Ottawa, July 3 - Loblaw is reducing the price spread between its discount superstores and conventional grocery stores in Ontario, a move that will pressure rivals of Canada's biggest grocer to follow suit, an analyst said on Thursday.
Loblaw narrowed the spread largely by lowering prices at conventional format stores and offering fewer big discounts on dry goods at its superstores. That reduced the gap in a 25-item basket to 12.9 percent from 16.7 percent last November, Keith Howlett, an analyst at Desjardins Securities, said in a research note on Thursday.
Howlett said his recent review also suggested that Loblaw is taking "a more rational and more targeted" approach to setting prices with less extreme discounts.
Loblaw could not immediately be reached for comment.
Its competitors Sobeys and Metro Inc will now likely need to reduce prices at their conventional grocery stores in the highly-competitive Ontario market, Howlett wrote.
"We continue to think Loblaw shares are appropriate for value investors with a two-year time horizon," wrote Howlett, who has a "buy" recommendation and C$36 target for the stock.
"Positives include credit car, gas and drugstore businesses: but we are still waiting on the core grocery business...operating EPS will only begin to recover and head upward in third quarter 2008."
In April Loblaw said it was behind schedule on the three- to five-year turnaround plan it launched a year ago. The company is cutting prices while upgrading systems and stores to try and keep customers as Wal-Mart Stores Inc expands food sales in Canada.
Loblaw shares gained 92 Canadian cents, or 3 percent, on Thursday to C$30.94 on the Toronto Stock Exchange. So far this year, the shares have declined approximately 10.5 percent.