Reference no: EM132910538
Read the Mini-Case Study: Competing the Loblaw Way
Loblaw is Canada's largest grocery store chain, with annual revenue of over $46 billion and over 135,000 full-time and part-time employees. Some stores also sell housewares, clothing, health and beauty products, and drugs. Some stores also have a gas station. Loblaw purchased Shoppers Drug Mart, Canada's largest pharmacy chain, for $12 billion in 2014. It offers financial services, including a MasterCard, and loyalty programs PC Plus and Shoppers Optimum.
When Richard J. Currie was appointed president of Loblaw in 1976, Loblaw was only a regional chain (mainly in Ontario), with low profits and cash flow problems. Most store buildings were leased on a long-term basis and the company had no strategic direction. Currie closed some unprofitable stores, including those in the United States, and concentrated on maximizing sales per square foot of the other stores. Loblaw did not open new stores. Although it appeared weak to its competitors, this strategy allowed Loblaw to survive.
Currie believed that Loblaw should own its stores, rather than lease them. The leases were long-term and inflexible, which frequently resulted in the company having to pay for the building well after the store was closed. Also, changing a leased building to accommodate new departments was problematic. So, Loblaw gradually reduced its leases and increased its real estate ownership. Loblaw now owns more than 70 percent of the buildings it uses. In 2013, Loblaw created a separate company, Choice Properties, which owns and manages over 519 properties, mostly Loblaw store buildings.
Currie also believed that controlling the buying activities and labour costs was most important. Given that cost of goods is over 90 percent of the selling price of groceries, there is not much margin for labour and overhead costs. Also, he believed that union workers were much more costly than non-union workers. Given that most stores were already unionized, the way around the low margin was to expand the high-volume large stores.
Another problem in the food retailing business was that competitors competed using periodic sales (promotions), following a "high-low" pricing strategy. Currie believed that selling anything below cost was absurd, but he could not convince his competitors. He believed that customers just needed "quality products, reliably available, and priced competitively." His solution was to introduce the No-Name private label brand in 1978. This way, Loblaw could provide reasonable quality products at reduced prices every day. This was very successful. Later Loblaw continued its private brand (or "control label" products, as it calls them) with President's Choice in 1984, and eight others later, including the Joe Fresh Style line of clothing in 2006, for a total of over 5,000 items (over 1,800 of which are No-Name products). Shoppers' private brand is called Life Brand. Loblaw in-store pharmacies also dispense generic drugs.
Currie also believed in the advantage of an online in-store computerized information system. The use of bar codes and scanners allowed efficient data gathering that was used to identify profitability of items. This allowed Loblaw to control costs back up its supply chain.
Throughout the years, Loblaw has grown immensely through buying smaller regional chains and opening new stores. The owners (the Weston family) believe in investing any free cash in the business. Loblaw uses multi-format stores in different markets. It now owns approximately 565 franchises and approximately 533 grocery stores (approximately 70 million square feet of floor space) under several different banners, including large superstores such as The Real Canadian Superstore in the West and Ontario, Dominion in Newfoundland, and Atlantic Superstore; medium-size food-focused stores (called Market stores) such as Loblaw's and Zehrs (mainly in Ontario), and Provigo (in Quebec); discount food stores such as Extra Foods (in the West), No Frills (franchised), and Maxi and Maxi & Co in Quebec; wholesale stores such as Real Canadian Wholesale Club, Cash & Carry, Fortinos (in Ontario), Presto; and ethnic (Chinese) chain T&T Supermarkets. Shoppers Drug Mart's more than 1,326 stores are franchised (pharmacist-owned).
The different store banners sell basically the same products, with over 25 percent being Loblaw's private brands. However, the general merchandise is sold only through large superstores. Until recently, pricing was not coordinated across different banners and regions. Relations with unions are fairly good. Loblaw has obtained wage cuts from its employees several times.
Loblaw's supply and distribution network is fairly efficient. It has 27 distribution centres throughout Canada, and has the largest fleet of trucks in the country. Administrative activities are now centralized in a huge office (for 2,000 employees) in Brampton, Ontario. This includes the information system (for inventory tracking, store ordering, forecasting, purchasing, and merchandising). Installation of the enterprise software SAP has been completed.
Control label products are continuously being expanded, with the objective that they constitute 30 percent of sales. Over 200 stores were renovated recently. Joe Fresh is now sold online and internationally. Other Loblaw digital initiatives include Click & Collect (online grocery ordering and pick-up at a store), and Shoppers' BeautyBoutique.ca ecommerce site. Loblaw's revenues are growing annually, and its profit margin is approximately 2.25 percent per year, which is high for a grocery chain.
Questions
1) What competitive priority does Loblaw emphasize? Explain.
2) Describe and evaluate Loblaw's operations strategy. Use the nine strategic decision categories.