CART TO CART How competition is intensifying across the provinces

BY KAREN RAUGUST

Bolstering their positions, the key national players have been involved in a number of acquisitions, with the continued consolidation impact- ing smaller regional chains and independ- ents. Loblaw completed its purchase of Shoppers Drug Mart in 2014 and pledged $1.2 billion in expansion funding for 2015; upermarket chains and independent grocery expanded westward by taking over the smaller retailers in operate in an extremely com- chain; and Metro moved into the upscale bakery market Spetitive landscape. The big three national food with the acquisition of the Québecois chain Premiere retailers—Loblaw, Sobeys, and Metro—face continuing Moisson. “Acquisitions are still on the agenda,” comments pressure from and other discounters, as well as senior research analyst Svetlana Uduslivaia at specialty stores and the rollout of Amazon’s e-commerce Euromonitor. “We’ll see this as more and more of a trend, push. Though Amazon is just beginning to enter the especially for building business in urban areas.” Canadian market, its popularity with millennials may The consolidation, it turns out, was both boon and signal an all-out battle for grocery dollars. bane to independent grocers as the big chains got bigger, In a report released in June 2014, Euromonitor found controlling more of the market. Tom Barlow, president the big three continued to dominate the Canadian grocery and CEO of the Canadian Federation of Independent sector in 2013. The leading chain in terms of sales, Grocers, explains: “In 2014, we actually saw an increase in Loblaw, commanded 29 percent of the total sector, down share, driven mainly by the acquisition of new stores,” he 2 percent from 2012, followed by Sobeys with a 25 says. “Most of these stores came from Sobeys as part of the percent share, up 6 percent thanks to its acquisition of Safeway acquisition; they were forced to divest stores as Safeway in 2013. Metro ranked third in terms of store part of the purchase agreement.” locations, but the bigger news is the fourth largest player, That said, continues Barlow, “consolidation has had a Walmart. Walmart has not only expanded steadily major impact on the industry. The centralization of power across the country, but vowed to open as many as 40 to a few big players is putting pressure on suppliers to new supercenters in 2015 in the wake of Target’s highly move support dollars from medium and small retailers to a publicized withdrawal. couple of large ones.” 6 — Blueprints Supplement | Apr/May/Jun 2015 Canada: Far and Wide On the plus side for suppliers, some of the Canada, are taking steps to address the compe- going forward, the leading grocery chains acquisition activity is expanding the shelf tition from Walmart. “The four incumbents are have required vendors to cut prices and grant space for produce. “There is growth in pro- not standing around while Walmart and other concessions. duce available at nontraditional retailers, Amazon are expanding,” says Ed Strapagiel, an For produce vendors, “there’s a trickle-down which are creating new food hubs in areas independent retail consultant in . effect,” says John Russell, president of J.E. where they don’t have a presence,” says Ron For suppliers, the ramifications of consoli- Russell Produce Limited, a wholesale distribu- Lemaire, president of the Canadian Produce dation and the increasing strength of the tor operating in and eastern Canada, Marketing Association. He notes that Loblaw discount tier include reduced prices and who explains the lower prices are coming at a is piloting basic produce sections in its newly lower margins. Since December 2013, when time when costs have been rising. “There are acquired Shoppers Drug Mart stores, particu- Sobeys instituted a retroactive price cut of 1 both increasing costs and increasing responsi- larly in urban areas. percent from most suppliers and froze prices bilities; there are new cost channels including

THE DISCOUNT WARS Most of the national retailers’ success sto- ries have come on either the discount or the specialty end of the market. “There are two polarizing tendencies, first the move toward discount formats of some kind that can com- pete on price, and second toward more of an upscale specialty retailer that appeals to an urban demographic,” says Uduslivaia. Sobeys, Metro, and Loblaw are reposi- tioning and rebranding many of their stores into their most successful formats, she says. “As opposed to having a gazillion banners, they’re now focusing on a few key banners.” Many of these are discount formats, includ- ing Loblaw’s , Sobeys’ FreshCo, and Metro’s . Uduslivaia points out that Walmart’s strong inroads into the market have driven many consumers to the discount tier and raised the stakes on the produce front by merchandising fresh fruits and vegetables at the front of the store, putting freshness at a premium, especially in urban formats. Unlike Walmart, Target, which entered the market in 2011, did not fare well and withdrew from the Canada retail landscape altogether in 2015. “They did everything right in terms of preparing to enter the coun- try,” Uduslivaia says, “but after they opened, it was another story.” Not only was Target unable to find its identity, she says, but stores were often out of stock or didn’t have the right product mix or pricing for Canadian shoppers. The result was reminiscent of British grocery giant Tesco’s debut in America under the Fresh & Easy banner, which ended in bankruptcy in 2013.

PRICING AND CONCESSIONS Meanwhile, the three leading chains, along with long-established warehouse chain www.producebluebook.com Apr/May/Jun 2015 | Blueprints Supplement — 7 CART TO CART food safety, compliance, traceability, and best- he says. “With the thin margins, there’s pres- THE PREMIUM NICHE before dates on perishables. It makes the man- sure on vendors to be more efficient, shave At the other end of the pricing scale, the agement of these commodities more difficult. prices, and make other concessions.” national chains also are testing and expanding And the decreasing Canadian dollar over the Barlow notes that consolidation intensi- premium formats, as well as adding premium past several months has also been tough.” fies these trends. “We expect to see food cost features to their mainstream stores. Many are Strapagiel points out that the Canadian dol- increases, combined with a reduction in taking cues from successful high-end specialty lar was down 10 percent in the winter months manufacturer or producer investments in grocery chains like Longo Brothers Fruit of 2014 and 2015 compared to the previous innovation and capital, due to margin pres- Markets and Whole Foods Markets. Longo’s, year, raising costs for suppliers during a time sures created by the buying power of the based in Toronto, and U.S.-based Whole when they were importing many commodities major chains.” Foods, both have a small footprint in Canada from the United States and elsewhere. “With “Price pressures are always a factor,” today, but are reportedly looking to expand the competition, it’s very hard for retailers to stresses Lemaire, “but all in all, consumers their market share in the True North in the pass those increases along to their consumers,” are still demanding quality.” coming years. Metro has been testing additions such as Select Chain Data for Canada expanded and more diverse salad bars and hot gourmet take-out options, as well as Company Geographic Scope Total Number of enhancing the quality and range of its fresh & Store Banners Grocery Stores fruit and vegetable offerings. Loblaw is tak- Buy-Low Foods and 24 (corporate & franchised) ing similar steps in some of its stores in Costco Wholesale Canada Nine provinces 88 Toronto and , adding new fruits and 2012 and southwestern Ontario 15, plus 2 planned vegetables to their mix. And Sobeys launched Fruitcana Produce British Columbia and Alberta 18 ‘Sobeys Extra’ in 2013 under a similar blue- National: Loblaw's, Zehrs, print, with additional signage to explain the , No Frills, Maxi, Real 1,132 (corporate & franchised), differences between varieties of produce, and Canadian Superstore 2,440 of all formats more fresh-cut fruits and vegetables. Longo Brothers Fruit Market Greater Toronto; is also Canada’s 26 including 4 small-format These moves are supported by consumer online grocery leader (The Market) trends. “The Canadian market is very unique Metro, Inc. Quebec & Ontario: includes in that Canadians have a high propensity for Metro, Metro Plus, , 564 (corporate & franchised), Food Basics, Adonis 832 all formats trying new products,” explains Lemaire, who British Columbia & western 145 reports that three in four Canadians have tried Canada: includes Save-On-Foods, a new fruit or vegetable in the last five years. Overwaitea, , Cooper's “It’s really exciting that the consumer base is Foods, PriceSmart willing to try something new,” he enthuses. Sobeys All provinces: includes Sobeys, Safeway, IGA, , FreshCo, 1,800 (corporate & franchised, “Retailers have to keep on their toes to meet Price Chopper, all formats) this consumer demand.”

Sunterra Quality Food Markets and 10 Lemaire also notes that while shoppers under 30 are driving the trend toward produce T & T Supermarket Greater , Calgary 22 (Loblaw-owned) & Edmonton;and Ontario diversity, older consumers are seeking more

Thrifty Foods Lower mainland and 26 fresh fruits and vegetables for their health, Vancouver Island while demanding they be packaged, displayed, National 396, including 288 Supercentres and merchandised for ease of purchase and preparation. Examples include more fresh-cut produce and value-added meal kits, merchan- dising ingredients for a healthy dish together in one display, adding recipe cards or recommen- dations to certain produce items, or having dietitians onsite. “How do you provide a solu- tions-based approach?” Lemaire asks. “It’s the ‘how’ that is essential.” And while demand for fresh-cut produce has climbed among older consumers, it also appeals to time-strapped shoppers of all ages. “As societal demands require more work and less play, we tend to have little time for food prep,” comments Joe Rubini, president of Toronto-based Rally Logistics, Inc. “Getting 8 — Blueprints Supplement | Apr/May/Jun 2015 Canada: Far and Wide

CART TO CART fresh-cut produce on store shelves is sometimes Rubini, too, sees the trend as gaining Quebec or Sobeys in the Maritimes—but all worth the expense to add that time back into momentum. “As Canada continues to diversify have expanded nationally. Metro, which is your day.” and more people immigrate here, it’s important the most regional of the big three chains, to provide the traditional fruits and vegetables bought A&P years ago to enter Ontario, ETHNIC AND ORGANIC TRENDS they would be accustomed to back ‘home’.” while Sobeys’ purchase of Safeway solidified Canada’s Asian population continues to rise, Both Russell and Rubini see further oppor- its presence in the west. French-speaking and mainstream grocery chains catering to spe- tunity with organic produce. Rubini believes Quebec has its own banners, but the national cific Asian populations, including those of smoothie and juicing trends are powering chains have entered through acquisition. As a Chinese, Indian, and Filipino descent, continue demand, while Russell believes pricing is key. result, consolidation, price pressure, new for- to grow. The leading national chains have pur- “Organic producers are getting pretty sophisti- mat testing, and other trends tend to be con- chased some of the key players in the past as a cated; their production levels are up to 75 per- sistent across Canada. way to participate in this trend, as Loblaw did cent of conventionals and the price differential There are some subtle differences, however. with T&T Supermarket in 2009. is shrinking,” he explains. “Organic demand is Many observers see Ontario, including But many observers believe there is much increasing steadily, and there are various levels Toronto, as being the most competitive of the more room for expansion. Uduslivaiya notes of demand based on family income. At the dis- provinces, with grocery square footage growing that ethnic consumers want a wide diversity of count banners it’s all about affordability, but more quickly than in the past and, many produce with a high degree of quality and even those consumers are trying to manage believe, faster than the market can handle. freshness, but at a good price—which is not their budget for organic.” Western Canada’s strong population growth available at most specialty stores. “Mainstream This is backed up by the big chains and robust economy has led to opportunities retailers are not really responding to these cus- adding more organics, from various meat there. And Alberta has higher per-capita con- tomers’ needs and demands,” she comments. varieties at Metro and tropical fruit at Loblaw sumer spending rates than other territories, Strapagiel agrees, adding: “The ethnic trend to a broader assortment of organic fruit and which could mean there is room for more pre- has been with us for a while, but it’s not at its vegetables at Sobeys. mium grocery stores. peak yet.” And although much of the develop- Diversity, especially in Asian population ment has been in the bigger cities including REGIONAL STRATEGIES growth, is affecting the country with higher Vancouver, , and Toronto, he notes, “I Each of the national chains has geographic concentrations in Ontario and British could see it expanding into other cities.” areas of relative strength, as Metro has in Columbia, though the actual composition of this trend varies by city and province as well. Uduslivaiya says the needs are tied to specific communities, propelling retailers into “ana- lytics to really understand their customers.” All of the national trends—the strength of the discount tier, expansion of ethnic and urban retail formats, and the testing of pre- mium banners and features—occur in the context of a very small population. Canada has less than 35 million inhabitants, compared to more than 319 million in the United States. Meanwhile, competition from U.S. chains, from Walmart to Whole Foods, continues to grow. All of these trends likely point to more consolidation and continued price wars within the Canadian grocery channel.

Image: Shutterstock.

Karen Raugust is a freelance writer who covers business topics ranging from retailing to the food industry.

In This Issue

Additional information about the sales pipeline at drugstores, convenience stores, and other retailers can be found in our feature, “A Hot Sales Opportunity?” in the main journal.

10 — Blueprints Supplement | Apr/May/Jun 2015 Canada: Far and Wide