Loblaw's data-driven algorithms weigh on grocery promotions and quarterly sales

Loblaw Companies Ltd. said data-driven algorithms focused on profitability and increasing margins led to fewer promotions at its grocery stores, weighing on same-store sales in the second quarter.

The Brampton, Ont.-based company on Wednesday reported a net income in the 12-week period ending June 15 of $286 million, which was essentially flat when compared to the same time last year. Same-store sales at Loblaw’s food retail stores, which include Loblaws, Real Canadian Superstore, and No Frills, increased 0.6 per cent in the second quarter, compared to a 0.8 per cent increase during the same time last year. Traffic at food retail stores also decreased in the quarter, while basket-size increased.

Sarah Davis, president of Loblaw, said on a conference call with analysts Wednesday morning that the company’s strategy of using data-driven insights to drive higher margins led to fewer promotional deals at the grocery stores.

“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,” she said on the conference call.

“You end up with fewer items on promotion in your flyer, and that does have an impact on sales.”

Loblaw first began using “data-driven insights” in the first quarter of 2018, within the company’s market division. By the third quarter of the same year, it was also being used in the discount division.

But, as the retailer ramped up use of algorithms through the first half of 2019, it may have been “overzealous” in its approach, Davis said.

“In the excitement of seeing margin improvements in certain categories, as we started to implement some of the algorithm, people were overzealous as we all enjoyed the additional margins we were seeing,” Davis said, adding that while the company is still very committed to its approach of using data to make prudent decisions, it is going to make adjustments going forward.

“We know what we did and we know what we can do in order to change it.”

While food retail sales were sluggish over the quarter, Loblaw saw strength in its drug retail business – which features the Shoppers Drug Mart brand – with same-store sales jumping 4.0 per cent to $3.05 billion in the quarter.

“The highlight of our quarter was the performance at Shoppers Drug Mart,” Davis said, pointing to the same-store sales figures which were the best in three years. While the delayed summer weather put a damper on apparel and home and entertainment sales for the company, it saw strong sales for cough, cold and allergy products at Shoppers.

Davis also said that expanded food offerings at Shoppers locations is helping drive traffic and basket increases at stores.

Loblaw stock closed on the Toronto Stock market down 2.14 per cent at $66.41.

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