From Ozempic to cosmetics, here’s what’s driving profits at Metro and Loblaw

Two of Canada’s biggest grocers reported a rise in sales and profits year-over-year in their latest quarterly earnings reports on Wednesday.

Metro Inc. and Loblaw Cos. Ltd both say sales growth in their pharmacy and cosmetics divisions helped drive profits higher in the last quarter.

At Metro, a boost to sales in the pharmacy section of the store last quarter was underpinned by a 6.7 per cent annual jump in prescription revenues.

CEO Eric La Fleche said in the company’s earnings call that demand for diabetes medication Ozempic, which has gained prominence as a weight loss drug, is “contributing to that lift” in Metro’s pharmacies.

Meanwhile, Loblaw’s same-store sales in drug retail outpaced the company’s traditional grocery segment in the past quarter.

Loblaw Chairman Galen G. Weston said on the company’s analyst call Wednesday that demand for cough and cold sales “remained extremely strong,” though it was a bit slower than last year.

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He noted that “beauty continued to outperform” in the quarter. Weston added later in the call that while some customers might be trading down from some premium brands to mass-market options, demand for cosmetics is continuing to fuel sales at Shoppers Drug Mart.

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“There might be a little bit of a shift towards mass (market) relative to prestige, but it would be around the edges as opposed to a major shift,” he said. “It continues to be resilient.”

La Fleche also flagged in his company’s earnings call Wednesday that “cosmetics was strong” for the Montreal-based grocer last quarter.

But like Weston, La Fleche noted that proceeds from cough and cold medicine sales are expected to be diminished in this year’s flu season compared to the boom seen last year at this time. He told analysts there will be “pressure” on the company’s over-the-counter drug sales in the first half of its fiscal 2024.

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Overall,  Metro reported a fourth-quarter profit of $222.2 million, up from $168.7 million in the same quarter last year as its sales rose 14 per cent.

The grocer said the profit amounted to 96 cents per diluted share for the 13-week period ended Sept. 30, up from 70 cents per diluted share a year earlier when the quarter ran 12 weeks.

Sales in the quarter totalled $5.07 billion, up from $4.43 billion a year earlier.

Loblaw meanwhile reported a profit available to common shareholders of $621 million or $1.95 per diluted share for the 16-week period ended Oct. 7. The result compared with a profit of $556 million or $1.69 per diluted share in the same quarter a year earlier.

Revenue for the quarter totalled $18.27 billion, up from $17.39 billion in the same quarter last year.

Metro and Loblaw see continued shift to discount stores

Weston said Loblaw’s Maxi and No Frills discount stores have seen higher traffic as of late, “generating double-digit growth again this quarter.”

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Sales of in-house brands like No Name and President’s Choice continued to outpace national brands as shoppers favoured lower-priced products, said Loblaw.

Weston said he doesn’t see the shift to discount going away any time soon.

“There’s no sign of it slowing down in any meaningful way,” he said. “Our perspective is that this will continue, you know, for the foreseeable future.”

La Fleche said Metro is also continuing to see shoppers shift to discount stores, helping to boost same-store food sales.

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However, the discount grocery segment has also become more competitive as other grocers add or convert more stores, La Fleche said.

“As more discount square footage is being added to the market, it’s having an impact for sure. But we’re well positioned to continue to grow in that market,” he said.

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During the past fiscal year, Metro opened three Super Cs in Quebec and converted a Metro store to a Super C, one of the company’s discount banners, said La Fleche. In Ontario, it opened two Food Basics stores, another discount banner. In the upcoming fiscal year, La Fleche said Metro is budgeting eight new discount stores, including two conversions.

Between new locations and converting some stores into discount banners, Weston said Loblaw has opened 23 discount stores so far this year. Next year, the company plans to convert 30 more stores and open 40 new locations across the country, he said.

Those conversions will mainly be in Quebec, added CFO Richard Dufresne on the call. Around 60 per cent of the new stores will be Shoppers Drug Marts, and the rest will mostly be discount grocery stores.

Suppliers put inflation progress at risk, grocers claim

Canada’s major grocers have been under pressure to stabilize food prices, and this fall they presented plans to the federal government to tackle rising prices through discounts, price freezes and price-matching.

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Finance Minister Chrystia Freeland said Wednesday that more competition is needed in Canada’s grocery sector as consumers grapple with the rising cost of living.

Speaking at a press conference in Mascouche, Que., Freeland said that major changes are needed to Canadian competition law in order to help stabilize prices.

On the conference call, La Fleche said Metro is still receiving price increase requests from big suppliers, which it will “negotiate as much as possible.”

He said the grocer’s food basket inflation measurement during the quarter was around 5.5 per cent, lower than its third quarter and below the most recent annual food inflation rate of 5.8 per cent across the country.

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Loblaw said its retail gross margin declined as a result of promotions and increased shrink — an industry word for theft — noting as well that its internal food inflation metric was lower than Canada’s food inflation number.

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But Dufresne, too, warned Loblaw is continuing to face pressure from its suppliers, which he warned could affect recent “momentum” in taming food inflation.

The industry is also nearing the completion of a grocery code of conduct meant to provide guidelines for fair dealings between retailers and suppliers.

Weston said Wednesday that Loblaw has been expressing “specific reservations about the way the code is currently constructed” because the company believes it could lead to potential “increases in inflationary pressure.”

— with files from The Canadian Press’ Rosa Saba

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