Can Investors Profit from Canada’s Grocery Wars?

Wars are seldom a recipe for investing success. Canada’s grocery biz is no exception.

| More on:
The Motley Fool

Competition is fierce in the grocery business. Margins are thin, weather affects sales and grocers must stay on top of the latest trends.

The Canadian grocery space is an all-out war. The winner will be the company that offers sought-after products at fair prices, takes care of core customers and maintains profit margins — while not overspending to acquire new customers.  Piece of cake, right?

The most recent development in the Canadian grocery space is the Sobey’s, a subsidiary of Empire Co. (TSX: EMP.A), acquisition of Safeway’s (NYSE: SWY) western Canadian assets for $5.8 billion.

Empire, with $16.3 billion in sales, arguably paid a premium for Safeway’s assets, but they give the company prime locations throughout Western Canada.  The Alberta properties are especially appealing given the retail sales growth experienced in the province over the past year.   Alberta’s retail sales in March were up 4.7% from the same month a year ago, according to Statistics Canada.

Competition Under Review

Canada’s Competition Bureau will review Empire’s acquisition. It’s possible Empire may have to sell some assets, which may present opportunities for Loblaw (TSX: L), the largest Canadian grocer, and Metro Inc. (TSX: MRU). It’s more likely Loblaw would pick up the leftovers since Metro concentrates on Ontario and Quebec.

The Canadian grocery market is a high-priced market, but prices of goods may drop as a result of increased competition. Wal-Mart Stores Inc. (NYSE: WMT) plans to spend $450 million this year to open several new stores and expand its distribution network, and Target Corp. plans to open 124 stores by year’s end.

Margin Squeeze

In the face of this increased competition, maintaining margins in this sector, which already has tight margins, is going to be difficult.

Wal-Mart’s net profit margin of 3.8% was lower than Metro’s 6.5%, but better than Empire’s 2.2% margin. But Wal-Mart’s scale is huge at $469.1 billion in annual sales, so it can handle a price-cut strategy in specific markets facing increasing competition.

Empire’s net profit margin of 2.2% will likely be compressed unless it implements cost savings in its new Safeway stores. Empire said it expects to find cost synergies of about $200 million over three years by integrating the distribution, information technology and procurement divisions of both Sobeys and Canada Safeway.

Metro and Loblaw surely had an opportunity to buy Safeway’s Canadian assets, but probably decided they were too expensive. Metro recently spent $50 million to build a new distribution system in Laval, Quebec, and is buying back shares.

Loblaw recently opened a new 10,000-square-foot store called The Box by No Frills in Calgary. This is an alternative way to grow the company without having to shell out major capital for acquisitions.

Empire’s stock climbed 18% from June 12, when news of its Safeway Canada acquisition was announced, to June 27, compared with no gain for Loblaw and a gain of 3.5% for Metro.

Conclusion

Shares in Canadian grocers Empire, Metro and Loblaw have all made gains in recent years. Going forward, their performance may be choppy due to increasing competition and pressure against their margins.

There appears to be a “honeymoon” premium baked into Empire’s stock since news of its Safeway Canada acquisition was announced. The acquisition will take several months to complete. Investors may want to wait until then to decide whether to buy this stock.

Canada’s grocery companies are solid, but it’s a tough industry that’s getting tougher.  In the Motley Fool’s special FREE report 3 U.S. Stocks Every Canadian Should Own” we’ve profiled 3 companies that are so out in front of their industries, a competitive war is out of the question.  To download this report at no charge, simply click here now.

The Motley Fool’s purpose is to help the world invest, better. Click here now for your free subscription to Take Stock, The Motley Fool Canada’s free investing newsletter. Packed with stock ideas and investing advice, it is essential reading for anyone looking to build and grow their wealth in the years ahead.

Follow us on Twitter and Facebook for the latest in Foolish investing.

This post was created by Fool contributor Michael Hooper.

Fool contributor Michael Hooper does not own any shares in the companies mentioned at this time.  The Motley Fool owns shares of Hain Celestial and Whole Foods. 

 

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

More on Investing

analyze data
Dividend Stocks

4 Canadian Stocks to Buy Now and Hold for Life

So you have an investment portfolio, but it's all in just a few stocks? If you need to diversify, here…

Read more »

woman looks at iPhone
Dividend Stocks

Want to earn the $1,364.60 Maximum Monthly OAS Benefit? Here’s How

Old Age Security (OAS) offers over $1,300 in benefits, but not everyone is actually receiving this. So how can Canadians…

Read more »

A Canada Pension Plan Statement of Contributions with a 100 dollar banknote and dollar coins.
Dividend Stocks

CPP Inflation Adjustment 2025: Here’s How Much You Could Get

The CPP's inflation adjustment isn't very large, but you can supplement CPP with dividend stocks like Enbridge Inc (TSX:ENB).

Read more »

RRSP (Registered Retirement Savings Plan) on wooden blocks and Canadian one hundred dollar bills.
Investing

RRSP Investors: Buy These Top Dividend Stocks for Total Returns

These two U.S. dividend king stocks are excellent holdings for an RRSP.

Read more »

RRSP Canadian Registered Retirement Savings Plan concept
Dividend Stocks

The Average RRSP Balance Isn’t Enough: Here’s How to Boost it

While it might sound like a lot, the RRSP average just isn't going to cut it for more retirees. So…

Read more »

green power renewable energy
Dividend Stocks

Forget Enbridge: Buy This Magnificent Utilities Stock Instead

Investors seeking higher growth in a solid utility stock should consider this stock over Enbridge. Here's why!

Read more »

potted green plant grows up in arrow shape
Investing

Growth Spurt: 3 TSX Stocks Set to Skyrocket

Given the favourable market environment and healthy growth prospects, these three growth stocks could deliver superior returns in the long…

Read more »

healthcare pharma
Investing

Is it Finally the Right Time to Buy WELL Health Technologies Stock?

With WELL Health Technologies trading unbelievably cheap, yet continuing to grow its profitability, is now the ideal time to own…

Read more »