Case 16 (Loblaw)

Case Teaching Note 16 - Loblaw Companies Limited: Preparing for Wal-Mart Supercenters*

C A S E T E A C H I N G N O T E 16Loblaw Companies Limited: Preparing for Wal-Mart Supercenters*

OVERVIEWIn 2007 Loblaw Companies Limited (Loblaw), the largest family-owned supermarket chain in Canada, was facing significant challenges including increasing customer dissatisfaction, a subpar logistics system, and the threat of increasing competition with the impending entry of Wal-Mart into the Canadian supermarket industry. Loblaw’s top management team, headed up by Galen Weston Jr., Executive Chairman and the fourth-generation leader of the family-owned company, had begun preparing for Wal-Mart’s entry into the market as early as 2004, when the company decided to focus its efforts on The Real Canadian Superstores. In 2004 Loblaw operated 670 corporate stores under at least 12 different corporate banners, but their best known chain was Loblaws. However, under the guidance of Weston, in 2004 Loblaw made the decision to no longer invest in conventional Loblaws supermarkets, but rather to focus its efforts on The Real Canadian Superstores (TRCS) and to reposition this chain with a deep discount strategy. TRCS carried many nonfood categories and groceries, and marketed them at everyday low prices rather than running weekly and seasonal specials as was the norm in the industry. Over the next three years the company undertook a major reorganization of its distribution system and replaced a number of top executives.

Similar to the strategy it used in the United States, Wal-Mart entered the Canadian grocery industry in the fall of 2006 using its large general merchandise discount stores as a base for its expansion as a food retailer. As expected, the entry of this formidable competitor had an impact on markets in which it competed. In response to Wal-Mart’s entry, other rivals had improved their product offerings focusing on fresh produce and enhancing their quality-based images with their customers. Thus, Loblaw was facing increased competitive pressure at both the higher and lower ends of the market.

Unfortunately for the company, Loblaw’s repositioning of its brand did not go as expected and by 2007 the company was in the unenviable position of having a weak distribution system, customers who were confused as to the company’s brand position and value proposition, questionable leadership and a falling stock price. The company’s troubles were most evident in the customers’ perceptions of the brand and the distribution system. Before the company began its repositioning it had a reputation among consumers for offering a large assortment of high quality fresh food. However, between 2004 and 2007, in an effort to compete with the superstores, the company had experimented with offering a large variety of nonfood merchandise ranging from electronics to kitchen goods to clothing. However, the company’s distribution system was not sufficient to support such a broad array of merchandise and both quality and customer service suffered. By 2007 customers were confused by the assortment of general merchandise carried by The Real Canadian Superstores and unhappy with its offering of fresh food. Further, inventory had leapt out of control and attempts to manage inventory were resulting in shortages and stale-dated products in both food and nonfood categories. These difficulties were especially troubling as Loblaw’s Canada based competitors sharpened their skills and competencies and there was no reason to believe that Wal-Mart would slow its expansion. It was evident to many observers that Loblaw needed to regain its focus and sharpen its competitive capabilities. However, there was some question as to whether the Weston family would retain its controlling stake in Loblaw or divest itself of this asset.

CTN 16-1


SUGGESTIONS FOR USING THE CASEStudents should find it relatively easy to understand the issues in the Loblaw Companies case because of the detailed information provided in the case and through their experiences as retail grocery customers. Also, most students in your class will have shopped in Wal-Mart Supercenters and will understand the threat that Wal-Mart poses to regional grocery chains. The central issues for students to consider are: (1) what must Loblaw do to restore its competitiveness in the Canadian retail grocery industry and improve its overall financial performance and (2) how should Loblaw best prepare for Wal-Mart’s entry into Canada as a new rival supermarket chain. We suggest making the case a component of your international module to have students apply Chapter 7 concepts. Specifically, students should refer to Chapter 7’s discussion of strategy options available to local companies intent on defending their positions against resource-rich multinational companies. In addition, the case also allows you to further drill students in the tools of industry analysis, with an examination of the industry’s dominant economic characteristics, the underlying forces causing change in the industry, and the industry’s key success factors. You can also ask that students utilize the analytic tools decribed in Chapter 4--SWOT analysis, strategic group mapping, and financial analysis.

The Student Edition of the Online Learning Center (OLC) provides students with copies of the assignment questions contained in this note. The list of assignment questions leads students through a thorough industry analysis and prepares them to make strategy recommendations for selected companies. We suggest that you always direct students to the assignment questions posted on the Crafting & Executing OLC and instruct them to use the assignment questions to prepare for the class discussion of the case. We always instruct our students to read the case once to gain a general understanding of the issues presented in the case and then return to the case to prepare written responses to each of the assignment cases. We’ve found that our students who follow this approach are well-prepared to make a meaningful contribution to the class discussion.

The case allows for a modest degree of number-crunching, and may be a good choice for oral team presentations or a written case assignment because of its decision focus. However, the case involves more complex issues and should not be assigned as a first written assignment or oral presentation in the course. Our suggested assignment questions are

The case is well suited for both oral team presentations and written assignments. A good assignment question is:

1. Galen Weston Jr., the Executive Chairman of Loblaw Companies Limited, has employed you as a consultant to evaluate the company’s approaches to executing its strategy and to make recommendations for improvement. Please prepare a 4-6 page report evaluating the Canadian supermarket industry and Loblaw’s current situation. Offer specific, actionable recommendations to Weston as to how he can improve the company’s competitive position and position Loblaw to compete with Wal-Mart. Your analysis should include an examination of the industry’s dominant economic characteristics, the driving forces impacting the industry, and the industry’s key success factors. In addition, your analysis should include an assessment and identification of the company’s current strategy, an examination of its recent financial performance, and a SWOT analysis. Your recommendations should clearly identify a specific course of action that Loblaw should pursue and be well supported with arguments and justifications from your analyses for each.

2. As a component of Loblaw Companies’ new employee selection process, you have been asked prepare an analysis of the Canadian supermarket industry and recommend strategic approached to improving the company’s competitiveness and performance and defending against Wal-Mart’s entry into the market. Your recommendations to restore the company’s competitiveness, improve financial performance, and defend against Wal-Mart should be in the form of a 2-3 page executive summary. Your recommendations should be specific and defended with findings from your analysis. Please use whatever analytic tools discussed in Chapters 3 and 4 you believe appropriate. All analyses should be labeled as exhibits and attached to your executive summary. Your supporting exhibits and executive summary of recommendations will be given equal weighting in your grade for the written assignment.

CTN 16-2


ASSIGNMENT QUESTIONS1. What are the defining business and economic characteristics of the Canadian supermarket industry? What is the

industry like?

2. How is the Canadian supermarket industry changing? Identify the 3-5 primary underlying drivers of change in the industry and discuss how those forces individually and collectively are changing competition in the industry.

3. Identify the 3-5 factors that determine success for supermarket operators such as Loblaw.

4. What does a SWOT analysis for Loblaw Companies reveal? Does the company have any identifiable core and/or distinctive competencies?

5. Assess the effectiveness of the actions taken by John Lederer and his executive group to prepare Loblaw and The Real Canadian Superstore for coping successfully with the added competitive pressures posed by Wal-Mart Supercenters. Are these actions likely to prove sufficient for Loblaw to maintain its market position and financial performance?

6. How well is Loblaw’s strategy working? What is your assessment of Loblaw’s recent financial performance?

7. What does a strategic group map reveal about Loblaw’s position vis-à-vis Wal-Mart’s position in the industry? How are Loblaws, Fortino, and The Real Canadian Supercenter store formats positioned to compete with Wal-Mart? Which format is likely to be the most direct competitor?

8. What issues should Galen Weston Jr. be most concerned about? Which should have the highest priority? Why?

9. What specific actions should Loblaw take to improve its competitiveness? How might Lowlaw exploit its local knowledge of the Canadian supermarket industry to defend against Wal-Mart’s entry?

TEACHING OUTLINE AND ANALYSIS

1. What are the defining business and economic characteristics of the Canadian supermarket industry? What is the industry like?

Market Size and Growth Rate: This industry is approximately $74 billion in sales during 2006 and is growing at a rate of 2.49%, which is slower than the American industry to which it is compared in the case. However, there has been some minor shrinkage in the number of stores in the industry, having reduced in number from 2005 by 0.81%.

Number of Rivals: There are three main competitors for Loblaw identified in the case, but this is almost a negligible factor since Loblaw held a commanding, if not dominant lead in industry market share (34.9%, more than double its closest competitor and nearly three times its next closest competitor).

Scope of Rivalry: Loblaw operates nationally, but its principal interests are in the urban centers of Canada, with particular concentration in the Eastern Provinces.

Number of Buyers: As a retail grocer, Loblaw’s customer base is the consumer making individual purchases, and is therefore fragmented and with no appreciable power. However, it should be noted that the case mentions that 50% of Loblaw’s income is from discount format stores, suggesting that consumers have driven the industry toward lower prices.

Degree of Product Differentiation: The product is grocery goods, and therefore, a commodity with some minor differentiation available on price, selection and quality. However, Loblaw introduced a means of achieving differentiation by wedding the concepts of private label goods with a premium image.

CTN 16-3


Product Innovation: As noted, Loblaw has pioneered the use of differentiation among private labels. They have also branched out, employing unrelated diversification to bring such goods and services as banking into their stores. Although the case does not suggest this is a prominent feature of the industry, having succeeded in doing it Loblaw should expect it to become a common feature as rivals attempt to copy their success.

Supply/Demand Conditions: Loblaw deals with suppliers, but the case gives no indication that those suppliers have any cohesion or power in the relationship.

Pace of Technological Change: More sophisticated means of managing the supply chain, to include EDI systems mentioned in the case, suggest that new means of reducing costs are presenting opportunities for grocers to obtain an advantage over one another.

Vertical Integration: The presence of suppliers indicates that the industry is not perfectly integrated. However, Loblaw and Wal-Mart each maintain extensive warehousing and transportation assets, suggesting that there is a considerable degree of integration in the industry.

Economies of Scale: Given that the product is a commodity provided by suppliers, economies of scale would be essential in this industry.

Learning/Experience Curve Effects: Developing the competencies required to accurately forecast and supply demand for perishable grocery goods, coordinate with suppliers, identify local market interests, and execute successful promotions would imply a substantial amount of institutional knowledge and skill that would be difficult to acquire (note: as the case demonstrates, simply hiring an executive from a rival with a distinct competency in these areas is not sufficient to acquire such abilities).

2. How is the Canadian supermarket industry changing? Identify the 3-5 primary underlying drivers of change in the industry and discuss how those forces individually and collectively are changing competition in the industry.

Students should have relatively little difficulty identifying five forces that are driving change in the Canadian retail grocery industry including:

Changes in the industry growth rate. As previously noted, the growth rate for the industry is slowing. The growth rate is only 2.49% and there has been a minor reduction, 0.81%, in the number of stores in the industry. This slowing growth rate is acting to increase the intensity of rivalry in the industry.

Changes in customer expectations. The industry’s customer, the consumer, is demanding lower priced goods, as indicated in the case by the fact that the discount formats were beginning to contribute 50% of Loblaw’s income.

Entry of new competition. A major, powerful competitor with a reputation for entering and dominating markets (Wal-Mart) has entered the Canadian arena and is doing so in Ontario, a concentrated center of Loblaw’s business. The case describes the potential impact of Wal-Mart’s entry predicting that other stores would lose between 5% and 10% of their business.

Application of new technologies. Technologies, such as EDI, are playing a more important role in managing cost for the firm and improving operational efficiencies.

Increasing pressure for efficiency. There is a drive for efficiency, reducing the number of warehouses, which reduces inventory costs, while at the same time maintaining service levels.

3. Identify the 3-5 factors that determine success for supermarket operators such as Loblaw.

The case provides ample information to address this question, but students should be able to draw on their own

CTN 16-4


experiences as well to identify five factors that are important to achieving success in this industry:

CTN 16-5


Affordability for the Value Delivered. As competition increases, customers are becoming increasingly value conscious. However, they still appear to be willing to pay a fair price for a quality product.

Quality of Product: within the constraints of affordability. The case makes it clear that Canadian grocery customers are very demanding of quality in their food and Loblaw had built a good reputation in this area.

Customer Service and Product Availability. It is crucial for a firm such as Loblaw to ensure that they can provide the goods their customers want, and to ensure that customers can find those goods.

Breadth of Selection. Customers will have a significant range of brand preferences for any given product and it is important that the grocer knows what those are and provides a good supply of those that are demanded in sufficient volume.

Logistics Management. Given the perishable nature of the goods in the industry and the impact of seasonality on sales, grocery stores need to have a logistics system that delivers the necessary products at the proper time.

4. How has the competitive strength of the Loblaw Companies changed in the past five years? How would a SWOT analyses for the company in 2007 compare to a SWOT analysis based on its competitive capabilities in 2003? Did the company have any identifiable core and/or distinctive competencies in 2007?

There is value in having students examine the company’s competitive positioning both 2003 and 2007 to better understand its eroding competitiveness and capability to defend against attacks from powerful new rivals. In 2003 the SWOT analysis included:

Loblaw Companies’ Internal Resource Strengths and Competitive Capabilities in 2003

Innovative business model including unrelated diversification into banks, etc. within their stores

Loblaw owned its own real estate which helped lower facility costs

The company owned a range of grocery store chains

Private label brands had a high profit margin and were popular with customers

The company had successfully implanted a differentiation strategy in what is typically a low cost product by successfully marking private label foods as a premium product.

They enjoyed a reputation for delivering quality and customer service

The company arguably had core and distinctive competencies in operational efficiency and customer service abilities

From Case Exhibit 1, the company had been experiencing increased profitability with growing profit margins, ROA and cash flow.

Loblaw Companies’ Internal Resource Weaknesses and Competitive Liabilities in 2003

Company growth has slowed

Management believes that the Loblaw’s brand might be stagnating

External Opportunities in 2003

CTN 16-6


Entering new segments (demonstrated the ability by unrelated diversification into banking)

CTN 16-7


Geographic Expansion: There are urban areas in Western Canada that can be serviced.

Acquiring Rivals: Although Loblaw’s two main competitors might be resistant to acquisition, many of the smaller grocers might be open to such approaches

External Threats in 2003

New Entrants: as indicated by the case, large, competent, and well-funded firms could enter the market

Growing Supplier Power: It is possible that Loblaw could face fewer numbers of suppliers, with more bargaining power as the growth in the industry slows, prompting suppliers to compete more intensely and acquire or eliminate one another.

Shifts in taste or demand: Loblaw could lose one of its key advantages, the premium private label good, if customers become more conservative.

Students should recognize that by 2006 the SWOT analysis of Loblaw had changed significantly. Many of the company’s key strengths had eroded or, worse yet, changed to weaknesses.

Loblaw Companies’ Internal Resource Strengths and Competitive Capabilities in 2007

Loblaw owned its own real estate which helped lower facility costs.

The company owned a range of grocery store chains.

Private label brands had a high profit margin and were popular with customers.

Loblaw Companies’ Internal Resource Weaknesses and Competitive Liabilities in 2007

Appears to lack any distinct competencies

Weak balance sheet. It appears that resources were drained by mismanagement of the supply chain and misreading of customer preferences.

Product service failures are common including the inability to place product in the stores and delivering poor quality in the product that does arrive.

The company appears to be attempting to compete directly with Wal-Mart and trying to use the same tools Wal-Mart has mastered in doing so. Effectively they have matched their weakness on logistics against Wal-Mart’s strength in this area.

The company is losing market share in several of its chains.

Drain of Intellectual Capital (lost or temporarily neutralized key employees during the relocation/consolidation of the purchasing groups)

The company’s image is suffering badly with customers and suppliers.

External Opportunities in 2007

Refocusing on differentiation by concentrating on the more upscale markets rather than competing in the costs arena

Developing Alliances: partner with suppliers to ensure better service and quality and preferential treatment)

Geographic Expansion: There are urban areas in Western Canada that can be serviced.

Acquiring Rivals: Although Loblaw’s two main competitors might be resistant to acquisition, many of the

CTN 16-8


smaller grocers might be open to such approaches

CTN 16-9


External Threats in 2007

New Entrants: as indicated by the case, large, competent, and well-funded firms could enter the market

Growing Supplier Power: It is possible that Loblaw could face fewer numbers of suppliers with more bargaining power as the growth in the industry slows, prompting suppliers to compete more intensely and acquire or eliminate one another.

Shifts in taste or demand: Loblaw could lose one its key advantages, the premium private label good, if customers become more conservative.

5. Assess the effectiveness of the actions taken by John Lederer and his executive group to prepare Loblaw and The Real Canadian Superstore for coping successfully with the added competitive pressures posed by Wal-Mart Supercenters. Are these actions likely to prove sufficient for Loblaw to maintain its market position and financial performance?

Some students may argue that Lederer was on the right track and that his basic strategy was sound; he just needed more time to make it work. After all, many of the strategic changes he was implementing in The Real Canadian Superstore chain were proven to work in Wal-Mart’s business model. However, other students are likely to be very critical and to describe Loblaw’s attempt to change strategy as both unwise and inept.

The firm correctly identified Wal-Mart as not being a low-cost general merchandise retailer that also offers groceries, but rather a supply chain company that happens to deal in general merchandise and groceries. To preempt competition from Wal-Mart, Loblaw attempted to become a supply chain company as well, consolidating distribution centers and forcing cost-cutting efficiency demands on suppliers. However, Loblaw underestimated the how difficult it would be to build competencies and capabilities in supply chain management that would be on par with that of Wal-Mart.

Students need to recognize that it is easy to be critical with perfect hindsight and it is important to acknowledge that Lederer’s team was aware of Wal-Mart’s plans and was taking action. Clearly, Lederer and his team made mistakes in executing the strategy but this can be at least partially excused by the significant changes in management that occurred during the transition. Perhaps the single largest mistake was the decision to enter into categories of merchandising in which the company had zero experience, namely the non-food categories, especially appliances. The Real Canadian Superstores name was new in Ontario, and customers did not expect to find appliances and pajamas when they went to buy groceries. Moreover, Loblaw was apparently not very good at promoting and managing these categories.

Students should have little trouble realizing that by choosing to enter direct competition with Wal-Mart, Loblaw placed itself at disadvantage in terms of resources. As noted in the table below, at no point during the period of the study did Loblaw comes within $5 billion of Wal-Mart’s earnings, thus it is unlikely that they would possess the resources to engage in a direct contest in the low cost arena with Wal-Mart, and unlikely that they could withstand a lengthy “war of attrition” if their hope was to make the market sufficiently unprofitable for Wal-Mart to abandon its efforts.

Earnings Comparison (in millions)

Period 2002 2003 2004 2005 2006

Loblaw 728 845 968 746 (219)

Wal-Mart 6,592 7,955 9,054 10,267

11,231

Difference (5,864) (7,110)

(8,086)

(9,521)

(11,450)

CTN 16-10


Calculated from case Exhibits 1 and 6.

CTN 16-11


Evidence of the poor execution of the strategy’s implementation can be seen in the fact that Loblaw experienced such overstock that it was required to liquidate nearly $140 million of excess inventory in the system at the time that the retail sites had empty shelves. Adjustments to make the organization more streamlined were executed in a similar poor fashion, such as relocating 2,000 employees to the new consolidated offices, disrupting the firm’s ability to employ its personnel resources while staff sought new homes, in addition to the staff that chose not to relocate, depriving the company of needed expertise.

6. How well is Loblaw’s strategy working? What is your assessment of Loblaw’s recent financial performance?

The case provides students with a detailed ratio analysis in case Exhibit 1 reproduced below so this provides an excellent opportunity for you to help them understand what these numbers actually mean.

Financial Ratios 2006 2005 2004 2003 2002

Adjusted EBITDA margin 6.7% 7.8% 8.2% 7.5% 7.3%

Operating margin 1.0% 5.1% 6.3% 5.9% 5.7%

Adjusted operating margin 4.7% 5.9% 6.3% 5.9% 5.7%

Return on average total assets 2.3% 11.2%

14.2%

13.9%

13.8%

Return on average shareholders’ equity (3.9)% 13.2%

19.2%

19.3%

19.0%

Interest coverage 1.0 5.1 6.4 6.4 6.8

Net debt to equity 0.72 0.66 0.71 0.79 0.72

Cash flows from operating activities to net debt

0.30 0.38 0.38 0.28 0.34

Price/net earnings ratio at year end (61.0) 20.7 20.4 22.1 20.5

Market/book ratio at year end 2.5 2.6 3.6 4.0 3.7

Reproduced from case Exhibit 1.

The ratios provided above allow students to get a solid picture of the company’s profitability and its leverage. Students should note that since 2004, when the repositioning began, virtually all of the company’s key ratios have been deteriorating. The decline in the profitability ratio can be traced back to multiple issues including the company’s new low priced format in The Real Canadian Superstores, the increased inventory holding costs the company is experiencing, and the loss of sales due to poor supply chain management and customer dissatisfaction. The reduction in profitability is forcing the company to increase its reliance on debt funding, although the debt level is far from a critical level. However, with a little encouragement, students should be able to forecast where these trends will take Loblaw if the situation is not corrected.

CTN 16-12


Ultimately, the story of Loblaw’s performance is told by the trend of the firm’s change in earnings over time. From a healthy 20% growth of earnings in 2003, Loblaw was earning barely more than 1/3 of its previous year’s earnings by 2006.

CTN 16-13


Earnings Growth

8. What does a strategic group map reveal about Loblaw’s position vis-à-vis Wal-Mart’s position in the industry? How are Loblaws, Fortino, and The Real Canadian Supercenter store formats positioned to compete with Wal-Mart? Which format is likely to be the most direct competitor?

Students can use a variety of axes for their strategic group maps. We have used price and level of service as the axes for the strategic group map shown in Figure 1 since these variables are closely tied to the industry’s key success factors. The map we have created shows that the Loblaws and Fortino brands compose a separate strategic group from The Real Canadian Superstores and Wal-Mart which are in head-to-head competition. For students familiar with retailing in the United States, some may identify the space in the middle of the map between Real Canadian and Loblaws as potentially fertile space that is occupied by Target Supercenters. This opens up the intriguing possibility that if Loblaws can address some of its other concerns, it may be able to occupy this space successfully in Canada.

Figure 1 Strategic Group Map of The Canadian Supermarket Industry

CTN 16-14


CTN 16-15


9. What issues should Galen Weston Jr. be most concerned about? Which should have the highest priority? Why?

Loblaw’s most serious issue is the loss of its ability to provide quality products, or even products in some cases, to its customers. Customers are losing faith in the brand. This deterioration of the company’s market position can be attributed to the poor quality of the groceries it is selling and its inability to properly manage its supply chain. These challenges can be attributed, at least partially, to the loss of much of the company’s intellectual capital in the fields of suppliers and demand planning. The firm has adopted a strategy that abandoned all other viable grocery formats to focus on the low-cost market. This has placed the company in direct competition with the most capable low-cost company in the world and has put Loblaw in an adversarial relationship with its suppliers. Additionally, Weston needs to be concerned with the company’s loss of managerial talent. It appears that there is no real succession, or contingency, plan in place for key leadership roles.

The most threatening issue is supplying quality goods to its customers is reliability. However, the issue demanding the most immediate attention is the loss of the intellectual capital. It is the absence of these key players that is causing the issues with the customers.

10. What specific actions should Loblaw take to improve its competitiveness? How might Lowlaw exploit its local knowledge of the Canadian supermarket industry to defend against Wal-Mart’s entry?

In broad terms, one of the first things Loblaw needs to do is to reposition The Real Canadian Superstores to a position that is superior to the Wal-Mart Supercenters, and not in direct competition with them. Trying to compete directly with Wal-Mart and matching one of Loblaw’s weaknesses to their strength is ill-advised. More specifically, the company needs to immediately resolve its supply chain problems. If it is not able to get the products to the stores in time and in the desired quality, no amount of marketing is going to help in repositioning the company. To resolve these problems, the company should

Rebuild its intellectual capital by rehiring as many of its purchasing experts as possible in order to repair its relationship with suppliers and “right-its-ship” in terms of identifying and meeting demand at the stores. Use tele-commuting to get those employees who did not want to move back on board if necessary, but they have to address this immediately.

Simplify the amount of merchandise it carries, perhaps going so far as to return almost exclusively to groceries.

Concurrent with this, Loblaw needs to return to its higher quality strategy of offering a broad portfolio of grocery services, rather than only focusing on low cost. The company has built a reputation and competencies around fresh, high quality groceries and it needs to strengthen and deepen this competence if it is going to successfully compete with Wal-Mart. If the customers don’t like the supercenters, reopen or buy stores that serve the more focused grocery need. As part of this, it may be necessary to rebrand several of the Loblaw banners in order to distance the firms’ locations from past failures in the minds of the customers.

Loblaw must also examine their restricted supply chain closely, employing consultants if necessary. They have already set the structures (warehouse locations, distribution networks, etc.) in place, and it is essential that they make sure these are working efficiently and halt the cash bleeding their poor operations have imposed.

There may be students who suggest that Loblaw Companies consider abandoning the supercenter concept in locations where they cannot compete and concentrate on customers who prefer higher quality products and better atmospherics in their grocery shopping.

An alternative to abandoning the concept would be to focus on its local knowledge of the Canadian supermarket industry to appeal to consumers in ways that would be difficult for Wal-Mart to match. In pursuing such a defensive international strategy, Loblaw Companies could:

CTN 16-16


Utilize its keen understanding of local customer needs and preferences to create products or services that are not offered by Wal-Mart, but that Canadian consumers would find appealing.

The company might also consider a merger with other Canadian grocery chains such as Metro or Sobeys to develop the scale necessary to better defend against Wal-Mart’s entry into the market.

EPILOGUEHeading into 2009 the company had made some significant changes in its strategy. According to a company press release highlighting the results from the fourth quarter of 2008 the company had develop a “five-point plan to drive profitable sales momentum. The five-point plan includes focus on a “Back-to-Best” great food renewal in Ontario, a Western Canada refurbishment, local market merchandising, improvements in foundational infrastructure and private label innovation.”1

Sales and profit margins were improving as well. According to the report:

“Total sales were $7,745 million in the fourth quarter of 2008 compared to $6,967 million in 2007, an increase of 11.2%. Same-store sales in the quarter increased by 10.6%. Sales and same-store sales growth in the fourth quarter of 2008 were positively impacted by approximately 7.9% as a result of an additional selling week. Sales and same-store sales growth were positively impacted by 0.8% as a result of a shift of the Thanksgiving holiday into the fourth quarter. Sales and same-store sales growth were also negatively impacted by approximately 1.0% as a result of a strike in certain Maxi stores in Quebec.

Operating income increased by $183 million, or 136.6%, to $317 million in the fourth quarter of 2008, compared with $134 million in the fourth quarter of 2007. Operating margin was 4.1% for the fourth quarter of 2008 compared to 1.9% in 2007. Included in operating income is a charge of $29 million (2007 - $33 million) for fixed impairments related to asset carrying values in excess of fair values for specific store locations. Operating income and operating margin were positively influenced by lower restructuring and net stock-based compensation costs, higher sales and the company’s cost reduction initiatives.

EBITDA(1) for the quarter was $441 million, representing an increase of 64.6% compared to $268 million in the fourth quarter of 2007. EBITDA margin(1) increased to 5.7% in the quarter from 3.8% in 2007.

Basic net earnings per common share increased $0.55 or 392.9% to $0.69 for the fourth quarter of 2008, compared to $0.14 in the same quarter last year.”2

1

2

CTN 16-17


In looking forward Loblaw stated

“The Company remains confident in its approach and will continue to focus on making measured progress on its key transformation priorities, including food renewal, store enhancements, product innovation, infrastructure, and customer value. During 2009 the Company will step up investments in information technology and supply chain which will increase the associated expense by approximately $100 million. This investment, coupled with the continuing economic challenges and competitive pressures are expected to challenge results in 2009.”3

You can find the company’s latest financial results and press releases at www.loblaw.ca.

_____________________

*This teaching note reflects the thinking and analysis of the case authors, Professor Kenneth G. Hardy, the Richard Ivey School of Business, University of Western Ontario and Veronika Papyrina, San Francisco State University. We are most grateful for her insight, analysis and contributions to how the case can be taught successfully..

3

CTN 16-18

http://www.loblaw.ca/

Documents

Case 16 (Loblaw)