Thursday, April 10, 2008

Thinking aloud: Loblaw's

It's almost sad to watch what's happened at venerable Canadian grocery chain Loblaw's over the last several years.

The grocery business is a notoriously low-margin business, where stores generally rely on high volumes of sales to make up for the microscopic profits they make on each individual item. For decades, the firm expanded the old fashioned way -- earning customers organically by offering better quality or lower prices, and strategically buying up smaller rivals when their low valuations made it worthwhile.

For several decades, the formula worked. Consumers were happy to lap down their Memories of Kobe marinade by the gallon. Stockholders were happy with double-digit returns, year after year, as earnings and market share increased. And the wealthy Weston family that controls the company went from super-rich to ultra-rich.

Then, in early 2006, all that changed when an 800-pound retailing gorilla appeared on the horizon and informed the world it was going to start selling groceries. The Canadian market was about to get a lot more competitive, so hegemon Loblaws decided that the most prudent course of action was to throw out the formula that had worked for the better part of a century, and try to out-Walmart Walmart. Loblaw's decided it needed to get bigger, and start selling in sectors it had no retail experience in. Huge stores! Furniture! Clothing! Mortgages! It was totally going to be great. As long as they could squeeze suppliers for an extra 1.3 cents on every jar of baby food, it didn't matter that customers didn't want to buy metric tonnes of bok choy. And look at this trendy patio furniture! "Stop focusing on the fact that milk sells out by 1 p.m. on a Saturday now -- look what a lean, modern operation we are, you backwards-thinking Philistines," the company seemed to be saying to its customer base.

The madness didn't end there. Throwing the old chestnut that "the customer is always right" on it's ear, in late 2007 the company launched a splashy ad campaign built around their folksy, populist superdork CEO, Galen Weston Jr. People are willing to put up with being told they're poisoning the planet by using plastic bags, or that purchasing their favourite burger paddy is actually going to kill them when it's Dave Thomas of Wendy's doing the talking. But they're a lot less open to being badgered by the heir to a $7-billion fortune who looks like he's 12, yet somehow still comes off as smarmy.

A few years on, it's painfully clear that a huge mistake has been made. Loyal customers complain loudly, and frequently, to anyone who'll listen. The stock's been an absolute ski-hill downwards for more than a year, as $12-billion of market cap has been wiped out in the process. Some insist we've hit bottom, and it's time to buy in for the turnaround. Others say there's more pain to come, and the tone of some analyst reports is borderline funereal.

The whole thing's just a mess, and it really is painful to watch a once-great Canadian retailer shoot itself in the foot time and time again. As an investor, I have a hard time getting excited by a battered, mismanaged retailing giant that pays a microscopic dividend. At this point, I wouldn't touch Loblaw with a 10-foot pole, but that's not to say I'm not keeping an eye on them down the road. They're almost at the point where the real estate they own alone is worth more than the stock's current price. And I still think the company's problems are fixable -- they just need to get back to basics, and stop trying to fight too many battles at once.

The day Loblaw's realizes it's a high-end grocery store and little else is the day I'd consider buying in.

Until then, I'm happy to wait it out, park my cash in one of their high-interest savings accounts, and track down the stockperson to find out why, exactly, they're always out of non-brown bananas.


MG said...

great post. I agree with your assessment.

Four Pillars said...

Excellent post - I laughed my head off.