For the exclusive use of M. Jabarzadnouri, 2018. S w 904M82 LOBLAW COMPANIES LIMITED1 Ramasastry Chandrasekhar prepared this case under the supervision of Professor Charlene Zietsma solely to provide material for class discussion. The authors do not intend to illustrate either effective or ineffective handling of a managerial situation. The authors may have disguised certain names and other identifying information to protect confidentiality. Ivey Management Services prohibits any form of reproduction, storage or transmittal without its written permission. This material is not covered under authorization from CanCopy or any reproduction rights organization. To order copies or request permission to reproduce materials, contact Ivey Publishing, Ivey Management Services, c/o Richard Ivey School of Business, The University of Western Ontario, London, Ontario, Canada, N6A 3K7; phone (519) 661-3208; fax (519) 661-3882; e-mail cases@ivey.uwo.ca. Copyright 2004, Ivey Management Services Version: (A) 2008-08-26 It was 8 a.m. on Wednesday October 1, 2003, when John A. Lederer, president of Loblaw Companies Limited, saw the following news item.2 Wal-Mart Canada Corp. is accelerating the pace of its expansion with plans for an undetermined number of Sam's Club wholesale mega-outlets. Some industry insiders have speculated that the company will launch as many as 10 to 15 Sam's Clubs next year to add to the first four it will open in Canada this fall. Many observers believe that setting up the grocery distribution network for Sam's Club will be the first step to U.S.-based Wal-Mart Stores Inc eventually bringing its giant Supercenters, carrying a complete supermarket assortment, to Canada. Although Wal-Mart had entered Canada in 1994, it had been uncharacteristically cautious. Even a decade later, it had not expanded fully into groceries despite its own global experience that the addition of a grocery line in a store pushed the sales of the more profitable general merchandise upwards by over 30 per cent.3 Canada was Wal-Mart's only overseas market in which it had not deployed its powerful 1 This case has been written on the basis of published sources only. Consequently, the interpretation and perspectives presented in this case are not necessarily those of Loblaw Companies Limited or any of its employees. 2 www.globeandmail.com/reportonbusiness/retail, accessed October 9, 2003. 3 Kevin Libin, \"The Last Retailer in Canada,\" Canadian Business, March 18, 2002, p.38. This document is authorized for use only by Maryam Jabarzadnouri in Strategic Management taught by Stephen Hudon, Concordia University - Canada from May 2018 to June 2018. For the exclusive use of M. Jabarzadnouri, 2018. Page 2 9B04M082 Supercenter concept. The launch of its wholesale brand, Sam's Club, suggested that the arrival of Supercenters in Canada was imminent. TIME-TESTED STRATEGY It was time for Loblaw to take a fresh look at its own strategy. The strategy had worked so far: Loblaw was the market leader in Canadian grocery, with a market share in excess of the combined market shares of its four nearest competitors, and it was the 24th largest grocery retailer in the world (see Exhibits 1 and 2). The Loblaw strategy was both consistent and transparent, listing the following elements in the company's annual reports:4 Use the cash flow generated in the business to invest in the future. Own real estate to maximize flexibility for future business opportunities. Use a multi-format approach to maximize market share over the longer term. Focus on food but serve the customer's everyday needs. Create customer loyalty and enhance price competitiveness through a superior control label program. Implement and execute plans and programs flawlessly. Constantly strive to improve the value proposition. The strategy was driven by two objectives: driving down costs through size and operational efficiencies, and differentiating both its products (by pioneering its President's Choice brand and other private label brands) and its stores (by following a multi-banner, multi-format approach). INDUSTRY OVERVIEW Growing at an average rate of four per cent, food retailing was a $66.8 billion business in 2002 (see Exhibit 3). The rate of growth was impressive in light of two factors: Canadians paid the lowest prices for food in the world, and food inflation was less than two per cent per annum.5 Grocery retailers also occupied four of the top 10 retailer rankings in Canada in 2002. A broad spectrum of competitors prevailed in the Canadian grocery sector from stand-alones with limited market presence to integrated firms involved in manufacturing, importing, wholesaling and retailing. They also operated at various levels: local, regional and national. The presence of high levels of discount stores 4 Loblaw Companies Limited, 2002 Annual Report, p.3. Ibid, p.7. 5 This document is authorized for use only by Maryam Jabarzadnouri in Strategic Management taught by Stephen Hudon, Concordia University - Canada from May 2018 to June 2018. For the exclusive use of M. Jabarzadnouri, 2018. Page 3 9B04M082 and private labels and the high degree of market concentration had made Canadian grocery rank among \"the most advanced grocery markets in the world.\"6 Canadian grocery stores often co-operated on the supply side even as they competed on the demand side. Smaller stores pooled up with large buying groups to negotiate volume discounts from suppliers. Integrated firms sold to independents. Retailers owned wholesalers and vice versa.7 Such interactions made Canadian grocery a fertile area for mergers and acquisitions. By contrast, Loblaw's approach was characterized by an equal focus on organic growth. CONSUMERS Grocery shoppers were creatures of habit. They went to the same store to buy the same goods and services at almost the same time and day of a shopping period, making the business amenable to relationship building. The advent of supermarkets in the 1930s and the focus on self-service that gathered momentum in later decades had made shopping impersonal. Re-establishing that link with the customers, through the use of technology, was now being seen by mega-grocers as a means of gaining leverage over competitors. Most grocers offered a frequentshopper loyalty card. The data gathered through it was also used to secure better terms with manufacturers and distributors. There were three generic ways in which grocers built their revenues: penetration (increasing the number of households shopping in their stores), frequency (increasing the number of shopping trips the shoppers made) and basket size building (getting shoppers to spend more on each shopping trip). Low price, quality service, quality products and breadth of product assortment were important. The increasing incidence of double income families fuelled the demand for readyto-heat and ready-to-eat convenience foods. Fast-food chains, take-outs and restaurants were growing in response. This, in turn, reduced the share of unprocessed cooking ingredients in the overall food bill of a household, estimated at $6,438 per annum in 2002, or 11.12 per cent of annual household expenditure. However, 70 per cent of Canadian meals were consumed at home, even though most were not cooked from scratch.8 Grocers developed new categories like home meals replacement (HMR) and offered on-site cooking demonstrations. Some had franchised restaurants in their premises both to lure traffic into the stores and to provide a value-added facility. 6 Perry Caicco, \"Loblaw Companies Ltd: A Company in Transition,\" CIBC World Markets Equity Research Report, February 18, 2004. 7 \"The Abuse of Dominance Provisions as Applied to Canadian Grocery Sector,\" Competition Bureau November 2002 Bulletin, www.cb-bc.gc.ca, accessed October 5, 2003. 8 \"Canadian Grocer,\" 2001-2002 Executive Report, p.15. This document is authorized for use only by Maryam Jabarzadnouri in Strategic Management taught by Stephen Hudon, Concordia University - Canada from May 2018 to June 2018. For the exclusive use of M. Jabarzadnouri, 2018. Page 4 9B04M082 SUPPLIERS Retailer-supplier relationships were characterized by power plays. The scale would tilt in favor of the one wielding the most clout at a point in time. A supermarket was like a landlord letting out shelf space for rent. The rent was a combination of different allowances that a manufacturer paid to the retailer to get secure shelf and warehouse position of its products, to encourage advertising, and to reward high volume purchases.9 They included, for example, listing fees, slotting fees, over and above allowances, vendor allowances for merchandise returns, quantity discounts and merchandising allowances. There was no standard basis on which the amount of each allowance was determined. The category manager10 usually had the last word in deciding how the shelves were stocked. Smaller suppliers often were at the mercy of their grocery customers since a large percentage of their business was in the hands of just a few buyers. Producers of category-leading products were in a better position: grocers had to carry their products (often as loss leaders) to attract and retain their customers. The higher a supplier's market share relative to a grocer's, the more power it commanded and vice versa. Consolidation among either suppliers or grocers would shift the balance of power temporarily, and consolidation was increasing on both sides. Mega-grocers took a long-term view of the relationships with suppliers as part of ensuring cost-efficiencies and seamlessness in operations. They involved suppliers in merchandizing, category management and supply chain management, using enterprise resource planning (ERP) technologies. Suppliers used their industry associations to push for standardization in the ERP programs of the mega-grocers to avoid having overlapping systems, one for each customer. COMPETITORS According to the National Market Survey 2002 conducted by Canadian Grocer, there were 1,791 supermarkets, 8,342 convenience stores, 3,906 affiliated independents and 10,109 unaffiliated independents in the Canadian grocery business (see Exhibit 4). The independent sector accounted for 39.3 per cent of the grocery market sales in 2002.11 The unaffiliated independents (usually smaller stores) were facing tough times: 418 of them went out of business during 2002. 9 Anne Kingston, \"The Edible Man,\" Macfarlane Walter and Ross, 1994, Chapter 2. A category was a group of products that were inter-related. A manager with profit center responsibility headed each category. Examples of categories were produce, meat, housewares, dairy and grocery. 11 Jerry Tutunjian, \"What's Up and What's Down,\" Canadian Grocer, February 2003, p.26. 10 This document is authorized for use only by Maryam Jabarzadnouri in Strategic Management taught by Stephen Hudon, Concordia University - Canada from May 2018 to June 2018. For the exclusive use of M. Jabarzadnouri, 2018. Page 5 9B04M082 Grocery Chains In 2003, there were 44 grocery chains in Canada (see Exhibit 5). Loblaw faced competition from four leading chains: Sobeys, Metro, A&P and Canada Safeway. Each had a distinctive profile. Sobeys Inc. In 1907, Sobeys Inc. set up in Nova Scotia, had over 1,500 stores in 10 provinces. It was the second largest national distributor with an estimated 15 per cent share of the Canadian food market. Employing 33,000 people, Sobeys had sales of $10.41 billion in 2002. Its retail banners included IGA and PriceChopper. Metro Inc. Metro Inc., another home-grown enterprise of over 50 years standing, was the leading supermarket chain in Quebec. It had sales of $5.15 billion in 2002, and employed 10,733 people in its 833 stores. Metro had several banners, including the discounter Super C, and three private labels: The Irresistible, Econochoix and Super C. Atlantic and Pacific (A&P) Established in 1927, A&P had 240 stores in prime locations in Ontario generating sales of $3.99 billion in 2002 under three banners: discount grocer Food Basics; Dominion, mainly in Toronto; and A&P in the rest of Ontario. A&P Canada was the best performing division of the U.S.-based The Great Atlantic and Pacific Tea Co. Inc., which was in serious financial trouble. Having recently gone through major capital rejuvenation and a change in marketing strategy emphasizing freshness, A&P Canada was in a growth mode. Canada Safeway Canada Safeway was started in 1929 as a subsidiary of Safeway Inc., the thirdlargest supermarket operator in the United States. Canada Safeway had 214 stores located primarily in Western Canada, capturing a 28 per cent share there. Employing 28,000 people, it had sales of $3.48 billion in 2002. Canada Safeway served its own stores and independents through its three distribution centers. This document is authorized for use only by Maryam Jabarzadnouri in Strategic Management taught by Stephen Hudon, Concordia University - Canada from May 2018 to June 2018. For the exclusive use of M. Jabarzadnouri, 2018. Page 6 9B04M082 Wholesale Clubs Wholesale clubs charged an annual fee (ranging between $30 and $50), and offered a broad range of products and services at low prices for bulk purchases. They lured away high volume \"stock-up shoppers\" from the grocery chains. Stores were functional, sans frills. The wholesale club was a profitable format in Canada. Costco Wholesale Canada was the leading wholesale club in Canada. It had 61 outlets and about four million members, which included small businesses and many individual consumers. The launch of Sam's Clubs in Canada by Wal-Mart posed a direct threat to Costco, which had enjoyed a first mover advantage in Canada since 1985. In the United States, Costco had dealt with competition from Wal-Mart through differentiation. Unlike Sam's Club, which went after bargainhunting Wal-Mart customers, Costco U.S. had positioned itself towards smallbusiness owners. The focus on a slightly higher-end customer had not only led to a significantly higher average sale per customer but also limited its competition with Sam's Clubs in the United States, which was generally perceived as downscale. Specialty Chains Specialty chains operated smaller stores in niche segments, such as ethnic groceries and organic foods. The ethnic foods market, estimated to be of the order of $6 billion,12 was likely to grow due to immigration patterns. Its customers comprised the five major ethnic communities in Canada Chinese, South Asian, Middle Eastern, Central and South American and Caribbean. The $1.8 billion organic foods market was growing at 20 per cent per annum.13 The world's largest natural and organic foods chain, based in the United States, had opened its first overseas store in Toronto in May 2002. Whole Foods Inc. products competed directly with Loblaw's PC Organics natural food products. Convenience Stores Convenience stores complemented supermarkets by allowing consumers to fill up between shopping trips. The convenience store segment had grown faster than grocery supermarkets, increasing in number from 6,629 in 1997 to 8,342 in 2002. 12 John Schofield, \"The Ethnic Market in Canada,\" Food in Canada Magazine, November/December 2002, p.28. 13 Lisa Rostoks, \"Romancing the Organic Crowd,\" Canadian Grocer, August 2002. This document is authorized for use only by Maryam Jabarzadnouri in Strategic Management taught by Stephen Hudon, Concordia University - Canada from May 2018 to June 2018. For the exclusive use of M. Jabarzadnouri, 2018. Page 7 9B04M082 Online Shopping Online grocery shopping accounted for only $100 million in sales in Canada. Grocery Gateway, a Toronto-based e-grocer, dominated the market, growing its customer base from 7,000 in 1999 to 14,200 by mid-2002.14 AC Nielsen studies indicated that 57 per cent of Canadians were Internet users in 2000, up from 31 per cent in 1997. A survey in 2000 showed that grocery orders through the Internet numbered between 800 to 1,000 per day, and the average size of an order was $120. New families and young singles were driving contemporary online grocery sales in Canada, but electronic security was a major barrier to shopping online for some consumers.15 Competitive Outlook Small entrants in the independent category entered the market frequently. Two of the most recent large entrants to the Canadian grocery were Whole Foods, which had entered a niche market of organics, and Wal-Mart, which had entered Canadian retail by acquiring 122 Woolco stores. Grocers in the mid-sized category were potential acquisitions for global firms pursuing expansion. European grocers were known to be on the prowl for acquisitions since their home markets had reached saturation levels and the rate of growth was slowing down.16 However, the limited market size in Canada and lower margins were major disincentives. Each of the four leading grocers in Canada including Loblaw had been the subject of regular media speculation as a take-over target of various global firms. GROCERY OPERATIONS Supply Chain and Logistics An average Canadian grocery store carried 25,000 to 40,000 stock keeping units (SKUs). Strong supply chain and logistics functions were thus crucial. Demand forecasts were, in large part, judgment-driven, despite the use of computers. Poor forecasting or logistics led to expired or obsolete products, which drained profitability, or conversely, to out-of-stocks, which reduced sales and customer satisfaction. 14 Lynne Davidson, \"The Milkman Returneth,\" pwcglobal.com/RealEstateTrendsSummer 2002, accessed October 7, 2003. 15 \"Canadian Grocer,\" 2001-2002 Executive Report, p.30. 16 Peter Diekmeyer, \"Are Canada's Retailers Ripe for the Picking?\" www.cdngrocer.com, accessed October 7, 2003. This document is authorized for use only by Maryam Jabarzadnouri in Strategic Management taught by Stephen Hudon, Concordia University - Canada from May 2018 to June 2018. For the exclusive use of M. Jabarzadnouri, 2018. Page 8 9B04M082 Technology Canadian retail was leading the revolution in technology, ahead of U.S. retail, with its ECCnet. Put into place in mid-2003, ECCnet was a national, online, standardized product registry for synchronized data exchange. It provided the foundation on which subsequent technology platforms, like Radio Frequency Identification, could be deployed without delay. Potential savings for grocers were estimated at one per cent of sales.17 Scale The average size of a Canadian supermarket was 28,000 square feet, generating average weekly sales of about $300,000. Goliath stores averaging 110,000 square feet could generate a million dollars in sales a week.18 Scale advantages included lower costs of handling incoming materials and lower procurement costs, but backroom support was crucial, and the store had to run at full capacity. Profitability The margins of a supermarket chain were among the lowest of all industries. Posttax profits averaged between 0.5 per cent and two per cent. Independents had higher margins of up to five per cent but on lower sales (see Exhibit 6). Since store profitability was linked to space, costs were calculated per square foot (see Exhibit 7). The data on product profitability or even on category profitability was not always reliable due to the number of variables in cost allocation and cost apportionment. 19 LOBLAW Company Background Loblaw Companies Limited was a part of George Weston Limited, a broadly based Canadian company operating in two distinct business segments: food processing and food distribution. Founded in 1919 by Theodore Pringle Loblaw and J. Milton Crok, Loblaw Grocetarias, as it was then known, was a prosperous chain of 113 stores spread in Ontario with sales of $50 million in 1947, when Garfield Weston, a young baker in Toronto, acquired a small stake in the company.20 Now controlled by a third generation member of the Weston family and spearheaded by a professional team led by John Lederer, Loblaw was Canada's largest food 17 \"Canadian Grocer,\" 2001-2002 Executive Report, August 2003, p.32. George H. Condon, \"Taming a Goliath,\" Canadian Grocer, March 2002. 19 www.georgemorris.org/HMR update, accessed October 12, 2003. 20 Charles Davies, \"Bread Men,\" Key Porter Books, 1987, p.92. 18 This document is authorized for use only by Maryam Jabarzadnouri in Strategic Management taught by Stephen Hudon, Concordia University - Canada from May 2018 to June 2018. For the exclusive use of M. Jabarzadnouri, 2018. Page 9 9B04M082 distributor with sales of $23.1 billion in 2002 (see financial statements in Exhibits 8-10), and 122,300 employees. The Weston family held majority ownership. Strategy Execution The company's overall strategy, as reiterated regularly in its annual reports, was evident at the level of execution in the following ways.21 Real Estate As opposed to its competitors who leased stores, Loblaw owned 63 per cent of its corporate stores in Canada, many of which were in very favorable locations.22 Ownership provided flexibility at the operational level. Loblaw upgraded its stores every five years in contrast to the industry norm of seven years, and redesigned its formats to meet changing customer needs. Control Label Program Grocery stores were compelled to carry very popular branded products and sell them as loss leaders in order to keep their customers happy. Through its very successful control label program, Loblaw was able to take significant market share away from the big brands, competing with them strongly on prices yet ensuring margins due to lower costs. The popularity of its control label products also produced customer loyalty. A Multi-Format Approach A multi-banner, multi-format approach had enabled Loblaw to cover all price points in the grocery market and cater to all segments ranging from discount to bulk and gourmet. Each store had a local appeal. Meeting Everyday Needs Groceries were the core of Loblaw business, but a rich fare of non-food items was offered to meet the daily needs of every household. The control label initiative had also been extended to general merchandise by the company. Loblaw also operated over 100 gas stations in Canada. 21 Ann Leamon, Ray A. Goldberg and David E. Bell, \"Loblaw Companies Ltd: The Road Ahead,\" Harvard Business School Case 9-901-015, p.9. 22 Loblaw Companies 2002 Annual Report, p.34. This document is authorized for use only by Maryam Jabarzadnouri in Strategic Management taught by Stephen Hudon, Concordia University - Canada from May 2018 to June 2018. For the exclusive use of M. Jabarzadnouri, 2018. Page 10 9B04M082 Increasing Market Share per Store Instead of pursuing national market share, Loblaw focused on increasing the market share of each individual store. Organizational Structure and Human Resources The organization structure of Loblaw is shown in Exhibit 11. Line managers reported to both regional heads and banner heads. Regional vice-presidents oversaw profitability in the Ontario, Quebec, Atlantic and Western regions. Senior banner managers held profit centre responsibility across regions. Corporate support departments included real estate, information technology (IT) and supply chain, legal, control label, finance and treasury, and labor relations. The tenure of Loblaw's senior operating team averaged 18 years.23 Stock options were a major performance driver for senior managers. One of the largest private sector employers in Canada, Loblaw offered top wages and benefits. The United Food and Commercial Workers represented Loblaw's employees. Marketing Loblaw stores advertised 35 to 50 sale items in a weekly flyer. Non-sale items earned higher margins. Beyond store marketing, Loblaw's three broad marketing initiatives were Stores-as-a-Brand, Control Label and Customer Loyalty. Stores-As-A-Brand Loblaw had acquired strong regional stores like Fortinos in Hamilton, Zehrs in Kitchener and Provigo in Quebec without changing their names or diluting their community character. The Real Canadian Superstore, reigning in Western Canada, was the first major Canadian attempt at establishing megastores. Averaging 125,000 square feet, the stores sold a variety of food and non-food merchandise including clothing, housewares, electronics, etc.; 60 per cent of the sales in Superstores came from higher margin non-food merchandise.24 23 Loblaw Companies 2000 Annual Report, p.23. Susan Thorne, \"Loblaws 84 years old Still Biggest Grocer by Far,\" www.icsc.org/srch/set/current/ page24.html, accessed March 19, 2004. 24 This document is authorized for use only by Maryam Jabarzadnouri in Strategic Management taught by Stephen Hudon, Concordia University - Canada from May 2018 to June 2018. For the exclusive use of M. Jabarzadnouri, 2018. Page 11 9B04M082 The Real Canadian Wholesale Club was positioned against Costco/Price Club, with good prices on bulk purchases of mostly branded products (including President's Choice). Extra Foods focused on bulk purchases of inexpensive products, with a higher concentration of no-name products in the store. SuperValue and Shop Easy Foods were smaller stores that operated in downtown areas offering smaller package sizes and semi-processed foods. Lucky Dollar featured Asian ethnic foods. No frills provided low-cost, mostly no-name products in bulk and a limited range of produce and perishables. Your Independent Grocer and ValuMart were smaller stores, affiliates and independents, often located in small towns where the personal relationship between the store owner and the community was important. In the Maritimes, Atlantic SaveEasy was similar in concept to No frills. Atlantic Superstore was positioned similarly to Western Canada's Real Canadian Superstore, though the stores were smaller. Dominion (in Newfoundland) had a profile similar to Loblaw in Ontario. Control Label Products In 1984, Loblaw introduced its President's Choice (PC) private label program. High quality products were sourced, labelled as PC, and marketed through the \"Insider's Report,\" a personal communiqu from Dave Nichol, the then-president of Loblaw Supermarkets. At one time, the Insider's Report attracted more readership than the mainstream newspapers in Canada. Other European and North American retailers also sold private label products, but Loblaw was the first to build a brand for its private label that could compete with national brands. In pioneering PC products, Loblaw paved the way for every major grocery chain in Canada to develop a private label program unique to its customer base. Private labels comprised about 25 per cent of grocery sales in Canada and their growth rate (seven per cent) outpaced that of national brands (six per cent), according to a study by AC Nielsen.25 Customer Loyalty Programs Loblaw had developed, in 1997, a loyalty program that worked across its store banners. Launched as an extension of the President's Choice brand and offered under the aegis of President's Choice Financial, the benefits were two-fold. Customers could earn points redeemable for free groceries based on their purchases at any store in the chain. They could also obtain low-cost financial services such as everyday banking, loans, investments and mortgages through electronic banking and pavilions at select Loblaw family stores. The PC MasterCard, launched in 2001, reinforced the program. Planned expansions for 25 Lisa Rostoks, \"Mastering Private Label,\" Canadian Grocer, February 2002. This document is authorized for use only by Maryam Jabarzadnouri in Strategic Management taught by Stephen Hudon, Concordia University - Canada from May 2018 to June 2018. For the exclusive use of M. Jabarzadnouri, 2018. Page 12 9B04M082 PC Financial Services included more stores and more products, such as home and auto insurance. Distribution Loblaw had four types of stores as part of its distribution network: corporate stores; franchised stores; associated stores and independent accounts. The corporate stores were managed directly by the chain while the others were business affiliations aimed at enlarging the reach of the chain. The company had a total of 632 corporate stores, 406 franchised stores, 659 associated stores and 7,069 affiliated independents. They were all serviced by 34 warehouses across Canada.26 New supermarkets being opened in Canada by existing grocers were getting progressively larger in size. This was accompanied by a gradual decline in sales per square foot. But Loblaw was different. Its annual average sales per square foot of corporate stores grew from $502 in 1994 to $575 in 2002, even as the average store size went up from 37,700 square feet to 48,900 square feet during the period. Future extensions of the large-format Real Canadian Superstore into other Canadian markets were planned, and five of them were under various stages of execution in 2003. THE WAL-MART THREAT Wal-Mart was the world's largest retailer with $245 billion in revenues in 200227 (see financial statements in Exhibits 12 and 13), and 1,383,000 employees. WalMart had 516 million square feet of retail space with an average store size of 116,795 square feet. It was three times the size of the world's second largest retailer, France's Carrefour. Its \"Every Day Low Prices\" (EDLP) strategy was an extremely popular alternative to the weekly sale items advertised by other retailers. The company was wringing billions of dollars in cost efficiencies out of the retail supply chain and passing them on to shoppers as bargain prices. According to an estimate by New England Consulting, the company saved its U.S. customers $100 billion in 2002 alone, both through lowering its own prices and forcing competitors to do so. The \"Wal-Mart effect\" has helped suppress inflation and distribute productivity gains through the U.S. economy year after year. The company was known to derive cost advantages amounting to 22 per cent over U.S. competitors, based on the way it managed its \"ecosystem\" of business partners.28 Wal-Mart earned US$403 per square foot in its domestic stores, with gross margins of 21.2 per cent.29 Wal-Mart established close relationships with its suppliers, and although it drove a hard bargain on price, the company shared 26 Loblaw Companies 2002 Annual Report p.18. Anthony Bianco and Wendy Zellner, \"Is Wal-Mart Too Powerful?\" BusinessWeek, October 6, 2003. 28 Marco Iansiti and Roy Levien, \"Strategy as Ecology,\" Harvard Business Review, March 2004. 29 Pankaj Ghemawat, Ken A. Mark and Stephen P. Bradley, \"Wal-Mart Stores in 2003,\" Harvard Business School Case Study, 9-704-430, p 5. 27 This document is authorized for use only by Maryam Jabarzadnouri in Strategic Management taught by Stephen Hudon, Concordia University - Canada from May 2018 to June 2018. For the exclusive use of M. Jabarzadnouri, 2018. Page 13 9B04M082 information and systems with its suppliers that made each company more efficient. A fierce competitor, Wal-Mart was widely touted as the cause of Kmart's bankruptcy, as that chain had tried to compete directly with Wal-Mart. Target, Wal-Mart's other major U.S. competitor, operated slightly up-market from WalMart to avoid head on competition with the retail dynamo. The company had internationalized with the opening of a Sam's Club in Mexico in 1991 (see Exhibit 14). Its international experience was mixed. While credited with \"helping to hold down inflation in Mexico, improving Britain's cost of living and revolutionizing the distribution system in China,\" 30 Wal-Mart did less well in Germany and Japan. Only four of its 10 overseas ventures were profitable. When asked about Wal-Mart's plans for the future, Chief Executive Officer H. Lee Scott, Jr. indicated the company wanted \"to be where we're not.\"31 More than two-thirds of the value implicit in Wal-Mart's stock price was based on growth possibilities rather than on current operations.32 Scott foresaw decades of growth in the core business, including more stores in smaller geographic centres than had previously been thought possible. Growth plans included significant expansion of their Supercenter format, with over 200 set to open during 2003, and 1,000 expected to open in the U.S. alone in the next five years. Wal-Mart's Supercenter concept was a larger format store that added a full line of groceries and specialty services to its discount store. Food made up approximately 35 per cent of sales, and, though margins were slimmer (6.6 per cent for Supercenters versus nine per cent to 10 per cent for discount stores), inventory turned faster than in discount stores, and so return on assets was higher. A population base of 76,000 people was needed to support a Supercenter.33 Sam's Club stores, which competed directly with Costco, did not perform as well as Supercenters and thus were scheduled for more limited growth. The company also expected to grow geographically: it had targeted a third of its sales and profit growth to come from its international operations by 2005, doubling from 16 per cent in 2002.34 Wal-Mart also announced the introduction of financial services for its customers in 2003. Wal-Mart in Canada Wal-Mart had entered Canada in 1994 by taking over 122 Woolco stores. It had raced past established retailers like Eatons, Hudson's Bay Co. and Sears Canada to 30 Robert Slater, \"The Wal-Mart Decade,\" Penguin USA 2003, p.133. Bill Saporito, \"Can Wal-Mart Get Any Bigger?\" Time, January 5, 2003. 32 Luciano Catoni, Nora F. Larssen, James Naylor and Andrea Zocchi, \"Travel Tips for Retailers,\" The McKinsey Quarterly, 2002. No. 3. 33 This paragraph draws on information in Pankaj Ghemawat, Ken A. Mark and Stephen P. Bradley, \"WalMart Stores in 2003,\" Harvard Business School Case Study, 9-704-430. 34 Chester Dawson, \"Will Wal-Mart Conquer Japan?\" BusinessWeek US Edition, April 1, 2002. 31 This document is authorized for use only by Maryam Jabarzadnouri in Strategic Management taught by Stephen Hudon, Concordia University - Canada from May 2018 to June 2018. For the exclusive use of M. Jabarzadnouri, 2018. Page 14 9B04M082 be ranked, by 2002, as No. 1 retailer in Canada. Wal-Mart Canada had become profitable by the second year of operations, providing a measure of confidence about the company's international operations in general. Even as its Every Day Low Prices strategy had become popular with Canadian consumers, Wal-Mart had acceptance problems of a different kind. The UFCW Canada had filed charges of unfair labor practices against the company.35 The first signs of discord had surfaced when Wal-Mart refused to buy any of the nine Woolworth stores where workers were enjoying UFCW Canada union contracts and benefits. The parent company, Wal-Mart Inc, had been a particular target for UFCW, even in the United States where it had successfully prevented unionization at all its stores. The largest private sector employer in the United States was widely blamed for the sorry state of retail wages in America.36 Raids on U.S. Wal-Mart stores in 2003 found illegal immigrants working as sub-contracted cleaning staff for low wages, with no overtime or benefits pay and no taxes withheld.37 Traditionally, supermarkets like Loblaw used size and scale to achieve cost leadership. But Wal-Mart, already the world's largest retailer, was using technology to cut costs further. A centralized information system in Arkansas linked the operations of its 4,750 stores and 30,000 suppliers around the world, in real time. Wal-Mart also developed in-house, retail technology solutions to drive costs continuously down.38 According to an industry analyst,39 Wal-Mart had quickly dominated most markets outside the United States within years of entry because the grocery markets in those countries lacked depth. The Canadian grocery market, in contrast, was characterized by several discount formats and many private labels. Wal-Mart also had limited expertise in perishables (which comprised 67 per cent of total grocery sales in 2001).40 The launch of Sam's Club wholesale megastores suggested that Wal-Mart was feeling confident about its ability to compete in Canada. Would Wal-Mart Supercenters be next? THE RESPONSE What should Lederer do, given the expected entry of Wal-Mart into the grocery business? Was it time to shake up the company's stable strategy? 35 \"Threat of Wal-Mart expansion,\" www.ufcw.ca, press release dated November 25, 2002, accessed October 12, 2003. 36 www.businessweek.com, accessed October 3, 2003. 37 \"Illegal immigrants arrested in raids sue Wal-Mart,\" Associated Press, November 9, 2003, www.cnn.com, accessed January 23, 2004. 38 \"The IT Inside the World's Biggest Company,\" CIO Magazine, July 2002. 39 Interview with Perry Caicco of CIBC World Markets. 40 Jerry Tutunjian, \"The Numbers are In,\" Canadian Grocer, November 2002, p.31. This document is authorized for use only by Maryam Jabarzadnouri in Strategic Management taught by Stephen Hudon, Concordia University - Canada from May 2018 to June 2018. For the exclusive use of M. Jabarzadnouri, 2018. Page 15 9B04M082 Exhibit 1 CANADIAN GROCERS' MARKET SHARES 2002 Statistics Canada Supermarket Sales Grocery Products in Other Channels Total Loblaw Sobeys Safeway Metro A&P Costco Food Convenience Stores Wal-Mart Co-Op Drug Stores Overwaitea Commisso Wholesale Hy Louie Other Mass merchandisers Commisso Food Markets Thrifty Foods North West Co T&T Foods Other Independents Sales (in million $) 58,191 16,409 Market Share (%) 78.0 22.0 74,600 23,894 10,960 5,492 5,201 4,400 3,550 3,250 2,758 2,667 2,659 2,380 757 595 494 466 374 333 170 4,200 100.0 32.0 14.7 7.4 7.0 5.9 4.8 4.4 3.7 3.6 3.6 3.2 1.0 0.8 0.6 0.7 0.5 0.4 0.2 5.6 Source: Canadian Grocer Executive Report 2003-2004. This document is authorized for use only by Maryam Jabarzadnouri in Strategic Management taught by Stephen Hudon, Concordia University - Canada from May 2018 to June 2018. For the exclusive use of M. Jabarzadnouri, 2018. Page 16 9B04M082 Exhibit 2 WORLD'S TOP GROCERY RETAILERS 2001 Ranking 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 Company Country Stores Owned Carrefour Ahold Metro Kroger Co Albertson's Wal-Mart (Food sales) Safeway Tesco Rewe Zentrale Aldi Edeka/AVA ITM Enterprises J.Sainsbury It-Yokado Group Casino Daiei Tengelmann Supervalu Jusco Auchan E. Leclerc Fleming Cos Delhaize \"Le Lion\" Group Loblaw Winn-Dixie Stores France The Netherlands Germany USA USA USA USA UK Germany Germany France France UK Japan France Japan Germany USA Japan France France USA Belgium Canada USA 8,926 8,062 2,169 2,354 2,533 4,190 1,688 907 11,788 4,388 12,000 8,545 626 35,600 6,650 7,800 6,689 1,194 1,780 243 555 250 2,310 606 1,079 Sales (in US$ million) 61,398 58,842 43,758 37,900 37,900 36,865 34,300 32,380 31,880 26,480 26,450 26,140 26,130 25,850 24,940 23,740 23,120 21,300 21,020 20,130 17,940 15,600 15,550 15,100 13,000 Source: Canadian Grocer Executive Report 2003-2004. Exhibit 3 VOLUME OF FOOD RETAIL TRADE IN CANADA $ in million A. Supermarkets & Stores B. All other Food Stores C. Total Food Sales (A+B) D. Total Retail Trade Sales E. % of Food in Retail Sales 2002 62,049 4,778 66,827 306,578 21.8 2001 58,858 4,793 63,652 289,130 22.0 2000 56,592 4,498 61,090 277,033 22.1 1999 54,500 4,389 58,889 260,779 20.2 1998 53,346 4,318 57,664 246,675 23.38 Source: www.statcan.ca. This document is authorized for use only by Maryam Jabarzadnouri in Strategic Management taught by Stephen Hudon, Concordia University - Canada from May 2018 to June 2018. For the exclusive use of M. Jabarzadnouri, 2018. Page 17 9B04M082 Exhibit 4 NUMBER OF GROCERY STORES IN CANADA Year 2001 2000 1999 1998 1997 Supermarkets 1,538 1,581 1,611 1,687 1,656 Convenience Stores 7,295 6,812 6,290 6,401 6,629 Affiliated Independents 4,782 5,269 5,212 5,078 5,091 Unaffiliated Independents 10,517 11,850 13,217 12,926 12,371 Total 24,132 25,512 26,330 26,092 25,747 Source: Canadian Grocer February 2003 - Annual National Market Surveys. This document is authorized for use only by Maryam Jabarzadnouri in Strategic Management taught by Stephen Hudon, Concordia University - Canada from May 2018 to June 2018. For the exclusive use of M. Jabarzadnouri, 2018. Page 18 9B04M082 Exhibit 5 GROCERY CHAINS IN CANADA WITH MORE THAN 20 STORES Name of the Chain A&P Canada Bulk Barn Foods Canada Safeway Coop Atlantic The Grocers People Loblaw Companies Metro Inc Overwaitea Rabba's Fine Foods Sobeys Inc H Y Louie Banners A&P Dominion Food Basics Bulk Barn Safeway Coop Atlantic Bigway Atlantic Save Easy Atlantic Superstore Cash & Carry Dominion in NFL Extra Foods Fortino's Loblaw Lucky Dollar Maxi Provigo Real Canadian SS RealCanadianWSC Shop Easy Super Value Valu-Mart Your Independent. Zehr's Markets No Frills Metro Ami Gem Loeb Marche Super C Overwaitea Foods Save-on-Foods Year Est. 1927 1919 1995 1982 1929 1927 1960 1986 1980 1980 1961 1920 Rabba's Boni Choix Food Town Food Land GardenMarket IGA IGA IGA Extra Knechtel Omni Price Chopper Sobeys IGA 1982 1951 1930 1982 1992 1907 1914 1984 1969 1980 1991 1912 1903 1925 1987 1950 1978 1947 1962 1960 1912 1952 1915 1982 No. of Stores 81 56 88 63 213 181 102 56 50 10 15 90 18 98 102 85 138 57 32 56 29 71 54 58 110 251 95 268 43 142 49 34 50 26 104 104 94 94 433 31 46 117 88 119 43 Ownership Corporate Corporate Corporate Franchise Corporate Cooperative Family Corp/Franch Corporate Corporate Corporate Corp/Franch Franchise Corporate JV/Franch Corporate Corp/Franch Corporate Corporate Franchise Corp/Franch Franch/JV Franch/AD Corporate Franchise Family/Fran Family Family Family/Fran Family Corporate Corporate Corporate Corporate Franchise Corp/Franch Franchise Corp/Franch Corp/Franch Corp/Franch Corp/Franch AD Corp/Franch Corporate Corp/Franc Private Labels Body Basics Master Choice Basics for Less Equality West Best Club Pack Exact Green President's Choice Today's Choice Too Good To Be True no name The Irresistible Econochoix Super C Value-Priced Western Classics Western Family Our Compliments Our Compliments Smart Choice Source: 2003 Directory of Retail Chains in Canada. This document is authorized for use only by Maryam Jabarzadnouri in Strategic Management taught by Stephen Hudon, Concordia University - Canada from May 2018 to June 2018. For the exclusive use of M. Jabarzadnouri, 2018. Page 19 9B04M082 Exhibit 6 OPERATING EXPENSES OF CANADIAN GROCETARIAS AS % OF SALES Item of Expenditure Store Labor Benefits Occupancy Utilities Advertising Maintenance Stores Supplies Interest Others Total Conventional Stores 10.0 1.7 2.4 1.2 1.3 0.7 1.1 0.4 3.1 21.9 Supermarkets 9.9 2.7 2.6 1.0 1.6 0.8 1.0 0.6 4.0 24.2 Source: Canadian Grocer Executive Report 2000-2001. Exhibit 7 PRODUCTIVITY OF CANADIAN SUPERMARKETS Productivity Measure Total Store Area (Sq Ft) % of Selling Area to Total Area Weekly Sales per Sq Ft of Selling Area ($) Weekly PBT per Sq Ft of Selling Area ($) Average Weekly Sales per Store ($) Sales per Labor Hour ($) Payroll Cost per Labor Hour ($) Occupancy Cost per Sq Ft ($) % of Occupancy Cost to Total Expenditure Overall Store Inventory Turns (No of Times) Average Number of Checkouts Average Transaction Size ($) Weekly Transactions/Checkouts (Nos) Total Gross Margin as % of Sales Total Store Labor Expenses as % of Sales Profit Before Tax as % of Sales Conventional Stores 17,400 73.90 9.10 0.20 102,574 82.33 7.76 10.47 15.40 15.70 6 14.60 1,356 24.3 11.7 2.2 Supermarkets 42,000 74 11.06 0.26 310,567 107.17 10.44 15.84 13.40 17.40 10 21.34 1,269 27.1 12.6 3.0 Source: Canadian Grocer Executive Report 2000-2001. This document is authorized for use only by Maryam Jabarzadnouri in Strategic Management taught by Stephen Hudon, Concordia University - Canada from May 2018 to June 2018. For the exclusive use of M. Jabarzadnouri, 2018. Page 20 9B04M082 Exhibit 8 LOBLAW COMPANIES LIMITED Consolidated Balance Sheet $ in million 2002 2001 2000 1999 1998 1997 1996 Assets Cash & S/Term Investments Accounts Receivables Inventories Others Total Current Assets Fixed Assets Investments & Advances Intangible Assets Other Assets Total Assets 1,127 605 1,702 92 3,526 5,587 1,599 398 11,110 1,001 472 1,512 101 3,086 4,931 1,599 409 10,025 1,050 381 1,310 175 2,916 4,174 189 1,641 105 9,025 726 417 1,222 50 2,415 3,549 160 1,685 170 7,979 672 352 1,141 84 2,249 3,194 134 1,363 165 7,105 562 364 707 48 1,681 2,093 113 38 88 4,013 720 157 659 16 1,552 1,738 112 40 88 3,530 Liabilities Short Term Borrowings Accounts Payables Other Current Liabilities Total Current Liabilities Provisions Long-term Debt Other Liabilities Total Liabilities 639 2,336 179 3,154 68 3,420 344 6,986 367 2,291 138 2,796 49 3,333 278 6,456 889 2,240 78 3,207 78 2,377 239 5,901 746 2,066 0 2,812 113 1,979 171 5,075 1,150 1,806 0 2,956 122 1,364 68 4,510 374 1,084 21 1,479 77 915 47 2,518 421 931 47 1,399 57 733 30 2,220 Retained Earnings Common Share Capital Total Shareholders' Equity 2,929 1,195 4,124 2,375 1,194 3,569 1,930 1,194 3,124 1,721 1,183 2,904 1,429 1,166 2,595 1,221 274 1,495 1,046 265 1,310 11,110 10,025 9,025 7,979 7,105 4,013 3,530 Total Liabilities & Shareholders' Equity Exhibit 9 LOBLAW COMPANIES Statement of Earnings $ in million Sales Cost of Sales Depreciation Oper. Income Interest Income Taxes Goodwill Net Earnings 2002 23,082 21,425 354 1,303 161 414 728 2001 21,486 20,035 315 1,136 158 372 43 563 2000 20,121 18,862 283 976 143 317 43 473 1999 18,783 17,706 266 811 112 280 43 376 1998 12,497 11,785 185 527 68 198 261 1997 11,008 10,435 147 426 44 169 213 1996 9,848 9,367 122 359 46 139 174 This document is authorized for use only by Maryam Jabarzadnouri in Strategic Management taught by Stephen Hudon, Concordia University - Canada from May 2018 to June 2018. For the exclusive use of M. Jabarzadnouri, 2018. Page 21 9B04M082 Exhibit 10 LOBLAW COMPANIES Retained Earnings $ in million Year Beginning Less: Misc. Charges Add Net Earnings Less Dividend Paid Year End 2002 2,375 25 728 149 2,929 2001 1,930 563 118 2,375 2000 1,721 152 473 112 1,930 1999 1,429 376 84 1,721 1998 1,221 2 261 51 1.429 1997 1,046 213 38 1,221 1996 902 174 30 1,046 This document is authorized for use only by Maryam Jabarzadnouri in Strategic Management taught by Stephen Hudon, Concordia University - Canada from May 2018 to June 2018. For the exclusive use of M. Jabarzadnouri, 2018. Page 22 9B04M082 Exhibit 11 LOBLAW COMPANIES LTD ORGANIZATION CHART (Figures in brackets indicate age and tenure of service) John A Lederer President David R Jeffs Western and Non-Food Operations Carmen Fortino Ontario Operations Bernard J. McDonell Quebec Operations Violet Konkle Atlantic Operations Real Estate David K. Bragg Marketing Paul Clark Retail Operations Tom G. Fraser (62 and 43 years) Loblaws Deane Collinson The Real Canadian Superstore Raymond P. Daoust Zehrs Markets R. Glen Gonder Extra Foods David A. Berg The Real Canadian Wholesale Club J. Lorne Cumming Fortinos Vince Scorniaenchi No Frills and Cash & Carry Robert Adams Loblaws Dave Mock Maxi (including Maxi & Cie.) Provigo Daniel Dufresne Distribution Group Associated Banners and Presto Atlantic Superstore, Dominion, Mark Butler Atlantic SaveEasy, Cash and Carry Tom Cogswell Labour Relations Roy R. Conliffe General Counsel Stewart E. Green Treasury, Tax, Risk Management, Investor Relations Richard P. Mavrinac Supply Chain, IT, Food Sourcing and Procurement Paul D. Omsby President's Choice Bank Donald G. Reid SuperValu, Shop Easy Foods, Lucky Dollar Foods Jim Courtney Your Independent Grocer and Valu-mart Kevin Ryan Control Label Development Pietro Satriano Financial Control and Reporting, Human Resources, Loss Prevention Stephen A. Smith This document is authorized for use only by Maryam Jabarzadnouri in Strategic Management taught by Stephen Hudon, Concordia University - Canada from May 2018 to June 2018. For the exclusive use of M. Jabarzadnouri, 2018. Page 23 9B04M082 Exhibit 12 WAL-MART INC. Consolidated Balance Sheet $ in million Current Assets Total Assets Current Liabilities Shareholders' Equity 2002 28,170 83,375 27,173 35,102 2001 26,555 78,130 28,949 31,343 2000 24,356 70,349 25,803 25,834 1999 21,132 49,996 16,762 21,112 1998 19,352 45,384 14,460 18,503 Exhibit 13 WAL-MART INC. Statement Of Earnings $ in million Net Sales Other Income Cost of Sales Operating & Admin Costs Operating Income Interest Taxes Net Income 2002 217,800 2,013 171,562 36,173 11,937 1,186 3,897 6,671 2001 191,329 1,966 150,255 31,550 11,311 1,195 3,692 6,295 2000 165,013 1,796 129,664 27,040 10,105 841 3,338 5,576 1999 137,634 1,574 108,725 22,363 8,061 614 2,740 4,430 1998 117,958 1,341 93,438 19,358 6,503 733 2,115 3,526 Exhibit 14 WAL-MART OUTSIDE USA Year of Entry 1991 1992 1994 1995 1995 1996 1996 1997 1998 1999 2002 Country Mexico Puerto Rico Canada Brazil Argentina China Indonesia Germany South Korea Britain Japan Mode of Entry JV Expansion Acquisition Expansion Expansion JV JV Acquisition Acquisition Acquisition Stakeholder Initial No of Stores 1 1 122 5 3 2 95 4 229 400 No of Stores in 2002 No of Employees in 2002 595 55 213 22 11 26 94 15 259 400 92,708 7,500 52,000 6,000 4,000 15,000 15,500 3,000 125,000 30,000 Sales in 2002 ($ mn) 10,980 2,000 5,643 421 100 517 2,408 741 17,430 NA Op.Income in 2002 ($ mn) 656 104 485 -3 -3 -8 108 -18 941 NA Source: Pankaj Ghemawat, Ken A Mark and Stephen P Bradley, \"Wal-Mart Stores in 2003\