Canadian grocers exceed U.S., Europe in margins, credit metrics

Canadian supermarkets exceed their U.S. and European counterparts when it comes to profit margins and credit metrics, according to a Moody’s analysis released Tuesday.

Canadian supermarkets exceed their U.S. and European counterparts when it comes to profit margins and credit metrics, according to a Moody’s analysis released Tuesday.

The big three Canadian grocers — Loblaw Companies Ltd. (TSX:L), Empire’s Sobeys (TSX:EMP.A) and Metro Inc. (TSX:MRU) — are seeing an improving trend in their earnings margins while four European peers are watching them shrink and margins are flat at two comparable U.S. companies.

The Canadian grocers also operate with lower leverage, or borrowed money, than their international peers, Moody’s said.

“While we do not rate any of the Canadian supermarkets, we are nevertheless asked for our views on the sector, especially given Loblaw’s July 15 announcement that it would acquire Shoppers Drug Mart Corp., Canada’s No. 1 pharmacy retailer, for $12.4 billion and Sobeys’ pending acquisition of Canada Safeway for $5.8 billion,” Moody’s said.

“Our main finding is that although the Canadians are smaller and less diverse, they have good margins and superior credit metrics.”

It says Loblaw’s leverage will rise following the Shoppers deal, which will be paid in cash and stock, but should come down within two years.

Comparable European supermarkets — which include Tesco PLC, Carrefour S.A., Koninklijke Ahold N.V. and Delhaize Group — are much larger and more geographically diverse than Canadian and U.S. grocery chains.

Moody’s says scale is positive for credit quality because it gives the stores bargaining power when dealing with suppliers, and increases their ability to leverage costs.

But the exposure of European supermarkets to non-food products, such as clothing and consumer electronics, has left them vulnerable to economic conditions, which have been poor lately.

This has left European grocers lagging behind their American and Canadian counterparts in terms of same-store sales growth.

Economic improvement in North America has boosted same-store sales growth, especially at Kroger, which has maintained growth at three per cent — compared with 1.5 per cent at Sobeys, 1.1 per cent at Metro and less than 0.5 per cent at Loblaw.

Loblaw should see some improvement in its sales growth after its acquisition of Shoppers, Moody’s says.

“The transformational acquisition is complementary to Loblaw and will expand its reach in health and wellness,” the report says.

Moody’s says Loblaw’s profit margin has also lagged those of its Canadian peers, mainly because of competition from Wal-Mart and Costco in Ontario.

It estimates Metro is the leader among the Canadian grocers in terms of profit margin, at nine per cent of earnings before certain items, compared with 7.5 per cent at Sobeys and 7.0 per cent at Loblaw.

An expansion into Quebec by Walmart and Target could squeeze Metro’s profit margins but Moody’s adds that:

“We think the Canadian supermarkets’ margins are somewhat protected to the downside by ongoing cost reduction measures, tight inventory management, improving store offerings and an increased focus on loyalty programs.”

“We expect the impact of rising competition to be manageable for the Canadians and that their aggregate margins will be better than those of the Europeans in the medium term.”

Just Posted

President Joe Biden delivers remarks about COVID vaccinations in the South Court Auditorium at the White House, Wednesday, May 12, 2021, in Washington. (AP Photo/Evan Vucci)
Biden team moves swiftly to tackle pipeline political peril

Executive order issued to improve cybersecurity

Street racers gather the evening of Sunday, Aug. 12, 2018, in the parking lot of the Goodwill on Northeast Marine Drive and 122nd Avenue in Portland, Ore. Across America, police are confronting illegal drag racing whose popularity has surged since the coronavirus pandemic and lockdowns began. Drivers have blocked off roads to race and to etch donut patterns on pavement with the tires of their souped-up cars. From Portland, Oregon; to Albuquerque, New Mexico; from Nashville, Tennessee; to New York City, officials are reporting a dangerous, and sometimes deadly, uptick in street racing. (Anna Spoerre /The Oregonian via AP)
US cities see surge in deadly street racing amid pandemic

Shutdowns associated with the pandemic cleared normally clogged highways

NDP leader Jagmeet Singh listens to a question as he speaks with reporters on Parliament Hill, Wednesday, May 5, 2021 in Ottawa. THE CANADIAN PRESS/Adrian Wyld
Singh calls for halt on Canadian arms sales to Israel as violence escalates in region

Dozens have died after Palestinian militants launched rockets and Israel unleashed new air strikes

Monarch butterflies have declined more that 80 per cent over the last two decades and scientists are trying to find out why. (Photo by THE CANADIAN PRESS)
Study suggests neonic pesticides harming monarch butterfly eggs

Research published in the Journal of Animal Ecology

Red Deer Mayor Tara Veer and several members of city council helped kick off the spring Green Deer cleanup campaign on Wednesday. Veer said city workers do their best to keep the city looking good, but need volunteer help to get rid of litter that has blown into bushes onto road sides over the winter. (Photo by LANA MICHELIN/Advocate staff)
Red Deer city councillors launch spring Green Deer campaign

Volunteers are needed to keep the city looking good

Toronto FC forward Jozy Altidore, center, celebrates after scoring a goal against the Columbus Crew with teammates from left, forward Tsubasa Endoh, defender Omar Gonzalez and forward Patrick Mullins during the second half of an MLS soccer match, Wednesday, May 12, 2021, in Orlando, Fla. (AP Photo/John Raoux)
Bradley, Altidore scores in Toronto FC’s 2-0 win over Crew

ORLANDO, Fla (AP) — Michael Bradley had a goal and an assist,… Continue reading

A football with the CFL logo sits on a chair during a press conference in Winnipeg, Friday, November 27, 2015. THE CANADIAN PRESS/John Woods
Former defensive lineman Klassen tackling retirement as he did opposing quarterbacks

Klassen spent seven CFL seasons with Montreal, Calgary and Ottawa

FILE - Contestant Lauren Spencer-Smith on an episode of ABC’s American Idol. (American Idol/ABC photo)
‘American Idol’ contestant exits show amid video controversy

A 16-year-old “American Idol” contestant has dropped out of the singing competition… Continue reading

FILE - Ellen DeGeneres appears during a taping of the “The Ellen DeGeneres Show,” in Burbank, Calif. on May 24, 2016. DeGeneres, who has seen ratings hit after allegations of running a toxic workplace, has decided her upcoming season next year will be the last. It coincides with the end of her contract. (AP Photo/John Locher, File)
Ellen DeGeneres to end long-running TV talk show next year

Viewership dropped by 1.1 million people this season

Ottawa Senators centre Josh Norris, right, celebrates his game-winning overtime goal against the Toronto Maple Leafs with left wing Brady Tkachuk Wednesday May 12, 2021 in Ottawa. THE CANADIAN PRESS/Adrian Wyld
Norris scored winner, Senators beat Maple Leafs 4-3 in Andersen’s return from injury

Norris scored winner, Senators beat Maple Leafs 4-3 in Andersen’s return from injury

Rafael Nadal, of Spain, holds up the trophy after beating Daniil Medvedev, of Russia, in the final at the Rogers Cup tennis tournament, in Montreal on Sunday, Aug. 11, 2019. THE CANADIAN PRESS/Paul Chiasson
Tennis Canada could move top tournaments to US if Toronto, Montreal plan not approved

Tennis Canada could move top tournaments to US if Toronto, Montreal plan not approved

Philadelphia Flyers' Travis Sanheim (6) and Brian Elliott (37) celebrate with teammates after the Flyers won an NHL hockey game against the New Jersey Devils, Monday, May 10, 2021, in Philadelphia. (AP Photo/Matt Slocum)
Puck luck? Hockey’s secrecy makes betting on NHL a gamble

Puck luck? Hockey’s secrecy makes betting on NHL a gamble

FILE - John Davidson, left, president of the New York Rangers, and Rangers general manager Jeff Gorton pose at a news conference in New York, in this Wednesday, May 22, 2019, file photo. The New York Rangers abruptly fired president John Davidson and general manager Jeff Gorton on Wednesday, May 5, 2021 with three games left in the season. Chris Drury was named president and GM. He previously served as associate GM under Davidson and Gorton. (AP Photo/Seth Wenig, File)
New York Rangers fire coach Dave Quinn, 3 assistants

New York Rangers fire coach Dave Quinn, 3 assistants

Most Read