While shoppers are feeling the pinch with their weekly grocery bills, shareholders of the Big Three publicly traded supermarket chains are feeling quite full and more than satisfied by their recent returns.
In the three years since the end of January 2020 when the pandemic began, Loblaw Co. Ltd. L-T -0.49%decrease, Metro Inc. MRU-T -1.31%decrease and Empire Co. Ltd., EMP-A-T -1.12%decrease have been behaving like anything but the slow growth, low-margin businesses they have been historically.
Shares of Loblaw, Canada’s largest grocer, are up 80 per cent in the three years and it has delivered three dividend increases. Metro is up 39 per cent and also raised its dividend three times. Even Empire, the laggard as it works through operational issues, is up 27 per cent with the same three dividend hikes.
“The companies all have different appeals and they’ve all done well,” says Gavin Graham, chief strategy officer of SmartBe Investments in Calgary. “The [pandemic] has been the perfect storm for them in a good sense.”
The question for investors is whether the pandemic was a one-time energizer, or is there more to come? The answer seems to be that while the surge may be over, the sector has a new appeal in a recessionary environment.
“Full-service stores did better during COVID-19 because they were one-stop shops and you could find all the things you needed in one place,” says Kathleen Wong, partner and senior investment analyst at Veritas Investment Research Corp. in Toronto.
“But now the pandemic is in the rearview mirror and discount store [traffic] is picking up. People have tighter budgets.”
Grocery stores were one of the few places consumers could spend money during the lockdowns. Full-service stores offered a wide range of products, meaning all the shopping could be done more safely, in one place. The grocers beefed up online ordering and customers could opt for home delivery or contactless pick up at the store.
But now, with higher interest rates squeezing disposable income, shoppers are looking around. That plays to other strengths. For Loblaw, that includes its No Frills and Real Canadian Superstores brands as well as Maxi in Quebec. For Metro, it’s Food Basics Ltd. in Ontario and Super C in Quebec. For Empire, which operates through Sobey’s, it’s expanding its FreshCo Ltd. brand.
Ms. Wong notes that 47 per cent of Loblaw stores are discount banners generating about 60 per cent of overall Loblaw sales. About 24 per cent of Metro’s stores are discount and 10 per cent for Empire.
She says conventional store sales have held up more than might be expected post-pandemic. Prices are higher but the stores are a more pleasant place to shop with more employees to help and a wider selection of goods. Loblaw’s PC Optimum loyalty program, with 16 million members, is a powerful marketing tool. Metro plans to beef up in this area with the launch of a co-branded Royal Bank of Canada Visa card this spring.
Passing through the costs
The analysts say there’s no evidence of gouging, but plenty of evidence that inflationary costs have been passed through. The price increases are noticeable to consumers because shopping is a weekly event. Canada’s supply management system for eggs, milk and butter, which sets prices paid to farmers, is seen as a culprit that’s hidden from view.
The companies are offended by the accusations of “greedflation.” Michael Medline chief executive officer of Empire, referred to these claims as “reckless and incendiary attacks” in a recent conference call.
Mr. Graham of SmartBe Investments argues that we want our grocers to be profitable and efficient to be able to give us the products we need at their true cost.
“The fact is that they need to pass through the costs, and they have seen very large increases,” he says.
Ms. Wong’s analysis sees Loblaw passing through the full cost of food inflation. She concluded this by comparing its reported internal food consumer price index (CPI) to Statistics Canada’s food at home CPI, which are the same.
Metro is passing through less of the increases, she says, instead using its exclusive partnership with U.K.-based Dunnhumby, a data analytics company, to target weekly specials strategically to drive traffic.
Rising profit margins have also been offered as proof of grocery gouging. Here, Ms. Wong notes that the pandemic may have distorted perceptions. All three of the grocers have tie-ins with pharmacy chains with Loblaw owning Shoppers Drug Mart Inc. and Metro the Jean Coutu Group Inc. chain. Their highest-margin products are front-of-store items such as cosmetics and health and beauty aids. Sales dropped off dramatically during the pandemic.
As Ms. Wong says, “If you’re working from home you have much less need for cosmetics.” With reopening and back-to-office trends, these sales are picking up.
‘Will do well in a recession’
So, which grocer to pick for an investment portfolio? Ms. Wong favours Metro. She argues its discounting strategy is well-positioned as consumers look for more value in a recession. Loblaw has a wider exposure to a weaker economy through its Joe Fresh general merchandise unit and credit card operations.
Mr. Graham favours Empire because of “a complete change in operational culture in the past five years.” That includes rebranding FreshCo, investing in food delivery fulfilment centres and selling off gas stations in Western Canada.
In a recent RBC Capital Markets outlook on consumer stocks led by retail analyst Irene Nattel, the team favoured Loblaw as best positioned, with the right mix of assets for the long term.
As a group, Ms. Wong sees the sector as a portfolio anchor. “They did well in the pandemic and will do well in a recession,” she says.
This article appeared in the Globe Advisor section of the Globe & Mail’s Report on Business on Feb.1, 2023. For reprint information please view this page.
Adam Mayers 
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