Retail: Lots more Mr. Nice Guy

Galen Weston has boldly put himself at the forefront of the turnaround effort at Loblaw. But can a guy this nice clean up a mess this big?

As television pitchman for Loblaw, Galen Weston Jr. couldn’t be more different, physically, from his famous predecessor, the one who made President’s Choice a household word in Canada. The Dave Nichol who appeared in all those ads more than 20 years ago certainly looked like a guy who loved to eat — someone who might as well have had “foodie” tattooed on his forehead, who you might actually believe spent his time scouring the globe for exotic foods. As for Weston, who stands six feet, four inches tall, with nary an ounce of fat on him — well, one look at the man and your immediate reaction is you want to give him a sandwich.

Yet there’s the 34-year-old executive chairman of Loblaw — and heir to the Weston family business — gamely appearing in a TV ad to expound on the wonders of international cuisine. He’s standing beside “friends” Sam and Ojus Ajmera of FGF Brands, based in Concord, Ont., telling viewers the two are responsible for building the world’s largest tandoor oven, used for making the traditional Indian flatbread naan. “It’s one of the world’s great eating experiences — unfortunately, it’s just about impossible for Canadians to enjoy at home,” says Weston. “Now, Sam and Ojus bake authentic naan exclusively for President’s Choice. Thanks, guys.” It’s just one of the reasons, says the announcer at the end of the 30-second spot, why Loblaw is “worth switching supermarkets for.”

It’s that tag line — one used by Loblaw back in its glory days in the 1980s — that gets to the heart of Weston’s challenge since he stepped into the top job just over a year ago. The last time the “worth switching supermarkets for” line was pitched, Loblaw was led by a seemingly magical team of Nichol (ad-guru pitchman and marketing genius), president Richard Currie (strategic and operational mastermind) and Weston’s father, Galen Sr. (chairman and head of the Weston family fortune). The slogan then was a war cry to other stores, putting them on notice that Loblaw had the goods to bring in the customers. This time, however, “worth switching supermarkets for” seems more of a plea, begging consumers to give Canada’s largest grocery chain — hobbled by distribution problems, out-of-stock issues, food priced higher than consumers’ expectations, and a botched attempt to enter the general merchandise area — a second chance.

The problem, says Unionville, Ont.–based retail consultant Richard Talbot, of Talbot Consultants International Inc., is that if you’re going to make that request of customers and “you don’t deliver when they come in the door, they ain’t never coming back.” Adds Talbot: “You have one chance, and if you blow it — well, let’s just say retail is a question of delivering at the store level.”

Nichol, who left Loblaw 15 years ago when it was at the top of its game, assesses the situation this way: “Young Galen has quite a job ahead, because the people who were running Loblaw beforehand did everything possible to try and destroy the business. And they almost pulled it off.” Nichol admits he’s often stopped in the streets by people who still think he’s with the company — “which annoys me, because I wouldn’t have left such a disaster.”

In an interview from his home in Rothesay, N.B., Currie, who ran Loblaw for 25 years before stepping down from the top job at the end of 2001 (he stayed on in the organization as president of Loblaw parent George Weston Ltd. until 2002), says it will take a lot of muscle and willpower to whip Loblaw back into shape. He makes it clear he doesn’t want to be portrayed as a “heartless son of a bitch” taking “potshots” at those who followed him, and he acknowledges it’s always “a lot more difficult to manage success than to manage failure.” But he also finds the situation at the company he built into a grocery powerhouse “heartbreaking.”

After all, he thinks the uphill battle the younger Weston now faces could easily have been avoided. If it had been up to him, Currie would have sold Loblaw a long time ago.

The scion of the Weston family doesn’t try to deny the scale of the challenge before him. Sitting across a boardroom table in Loblaw’s headquarters — which sits in a particularly barren corner of Brampton, Ont., where the huge office building off the 407 highway stands out like a monolith — Galen Jr. says the company is looking at a three-year turnaround plan. He acknowledges that managing the expectations of both shareholders and consumers during that time will be an enormous task. “The biggest challenge,” he says, “is striking the balance between moving fast and moving too slow — it’s a continual game of accelerate and brake, accelerate and brake.” He says he’s convinced, however, of the company’s “tremendous scale” over its competitors and of how “that advantage over everyone else has been underexploited.”

Weston, who is sometimes referred to as G2 around Loblaw (his father is G1), is reserved but also charming. He’s dressed casually in a striped, open-collared shirt and dark pants, and with his floppy hair and bookishness looks every bit the type you do take home to mother. (For the record, he’s married to Alexandra Schmidt, of the Bata family shoe empire.) He has a considered, contemplative demeanor, something he demonstrates through the long pauses he takes before answering “big” questions like, well, how does he plan to save the company?

Much of what he has to say sounds rehearsed, but there’s a definite intensity about his desire to put Loblaw back on top of the food chain. “It’s an incredible business, with extraordinary potential and some fantastic people,” he says. “It’s just a matter of putting our heads down and getting the work done.” He likens the job to running up the down escalator — “You can do it for a while,” he says, “but eventually you get tired and you have to make the leap to the top.”

Weston admits that 2006 and 2007 have been rough years, during which shareholders have seen the stock price sink to just over $45, from a high of about $75 in the spring of 2005. Loblaw ended last year with its first annual loss ($219 million) since 1987. Weston also had to oversee the laying off of about 1,000 managers as the company changed its operational structure. Then there were the inventory writedowns, totalling $120 million, which were mainly the result of a failed strategy to get into general merchandise, and another $800-million writedown hit on its Provigo assets in Quebec.

This all happened during a time when upper management turned over almost completely following the major shakeup of September 2006, which included the departure of former president John Lederer and the stepping down of Galen Weston Sr. from his position as chairman. “It’s always harder than you think,” says Galen Jr. “There were 15 senior managers, and there are still 15 today — but 13 of them are new and I’m one of the old ones. That’s an enormous amount of change in the senior ranks, and it takes time for the chemistry to develop between these people.”

It hasn’t been all bad since the Harvard and Columbia MBA graduate, who has had smaller-scale management positions with both the No Frills and President’s Choice Financial divisions, came on board. Senior management now comprises Mark Foote, formerly of Canadian Tire Corp., as president and chief merchandising officer; deputy chairman Allan Leighton, a longtime business confidante of Galen Sr. whose past experience includes senior management positions at Britain’s Asda grocery chain; and chief operating officer Dalton Phillips, who came to Loblaw from Brown Thomas, a Weston-owned department store in Ireland, and has experience at Wal-Mart’s operations in Europe. By all appearances, they seem to be reading from the same script. “I’m relatively impressed at how well they all seem to be working together,” says Peter Holden, analyst at Veritas Investment Research Corp. He thinks management has done a good job of analyzing the problems and coming up with a potential fix. But he wants to see hard figures to back up the strategy relatively soon. “As one of my friends likes to tell me,” Holden says, “the plural of anecdote is not ‘data.’”

It’s been eight months since Loblaw held an analyst day in February to lay out a battle plan for “making Loblaw the best again,” and five months since the annual general meeting in May, when Weston gave his first address to shareholders as executive chairman. The first stage, he said back then, is to simplify the organization and fix the basics — product availability, in-store operations, IT and supply-chain management. Then there’s improving the “value-for-money” proposition for customers. Finally, there’s fixing the economic model of the Superstores it is introducing in Ontario. Once that’s done, Weston has said, the job over the next year or two will be to “innovate through the formula for growth.”

That formula includes accelerating the development of the private brand strategy, with an emphasis on the President’s Choice label and the Joe Fresh “cheap chic” clothing brand, which has brought in sales of $400 million since it launched a little more than 18 months ago. The company also plans to rejuvenate store formats across the country — it has many banners, including No Frills, Loblaws, Zehrs and Fortinos, and Provigo and Maxi in Quebec — while rolling out improved Superstores in Ontario. At the same time, Weston says, Loblaw will continue to improve operations to become a “truly lean” retailer.

But exactly how does Loblaw plan to do this? Well, Weston told shareholders back in May that the idea is to ensure these basics of food retailing: “best format” stores, distinctive and able to meet customers’ different needs; “fresh first,” especially when it comes to produce; maintaining a “control label advantage,” given that house labels like PC, Blue Menu and PC Organics are responsible for 35% of sales at Loblaw; “always available,” meaning stores must aim for the best availability of food and merchandise in Canada, with out-of-stock becoming a non-issue; “health, home and wholesome” — providing products that contribute to the well-being of not only Canadian consumers but the environment, too; and finally, “friendly employees, motivated to serve.” Back at the head office in Brampton, Weston continues on this theme. “It’s not rocket science,” he says. “You just have to do it and do it consistently.”

He and his management team have lofty financial ambitions for their turnaround strategy, to be sure. If everything goes according to plan, sales will grow 5% annually, adjusted net earnings will climb 10% annually, and there will be free cash flow of about $250 million a year. Those targets appear still a way off. For the second quarter, the company earned $119 million, or 43¢ a share, compared with $194 million in the same quarter of 2006. Adjusted for one-time charges, it earned 60¢ a share, versus 70¢ in the second quarter of 2006. Revenue increased 3.5% to $6.93 billion; same-store sales grew 2.7%.

Ryan Balgopal, of Scotia Capital, says in a recent note that Loblaw is in the midst of its “maximum-risk” period, as it waits to see if its plan will work. Getting serious about price reductions will hurt profitability, and “there appears to be little movement on food merchandising initiatives” to drive volume, Balgopal says. Keith Howlett of Desjardins Securities expresses concern in a research note over an “eye-popping” promotion from Loblaw prior to Thanksgiving weekend. The company offered $10 off purchases of $100 or more, and $30 off purchases of $250 or more, at stores representing about 50% of its revenues — which he estimates at $800 million over the promotion period. “We have two diametric reactions,” Howlett writes. “This promotion will cost a lot of money; and Loblaw must be feeling better about its in-stock, supply chain and store presentation to offer such discounts.”

It’s certainly true that Loblaw today is far stronger than it was in the early 1970s, when it was bringing in annual revenue of only about $40 million. But it’s also true that its current problems, though smaller in magnitude, could be harder and more expensive to fix. During its earlier crisis, Loblaw was so broken that almost anything you did would help, and the competition was weak. Today, the Loblaw behemoth brings in annual sales of close to $30 billion, but its rivals are far stronger and coming at Canada’s largest grocery retailer from both sides. On one front are other large grocery chains Sobeys and Metro, niche players like Whole Foods and regional entries like Bruno’s and Farm Boy. On the other is the Godzilla of retail, Wal-Mart, which has made blood sport out of competing with other retailers.

Nichol, who now runs a food marketing consulting business in Toronto, suggests the “only answer” to Loblaw’s problems are to create “meaningful and sustainable differentiation” with its competitors by developing superior products available only at its stores. (While selling Tide laundry detergent below-cost is certainly “meaningful” to consumers, Nichol says, it’s not “sustainable.”) The key is the private label program, he adds, yet it seems the company “forgot about President’s Choice and No Name brands.” Nichol has talked to Galen Jr.informally about the problems at Loblaw, and agrees the product-specific approach to advertising is a good strategy. (He hears the much-touted naan is flying off shelves.) And Galen Jr. “reads well” on TV. “He’s not wound up in himself,” says Nichol; he comes across as “just a nice guy.”

Don Watt, chairman and CEO of Toronto-based retail consultancy DW+ Partners Inc., and the man responsible for putting Dave Nichol on television, says he’s relatively optimistic about Loblaw’s future. “I have enormous belief in the Weston family — they’ll get it right,” he says. The ownership structure at Loblaw, while still a publicly traded company, means the Westons will do what it takes to put the company back on its feet, he says. Watt, for one, thinks the new Loblaw ads are fairly effective, using a simple strategy of Weston pointing to one product — whether its reusable shopping bags, low-fat beef burgers or Indian naan — at a time. “You get customers in to look for that one product, and hopefully they’ll see other things they like,” he says. The good news, he adds, is that Loblaw has the right essentials to start with, and “the food business is not complicated, if you stick to the basics.”

Currie is less sanguine. He thinks the company already has the essential ingredients for success; they just need to be managed better: “Loblaw has great products and market leadership, so all that needs to be done is run it. But that requires real managerial leadership, day by day by day.” While it is still early in Loblaw’s rejuvenation, and the decisions Galen Jr. and his senior managers are making today may very well work out, Currie says that — so far — “there’s been a lot of talk, a lot of presentations, but I haven’t seen any material change.”

Loblaw still has a tremendous asset base, with great stores, real estate, brands and distribution facilities, Currie adds, but it has strayed too far from its core food business in favour of pursuing a general merchandise strategy. “Loblaw built a reputation on food,” he says. “If Loblaw loses its food reputation, whatever else won’t matter.” Broadening the types of goods sold at Loblaw grocery stores — at one point, general merchandise included everything from barbecues and patio furniture to big-screen televisions and DVD players — meant that Canada’s largest grocery retailer was fighting two very different wars: one with the other grocers, and one with Wal-Mart and Canadian Tire. “Loblaw is going to have to make up its mind,” Currie adds, “because it can’t fight both at the same time.”

To be fair to the Westons, it’s not as if they don’t “get” the need to put the focus back on food. Galen Jr. points to the privately owned Wegmans chain in the United States. He says it’s a good example of a food retailer that has managed to succeed by focusing on food and providing superior service. Likewise, analysts like Holden and Peter Rozenberg of UBS Securities Canada point out that another U.S. grocer, the Kroger Co., has managed to resuscitate itself on a food strategy even while going head-to-head with Wal-Mart. “Loblaw’s strategy parallels a very successful restructuring at Kroger in the U.S., which similarly focused on price reductions, cost savings and improved in-store execution,” Rozenberg says in a recent research note. Kroger’s stock price has doubled, to about $26, since early 2003 as a result of the strategy.

Weston believes a general merchandise strategy in key areas that make sense to a grocer has its place in the Loblaw of the future. Along with a great selection of food, general merchandise in important areas such as home, health and lifestyle will provide a differentiated shopping experience, according to Weston. “If you tell that story in an integrated way to consumers,” he says, “Wal-Mart is nothing like that.”

Some retail watchers say that Currie himself sowed the seeds of Loblaw’s decline. After all, he favoured Lederer to replace him, and it was Lederer who embarked boldly on the general merchandise strategy. Talbot says it was clear from the time Wal-Mart entered Canada in 1994 that it was going to get into the food business here. “Godzilla was coming in to kick them [Canadian grocers] — how could anyone miss that?” Talbot asks. What retailers like Loblaw should have done in the 1990s was align their products and strategies to take on Wal-Mart, rather than “waiting to fight their enemy once it had reached the beach,” he says.

Currie admits Lederer was his choice, but says that it was the Weston family, Galen Sr. in particular, who seemed to be smitten by the merchandise solution to growth, and Lederer more or less agreed with the plan and implemented it. Currie also makes the point that the high-water mark for Loblaw stock was to where it was. “And the shareholders who have held on through all that time,” he adds, “still won’t have made a dime.”

in April 2005 — more than three years after he had left the president’s post.

Back then, he saw three ways forward for the company: take its food expertise to other countries, get into general merchandise — or sell the business. The reasoning behind the last option was simple: Loblaw had such a huge market share in Canada, it was not likely to grow very much, because the cost of gaining any extra point in market share at that level “keeps going up,” Currie says. “There is no question I wanted to sell it, because we couldn’t double the size of Loblaw in Canada, we couldn’t take it outside Canada, and the other options, as in going big on a broad assortment of general merchandise, was too risky.”

So why wasn’t Loblaw sold? Family businesses, Currie says, “have their own dynamic.”

The Westons have obviously chosen, for now at least, not to entertain the idea of selling the company. Galen Jr. told reporters at this year’s annual meeting that “the family is committed to the business” and is focusing on turning it around. But the family might have little choice. Both to where it was. “And the shareholders who have held on through all that time,” he adds, “still won’t have made a dime.”

Watt and Currie say they definitely don’t believe selling the business “is an option today” for the Westons, mainly because of the loss of $8.5 billion-plus in shareholder value since 2005. “Those are big numbers to work with,” says Currie.

Everything, then, hinges on Galen Jr.’s strategy. “We continue to see the Loblaw turnaround as a long-term process that can have a successful conclusion,” says Jim Durran of National Bank Financial in a research note. But if “efforts fail to gain sufficient traction within the next two to three years, we believe the Weston family will seek a buyer.” Watt suggests an international player, like Kroger or Tesco of Britain, would be likely buyers if Loblaw ever did come on the market — more likely than Wal-Mart, which wouldn’t like dealing with the unions that represent Loblaw employees.

If Loblaw had sold back when Currie had wanted to, none of this would have been necessary, of course. And Currie points out that if it takes four or five years to get things right — and get the stock price back up — then close to a decade will have passed just to get the company back just to where it was. “And the shareholders who have held on through all that time,” he adds, “still won’t have made a dime.”