The State of Canada’s Grocery and Consumables Retail Landscape By: Robin Sherk THE RETAIL AND SHOPPER SPECIALISTS Table of Contents Executive Summary .................................................................................................................................2 Macroeconomic Environment Overview .................................................................................................2 Consumer and Retail Spending .................................................................................................... 3 Channel Sales Growth ................................................................................................................. 3 Key Consumer Trends Shifting Shopper Demand .................................................................................. 4 Health and Wellness Maintenance ............................................................................................... 4 New Tastes, New Experiences ...................................................................................................... 4 Omnishopping Demands ..............................................................................................................5 Elevated Value Expectations .........................................................................................................5 How Leading Retailers Are Responding ..................................................................................................5 Loblaw ........................................................................................................................................ 6 Sobeys .........................................................................................................................................7 Metro .......................................................................................................................................... 8 Walmart Canada ........................................................................................................................ 9 Costco Canada .......................................................................................................................... 10 Dollarama ...................................................................................................................................11 Amazon ..................................................................................................................................... 12 Implications for Consumables Brands .................................................................................................. 13 References .............................................................................................................................................. 14 1 The State of Canada’s Grocery and Consumables Retail Landscape By: Robin Sherk Executive Summary Canada’s retail environment is healthy. However, the consolidated and intensely competitive market means retailers must serve fast-changing consumer demands to find growth. These shifts are evident in shoppers’ rising health and wellness concerns, their desire for new tastes, their demands for the flexibility that comes with omnishopping, and their elevated value expectations. Several established players, including Loblaw and Walmart, are well-positioned against today’s consumer trends, while rising consumables disrupters such as Dollarama and Amazon are quickly changing the conversation about value and convenience. For manufacturers to be effective partners, they must keep pace with these shopper shifts, recognize how retailers are positioning themselves, and communicate their own alignment. Macroeconomic Environment Overview Canada’s macroeconomic conditions are solid. In the second quarter of 2017, real GDP grew at an annualized rate of 4.5%, the strongest pace in five years.1 This increase reflects good performance across industries, with the energy sector showing particular strength. The International Monetary Fund forecasts that Canada’s 2017 GDP growth will outpace that of the euro area, the U.K., the U.S., and Japan.2 The national unemployment rate of 6.3% in July 2017 is the lowest since 2008.3 At 5.8%, Quebec’s unemployment rate is even lower, and the lowest rate the province has recorded since comparable statistics became available in 1976.4 Although the market is looking up, three potential disrupters are on the horizon: oil, the North American Free Trade Agreement (NAFTA), and housing prices. A change in any of one could have dramatic consequences on consumer spending and the retail environment at large. The first potential disrupter is a change in oil prices. Canada is an export economy, and crude oil is its top export.5 The price of oil has fluctuated widely in the past three years, exceeding USD100 a barrel in 2014, but hovering around USD50 a barrel more recently.6 This variation creates unpredictability for the business environment in oil patch regions, particularly Alberta and Saskatchewan. If prices fall much below USD45 a barrel for an extended period, it will cause pullbacks in business investment and drive a sense of job insecurity as companies get pinched. Next is the current renegotiation of NAFTA, a long-standing trade pact among the U.S., Mexico, and Canada. This treaty is important because the U.S. is Canada’s largest trading partner, accounting for nearly three- quarters of Canada’s exports in 2015.7 Significant changes to this agreement could have a big impact on a number of sectors, ranging from agriculture and raw commodities to automotive. Clarity on the treaty’s status is not expected until later in 2018. The third market disrupter is escalating housing prices. After years of rising prices — punctuated by a year- over-year increase of 14% — housing prices across Canada hit a record high in June 2017, according to the National Bank of Canada and Teranet.8 Prices rose despite ongoing policy tightening designed to help contain rising mortgage debt. For instance, in October 2016, the federal government introduced tighter 2 stress tests of mortgage applicants to ensure they could handle monthly payments if interest rates rise. Higher prices require buyers to take on large debts, making households vulnerable if prices crash or if interest rates increase sharply. Concerns about unaffordable housing prices are regional, with Vancouver and the Toronto area having the highest increases. In June 2017, Toronto posted the highest year-over-year growth in housing prices at 29%. To help contain the acceleration, both of these markets have introduced 15% foreign-buyer taxes in the past year to discourage foreign investors from speculative buying. To date, Montreal and Quebec City have not faced skyrocketing housing markets, but the introduction of the tax disincentives elsewhere may shift investment focus to Quebec. Consumer and Retail Spending As the environment looks healthy, Canadians are feeling good. In August 2017, consumer confidence reached a 10-year high (Figure 1). Figure 1. Consumer Confidence in Canada Canada Consumer Condence 130 2014 = 100 Oct 2017: 120 116.6 110 100 90 80 70 60 50 2009 2010 2011 2012 2013 2014 2015 2016 2017 Source: Kantar Retail, Conference Board of Canada This optimism is translating into strong retail spending. Retail sales growth was up 7% through September 2017, with year-over-year growth reported in every province and territory. Furthermore, consumers are showing a willingness to buy big-ticket items. After hitting record growth levels in May, auto sales were up 5% through July 2017.9 Looking forward, spending growth cannot last at the current rate because household income growth is not keeping pace. Between 2000 and 2013, household income grew an average of only 1.2% annually, suggesting that debt is fuelling much of the increased spending.10 By Q1 2017, TransUnion Canada reported that consumer debt (excluding mortgages) averaged CAD21,696 nationally, up 1.9% year over year.11 This increase is due to rising debt across bank cards, auto loans, and installment loans. On a regional level, Quebec is relatively less leveraged, reporting an average debt of CAD17,894, whereas Alberta’s borrowers carry the most debt at CAD27,534. While delinquency rates average a relatively low 2.6%, Canadians are stretching their finances because they feel good about the value of their homes and other investments. Channel Sales Growth While Kantar Retail expects a more moderate increase in retail sales, channel sales are still looking up. The channel sales compound annual growth rate (CAGR) forecast through 2022 is 3.1%, up from 2.6% in the previous five-year period (Figure 2). While this projection includes expectations for inflation and population growth, the underlying result is still a slow-growth environment. Supermarkets and drugstores will lag the industry average. Instead, consumables channel sales growth will be led by discounters, hypermarkets, warehouse clubs, and online retail. These four channels offer shoppers a distinct value and convenience proposition. 3 Figure 2. Canadian Retail Formal Channel Sales: 2012, 2017E, 2022E CAD Billions Kantar Retail: Canadian Retail Sales ‘12-’17E ‘17E-’22E 300 CAGR CAGR Supermarket 0.5% 0.8% 250 Online 18.7% 12.1% Mass Merch Ex SC -6.1% -1.2% 200 Hypermarket 7.6% 3.2% Drug 2.5% 2.4% 150 Discounter 6.2% 5.3% Department -4.2% -0.7% 100 Convenience 1.2% 2.0% Category Specialist 1.5% 3.0% 50 Cash and Carry 3.3% 5.9% Apparel 5.2% 4.6% 0 Total Canada KR Retail 2.6% 3.1% 2012 2017E 2022E Source: Kantar Retail Key Consumer