Loblaw's data-driven algorithms affect grocery promotions and quarterly sales
Canada’s largest grocery and pharmacy chain store Loblaw Companies Ltd. said its attempt to implement data-driven algorithms—focused on profitability and increasing margins—by using consumer data, led to fewer promotions at its grocery stores, affecting same-store sales in the second quarter.
The company, based in Brampton, Ont., on Wednesday, reported a second-quarter net income of $286 million, which was essentially flat in comparison to the same time last year. However, same-store sales at Loblaw’s food retail stores, which include Loblaws, Real Canadian Superstore, and No Frills, grew by 0.6 per cent in the second quarter.
The growth of same-store sales reduced when compared to a 0.8 per cent increase during the same time last year. Traffic at food retail stores also decreased in the most recent quarter, although consumers’ basket-size increased.
“We are not content with that performance,” Loblaw president Sarah Davis said during a conference call with analysts Wednesday.
The poor growth of the grocery-store sales figure was a result of the company opting to create algorithms focused on profitability and increased margins, which created a lag on promotions meant to attract customers.
“When you ask people to develop algorithms focused on profitability and increased margins, that’s exactly what you get… what happens in-store is it actually brings down the promotional intensity,” said Davis. “You end up with fewer items on promotion in your flyer, and that does have an impact on sales.”
With Loblaws poor sales promotions, The Source flyers provides a suitable alternative to major Canadian supermarkets and customers can equally get discounted prices on their purchases.
Loblaw began using data-driven insights in the first quarter of 2018, starting with its market division before progression into other categories. They witnessed positive results with major improvements in their margins and by the third quarter of that financial year, some elements of the technology were introduced into the discount division.
Davis said that the company was very intentional with its actions as they were focused on improving their margins and after beginning to witness traction in some categories, they became “overzealous”.
“We know exactly what we did and what we did was we focused on going for margin improvements,” she said. “And in the excitement of seeing margin improvements in certain categories as we started to implement some of the algorithms, people were overzealous.”
Nonetheless, the company is still not wavering on its commitment to using data to make important decisions, adding that necessary adjustments would be made going forward.
“We know what we did, and we know what we can do in order to change it,” said Davis.
In recent years, Loblaw has enhanced its technological offerings, adding self-service checkouts and electronic shelf labels in stores, as well as improving its e-commerce platform.
But even as the company’s grocery chains suffered loss, their drug retail division had a same-store-sales growth of 4 per cent in the same quarter. This was the best quarterly performance for Shoppers Drug Mart in three years and partly due to “a very strong cough, cold and allergy season,” Davis said.
The expanded food offerings at the over 100 Shoppers Drug Mart locations helped drive traffic and basket growth at the stores, added Davis.
Overall, Loblaw revenue grew by 3 per cent to $11.1billion in the second quarter this year—up from $10.8 billion last year—largely due to sales growth at Shoppers Drug Mart stores.
The company’s quarterly profit from continuing operations was $286-million, or 77 cents a share—a $7-million decrease from $293-million earned during the same period last year.