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Cleanup in algo three: Loblaw blames data-driven pricing formula for sluggish second quarter food sales

Loblaw Companies Ltd. said on Wednesday that a plan to boost profit margins using algorithms backfired in the second quarter, leading to stingier  promotions that weighed on food sales in its core grocery operations.

While the chain posted net earnings of $286 million in the quarter, roughly level with the previous year, its grocery division — including brands like No Frills, Real Canadian Superstore and Loblaws — saw a slowdown in same store sales growth, a key performance indicator in retail.

The setback comes as Loblaw, Canada’s largest grocer, pushes to transform itself into a company driven by data, efforts that include an expansion of its PC Optimum loyalty program.

Loblaw president Sarah Davis said Wednesday she planned to resist a “knee-jerk reaction” to the results, and would instead focus on tweaking the  their data-based strategy.

The company has been developing algorithms for more than a year, using historic customer data to help set product prices on in-store flyers and in personalized promotions for PC Optimum members.

But when your algorithms focus on profit margins, “that’s exactly what you get,” Davis told investors on a conference call Wednesday.

“It actually does bring down the promotional intensity. So you end up with fewer items on promotion in your flyer and that does have an impact on sales.”

In an update on Wednesday, Loblaw reported $11.1 billion in revenue in the second quarter of 2019 — a $312 million increase compared to a year previous, driven by a strong showing from its pharmacy business, which includes the Shoppers Drug Mart chain.

“That’s the benefit of having a big enterprise,” Davis said.

But, as one analyst noted, the results were overshadowed by the grocery division’s “sluggish” same store sales growth.

“(The) story today is once again likely going to be sluggish SSS growth in food segment,” RBC analyst Irene Nattel wrote in a research note on Wednesday morning. “It appears as though Loblaw’s focus on profitable sales may be costing the company a bit more than expected at the top line.”

We were not satisfied with our supermarket sales slipping outside our stable trading range

Loblaw’s grocery division saw same store sales growth of 0.6 per cent in the quarter, down from 0.8 per cent the year previous and well below RBC’s forecast of 2 per cent.

Shoppers Drug Mart, however, saw same store sales growth of 4 per cent — its best quarter in three years — driven in part by inclement spring weather that, Davis said, provided a “a very strong” cough, cold and allergy season.

“We were not satisfied with our supermarket sales slipping outside our stable trading range,” executive chairman Galen Weston told investors. “The team is now making the appropriate adjustments to bring food sales back into balance.”

Davis said Loblaw started using algorithms in specific grocery categories to boost profits in the first quarter of 2018. The team saw promising results early on, so they expanded to other categories and into Loblaw’s discount grocery chains this year.

“In the excitement of seeing margin improvements in certain categories,” Davis said, “people were overzealous.”

The push for profitability meant fewer loss leaders on grocery flyers — promotions priced so low they typically lose money on their own but help lure customers. In a quarter that saw inclement weather and food price inflation, the change in promotions spelled lower traffic to stores, Davis said.

Davis reiterated, in her answers to several questions from analysts, that the company knows which categories need algorithm adjustments, so attempts to add promotions don’t tamper with profits and attempts to add profits don’t tamper with promotions. Clarity on which categories were out of whack — or even describing what categories where involved — wasn’t possible, Loblaw said, “due to competitive sensitivities.”

“What you should know is that we know exactly where we need to make these targeted investments,” Davis said.


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