period, making the business amenable to relationship building. The advent of supermarkets in the 1930s and the focus on self-service that gathered momentum in later decades had made shopping impersonal. Re-establishing that link with the customers, through the Authorized for use only by Aayush Sharma in MGMT 5333 at Mount Royal University from Oct 10, 2017 to Dec 31, 2017. use of technology, was now being seen by mega-grocers as a means of gaining leverage over competitors. Most grocers offered a frequent-shopper loyalty card. The data gathered through it was also used to secure better terms with manufacturers and distributors. 4Loblaw Companies Limited, 2002 Annual Report, p.3. 5Ibid, p.7. 6Perry Caicco, “Loblaw Companies Ltd: A Company in Transition,” CIBC World Markets Equity Research Report, February 18, 2004. 7“The Abuse of Dominance Provisions as Applied to Canadian Grocery Sector,” Competition Bureau November 2002 Bulletin, www.cb-bc.gc.ca, accessed October 5, 2003. Page 3 9B04M082 There were three generic ways in which grocers built their revenues: penetration (increasing the number of households shopping in their stores), frequency (increasing the number of shopping trips the shoppers made) and basket size building (getting shoppers to spend more on each shopping trip). Low price, quality service, quality products and breadth of product assortment were important. The increasing incidence of double income families fuelled the demand for ready-to-heat and ready-to-eat convenience foods. Fast-food chains, take-outs and restaurants were growing in response. This, in turn, reduced the share of unprocessed cooking ingredients in the overall food bill of a household, estimated at $6,438 per annum in 2002, or 11.12 per cent of annual household expenditure. However, 70 per cent of Canadian meals were consumed at home, even though most were not cooked from scratch.8 Grocers developed new categories like home meals replacement (HMR) and offered on-site cooking demonstrations. Some had franchised restaurants in their premises both to lure traffic into the stores and to provide a value-added facility. SUPPLIERS Retailer-supplier relationships were characterized by power plays. The scale would tilt in favor of the one wielding the most clout at a point in time. A supermarket was like a landlord letting out shelf space for rent. The rent was a combination of different allowances that a manufacturer paid to the retailer to get secure shelf and warehouse position of its products, to encourage advertising, and to reward high volume purchases.9 They included, for example, listing fees, slotting fees, over and above allowances, vendor allowances for merchandise returns, quantity discounts and merchandising allowances. There was no standard basis on which the amount of each allowance was determined. The category manager10 usually had the last word in deciding how the shelves were stocked. Smaller suppliers often were at the mercy of their grocery customers since a large percentage of their business was in the hands of just a few buyers. Producers of category-leading products were in a better position: grocers had to carry their products (often as loss leaders) to attract and retain their customers. The higher a supplier’s market share relative to a grocer’s, the more power it commanded and vice versa. Use outside these parameters is a copyright violation. Consolidation among either suppliers or grocers would shift the balance of power temporarily, and consolidation was increasing on both sides. Mega-grocers took a long-term view of the relationships with suppliers as part of ensuring cost-efficiencies and seamlessness in operations. They involved suppliers in merchandizing, category management and supply chain management, using enterprise resource planning (ERP) technologies. Suppliers used their industry associations to push for standardization in the ERP programs of the mega-grocers to avoid having overlapping systems, one for each customer. Authorized for use only by Aayush Sharma in MGMT 5333 at Mount Royal University from Oct 10, 2017 to Dec 31, 2017. COMPETITORS According to the National Market Survey 2002 conducted by Canadian Grocer, there were 1,791 supermarkets, 8,342 convenience stores, 3,906 affiliated independents and 10,109 unaffiliated independents in the Canadian grocery business (see Exhibit 4). The independent sector accounted for 39.3 8“Canadian Grocer,” 2001-2002 Executive Report, p.15.