Food inflation has deepened the price gap at discount grocery stores, and Loblaw Cos is set to cash in

TORONTO – An increase in food prices has widened the cost divide between Canada’s supermarkets as well as their discount divisions – an issue that could play out in Loblaw Cos.’ favour.

“Looking at identical items, the discount channel doesn’t have the symptoms of increased shelf prices to the significant degree, as the conventional channel has significantly increased shelf prices,” analyst Keith Howlett of Dejardins Securities wrote within an industry report Monday after an assessment of grocery price fluctuations between retail channels. “We also note a greater diversity of pricing on identical items between competitors in the same channel inside the same trading area.”

Howlett anticipates the pricing gap between discount and conventional channels will move toward equilibrium within the next four to six weeks.

But among public grocers, “this duration of pricing confusion favours leader in the industry Loblaw,” given its scale relative to other players and its large network of discount stores, No Frills.

Related

Canadian farmers go back to growing vegetables, fruits as low loonie lifts pricesLoblaw Companies Ltd cookies help sweeten sales at Shoppers Drug Mart unitPricey vegetables sending more customers to freezer aisle: Metro CEO

“We would expect customer traffic to shift temporarily toward the discount and club channels until required price increases are implemented across all channels in the coming weeks,” the analyst said. Howlett rates Loblaw like a buy having a target cost of $76. Also, he has a buy on Metro Inc., operator from the discount chain Food Basics, at a price target of $44.

Grocery price inflation, which climbed 4.1 percent nationally around the fourth quarter according to Canada’s Consumer Price Index, has been aggravated by a weak Canadian dollar. Food prices have become a warm button topic among consumers in recent months, having a Canadian price peak for cauliflower in January drawing international attention.

On a conference call with analysts last week to go over fourth-quarter results, Loblaw president Galen Weston said the retailer was experiencing “disproportionate momentum” in the discount side of their business.

“The most illustrative example of that’s in Alberta, and the good news for all of us in that province is the fact that we’re really well-positioned in terms of discount, and so I don’t wish to say that’s entirely helpful, but certainly I think we’re more insulated in the impact than the others,” Weston said.

Financial Post

hshaw@nationalpost.com

Twitter.com/HollieKShaw