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Retail Food Fight

Regional and Independent Players Compete in a Fast-Paced Environment
Supermarket shopping

Independent and regional grocery chains in Canada face many challenges. Competition comes not just from the big three national supermarket chains—Loblaw, Sobeys, and Metro, with their myriad nameplates—but also from channel-blurring mass merchandisers whose share of the evolving grocery landscape has nearly doubled in the last decade, from 8.7 percent in 2005 to 16 percent in the first half of 2015, according to Statistics Canada.

“We’re seeing the continued incursion of the general merchandise sector into the food and grocery business,” confirms retail marketing consultant Ed Strapagiel. “Walmart continues to move more into the food sector, and Costco is growing.”

In addition, Strapagiel notes that Walmart is also battling Amazon for Canadian consumer dollars, which in turn puts pressure on Costco, the three national supermarket chains, and everyone else to keep up.

“The big guys are getting bigger and bigger, or competing harder and harder, and the smaller chains are getting squeezed,” Strapagiel explains, which has forced a number of regional players into the proverbial rock-and-a-hard-place dilemma. The smaller stores aren’t big enough to gain the types of efficiencies the largest retailers enjoy, nor are they “small enough to be fleet-of-foot or have a particular specialist niche.”

Pricing and the Exchange Rate
The big players have the clout to negotiate better deals with suppliers (like Sobeys’ controversial 2013 edict that it was cutting supplier prices by 1 percent), leading to lower consumer prices. This is critical to Canadian consumers, who have become much more price-conscious over the past decade. According to Euromonitor International research analyst Amanda Bourlier, concerns about the economy and employment, coinciding with the expansion of discount chains, has caused a long-term shift in the True North’s retail food industry.

Further evidence of this shift came in late January when Sobeys announced it would lower produce prices at both its namesake locations and Safeway stores in Alberta, as part of an ongoing commitment to help Canadians eat healthier.

Delivering on these low-price promises, however, has been particularly difficult due to the decline of the Canadian dollar.

“The exchange rate is our number-one challenge,” cites Larry Davidson, vice president of North American Produce Buyers Ltd. “Prices are far higher throughout the supply chain and it’s starting to limit the amount of produce in the pipeline.” The exchange rate, he points out, exacerbates cost increases due to other factors such as labor, water, and weather issues.

“Canada imports most of its produce through the United States, whether it’s grown there or comes in through U.S. ports, and it’s denominated in U.S. dollars,” says Jason Furman, director of logistics operations at Sunbelt Logistics Group in Toronto. “We’re seeing really drastic inflation pressures as a result of the weak Canadian dollar. Our customers are very particular about their buying habits, especially on hard-to-find or expensive produce items, and some of the big players have said they’ve seen customers going to the frozen section to buy fruit and vegetable items rather than buying fresh. We’ve seen a pretty significant slowdown in demand as a result of consumer spending and changing decisions about what to buy.”

All retailers, large and small, are affected by the exchange rate, but the bigger chains have more flexibility to lock in currency hedges or plan ahead on purchasing. More importantly, they can try to offset higher costs with internal efficiencies. And while low prices continue to be important, the higher end of the retail spectrum remains strong. Luxury retailers continue to successfully enter the Canadian market and grocery retailers are investing in higher-end formats and offerings.

“We’ll continue to see the bipolarization of the Canadian retail landscape,” predicts Bourlier. “Consumers want value at both ends of the spectrum, but they will spend on higher-end goods across all categories.” On the other hand, much of the share lost by independent retailers, especially since 2011, has come from those operating in the middle tier, neither low-cost nor premium. “It’s a tough time to be positioned in the middle,” she notes.