Loblaw expects higher minimum wage rules will increase its labour costs by $190M

Canada’s largest grocery and drug store operator warned Wednesday that minimum wage increases in Ontario and Alberta threaten to harm its bottom line and it will have to find ways to cut costs.

Loblaw Companies Ltd. (TSX:L), which owns Shoppers Drug Mart and grocery chains including Loblaws and No Frills, estimates the wage hikes will mean its labour costs will grow by about $190 million next year.

“We are flagging a significant set of financial headwinds and the organization is mobilizing all of its resources to see whether or not it can close that gap,” Loblaw chairman and CEO Galen G. Weston told analysts during a quarterly earnings conference call.

“At this point, we don’t know the answer.”

The Ontario government has proposed legislation that would boost the hourly minimum wage, which is currently set to rise from $11.40 an hour to $11.60 in October, to $14 on Jan. 1 and $15 the following year.

The province has said the wage increases are intended to increase people’s purchasing power and stimulate the economy. But a number of business groups, including the Ontario Chamber of Commerce and the Canadian Federation of Independent Grocers, have decried the legislation, saying it will result in job cuts.

Ontario Labour Minister Kevin Flynn called Loblaw a “true Canadian success story,” noting that profits attributable to shareholders have more than doubled since last year and dividends have also increased.

Despite the growth, “not everyone is sharing in the benefits,” he added.

“Many workers are feeling as though they are not able to get ahead and some are struggling to support their families on part-time, contract or minimum-wage work. Given this uncertainty, government has a responsibility to protect workers and create opportunities so people feel confident about the future,” Flynn said in an emailed statement.

In 2015, Alberta announced plans to hike its minimum wage from $10.20 an hour to $15 an hour by next year.

Weston called the wage increases “the most significant in recent memory,” adding that the company is expediting measures to save money such as rolling out more self-checkouts at its Shoppers Drug Mart stores.

“We have a lot of work ahead of us as we’re still assessing the extent to which we can mitigate these headwinds,” Weston said.

Loblaw said Quebec’s changes to generic drug prices are also expected to cut into its bottom line. Last week, the Quebec government reached a five-year deal with the Canadian Generic Pharmaceutical Association that will see the launch of new cost-saving generic prescription medicine and reduced prices.

The agreement will result in lower generic drug prices beginning in the fall and is expected to save the province more than $300 million a year.

There may also be more challenges ahead for Loblaw.

Last month, U.S. e-commerce giant Amazon announced a US$13.7-billion deal to acquire Whole Foods, a move some say could upend Canada’s grocery industry.

Earlier Wednesday, Loblaw reported a second-quarter profit attributable to shareholders of $358 million or 89 cents per diluted share, up from its profit of $158 million or 39 cents per diluted share a year ago.

Revenue for the quarter ended June 17 amounted to nearly $11.08 billion, up from $10.73 billion in the same quarter last year.