Loblaw's Strategy Seems Past Its Sell-By Date

| About: Loblaw Companies (LBLCF)

Loblaw Companies Limited (OTCPK:LBLCF), Canada's largest food retailer reported Q2 profits of C$0.56 a share on Wednesday last, down from C$0.69 a year earlier. It is currently trading well down on year-to-date highs, and has consistently underperformed over the last four years. Last Friday's close at $32.58 is well below the 52 week high of $38.56. The company was trading above $50 in 2008.

The Brampton, Ontario-headquartered retailer has faced a triple threat in recent years, and have struggled to react decisively. The expansion of Wal-Mart (NYSE:WMT), the move by Target (NYSE:TGT) into the Canadian market and more nimble domestic chains such as Longo's and Metro (OTCPK:MTRAF) have squeezed margins at the iconic retail operator. Excluding apparel, overall sales at Loblaw's 1,000 stores have been flat for the last couple of years. And like the rest of the sector, profits at Loblaw have suffered due to rising transport and food prices.

The response from Loblaw to the threat from Wal-Mart and Target has been somewhat muddled. Operating diverse brands such as Loblaws, No Frills, The Great Canadian Superstore, T&T, Bloor Street Market, Joe Fresh and so on and so forth, along with a financial company President's Choice Financial, Loblaw tries to be all things to everyone without focusing on any one area.

There are plans to roll out 700 of the popular Joe Fresh apparel shops in renovated J.C. Penney (JCP.N) stores in the U.S. next year, in an interesting joint venture. But this will do little to address the retailer's challenges north of the border.

A look at the collection of brands that the company manages, as shown on the corporate website, reveals what can only be described as a logo soup. The brand managers must be kept busy, which makes you wonder how much senior management time is consumed try to juggle such a varied portfolio of banners.

Added to this, the company has a history of problematic technology implementations which has also consumed management time and efforts, hampering the company's ability to respond quickly to external threats. Earlier this year the company announced that a five year long overhaul of its supply chain would hit profits for 2012 as project-related expenses mount up. The initiative isn't expected to be completed until 2014. The disappointing profit figures in Q2 were partly attributable to incremental costs associated with the troubled project.

Leadership has clearly been an issue. The appointment last year of Spanish industry veteran Vincente Trius as president, replacing British-born Allen Leighton is clearly meant to address that. Mr. Trius has a wealth of experience gained at Wal-Mart in Latin America and Carrefour (OTCPK:CRERF) in Europe.

The company encourages high levels of employee engagement, and is considered one of the best workplaces in Canada. But critics point out that the appointment of Mr. Trius follows a pattern that has seen Loblaw consistently hire CEOs from outside the firm, thus potentially alienating their own executives. There has long been a feeling that Loblaw produces managers, not leaders. And the motivation of managers who can't apparently aspire to the top job is open to question. Leadership cannot exist only at the top of the organization. It has to permeate through every level of the company to ensure that the strategy is implemented consistently across the board.

A good strategy is at the very least one that is consistent, comprehensible and clearly aligned with the stated objectives of the firm. In other words, the simpler, the better. But Loblaw has a confusing structure, is poor at implementing large-scale technology initiatives and the most senior management may be have a disincentive to go the extra mile. Mr. Trius' record is impressive, but whether he can solve the problems that his predecessor struggled with remains to be seen. The outlook for Loblaw is uncertain.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.