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.
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.
Success by Differentiation
Despite the competitive challenges, many independents and local grocers are flourishing. “We have a healthy mix of national and regional customers and our business is growing on both sides,” says Davidson. “Smaller chains that are hands-on operators and have a passion for fresh produce are doing really well and are happy with the reality of their situation.”
David Wilkes, senior vice president of the Retail Council of Canada, believes size is less important in the grand scheme of things than customer service. “It’s all about basics and fundamentals to give the customer the best possible experience, no matter the size or ownership.”
LESSONS LEARNED FROM TARGET
Target closed down its Canadian operations in early 2015, just two years after its debut in the country. Were Target’s woes unique, or does its situation offer lessons for U.S. retailers hoping to expand into Canada?
David Wilkes, senior vice president of the Retail Council of Canada, notes that popular high-end grocer Whole Foods as well as luxury retailers Saks Fifth Avenue and Nordstrom department stores have been able to enter the Canada market successfully and continue to expand. “It was a black swan event with a unique set of circumstances,” he says of Target.
“There are no barriers to U.S. firms if they approach it right; you have to have the right product at the right price at the right time, with the right focus on individual markets. Most retailers understand that—Target was an exception.”
Retail marketing consultant Ed Strapagiel agrees: “Up to their advances into Canada, Target was regarded as a sharp operator with excellent marketing.” But the retailer misjudged the market initially and then pulled the plug, possibly prematurely, when a new CEO came into the picture. “There were all sorts of missteps; many of the wounds were self-inflicted.”
Euromonitor International research analyst Amanda Bourlier adds that not only did the retailer exhibit a lack of understanding of Canadian consumers, especially when it came to product mix and pricing structure, but executed its plans in a haphazard manner.
Strapagiel concurs, and says other retailers can learn from Target’s experience. “Canada is a very different place to do business,” he explains.
“It’s not so much that consumers are different, it’s the operational structure.” Canada’s lower population density adds wrinkles to distribution, though he believes there are plenty of opportunities in the more populous areas. Additionally, unions tend to be stronger than in the United States affecting labor costs, while packaging and labeling costs are higher in the provinces due to bilingual requirements.
“Loblaw, Metro, and Sobeys are formidable competitors,” Strapagiel says. All three are operationally sound and vertically integrated, and Loblaw in particular is a master of private labels, he adds.
The largest of the regional chains, 100-year-old Overwaitea Food Group, is owned by the Jim Pattison Group and operates the Save-On-Foods, PriceSmart Foods, Cooper’s Foods, Urban Fare, and Overwaitea Foods banners. Save-On-Foods is the chain’s most recognized banner, and other stores, like Cooper’s Foods (purchased in 1999), are being rebranded. Like the big national supermarket groups, Overwaitea is also expanding its reach: the chain began moving outside its traditional base of British Columbia and Alberta in 2015 to the prairie provinces of Saskatchewan and Manitoba.
Overwaitea has opened nearly two dozen new stores in the last two years, and expects to add 25 more to its ranks within the next two years. It also opened new stores in British Columbia, including higher-end PriceSmart Foods in Burnaby and Fleet-wood, and converted three recently acquired Lower Mainland MarketPlace IGA stores to Save-On-Foods.
Another group, Federated Co-operatives Ltd. based in Saskatoon, Saskatchewan, acquired a number of Safeway stores from Sobeys, and rebranded the new locations. While Federated Co-op is certainly not as large as Walmart or Canada’s Big Three chains, it has a sizeablenetwork of wholesale, foodservice, and retail services. Through its The Grocery People subsidiary, which contracts with grower-shippers in several provinces, affiliated member stores are supplied with competitively priced produce and fresh-cut products.
A standalone retailer, Pasquier, which opened in Quebec in 2010, is touted as the country’s largest independent grocer at 150,000 square feet. The grocer is well known for its bakery and meat departments, but also offers an expansive produce section with many locally grown fruits and vegetables, a plethora of fresh-cut selections, and an entire second floor devoted to cooking lessons and dining.
Originally modeled after the U.S.-based Wegmans Food Markets chain, Pasquier has become a “destination” for Quebecois shoppers—so much so that Big Three rival Loblaw looked to the independent retailer for inspiration when remodeling its own Quebec stores.
Urban vs. Rural Locations
Stores in major town centers are thriving, but some rural areas have become extremely price-sensitive. “Urban independents and regional players are doing better than small and rural operators,” Bourlier says. She notes that Walmart has been aggressively expanding into rural areas and small towns, as urban areas have less space available for supercenter formats and already face fierce competition.
Independents and smaller chains operating in urban areas, meanwhile, are able to fill niches not well served by the big chains. Downtown stores, for example, often feature better or unique selections of natural and organic foods, a health and wellness focus, or assortments of hard-to-find produce for ethnic consumers and sophisticated cooks.
An example is Toronto’s Galleria Super-market, with two locations in the city and plans for as many as 20 stores by 2030. Galleria specializes in Korean foods with an extensive array of fruit, vegetables, herbs, and flavorings. The stores are also known for their selection of freshly-prepared traditional Korean meal kits; customers call a day ahead and meal components are assembled for pick up the next day.
Some of the independent chains opening new stores in 2015 and 2016 include Vince’s Market, which specializes in fresh food-heavy small formats and is adding a new location in Tottenham to its existing stores in Sharon, Newmarket, and Uxbridge, Ontario; Farm Boy 2012, which opened four fresh markets in Ontario in 2015, bringing its total to 19; Marché Adonis, which opened branches in Laval and Anjou, Quebec; and the McEwan Group, owned by celebrity chef Mark McEwan, which opened a second store in downtown Toronto featuring chef-created prepared foods and groceries.
A prime differentiating factor of these urban and suburban chains is their selection of fresh fruits and vegetables, often featuring abundant ethnic varieties tailored to local communities. Adonis’ produce department features commodities used in Middle Eastern cooking, including six varieties of dates and several types of figs, Egyptian mangos, almonds and pistachios, Lebanese cucumbers, molokhia (mallow), and green fava beans. Overwaitea’s new PriceSmart store in Burnaby focuses on produce from across Asia, as well as packaged goods from Asian suppliers with its grab-and-go dishes including sushi, dim sum, and Asian barbecued meats.
Fresh Alternatives: Nonfood Retailers
Another emerging trend in Canada mirrors the United States: the entry of nonfood stores into the grocery business. Drugstore chains have been adding fresh food and produce to their shelves. Shoppers Drug Mart, acquired by Sobeys in 2013, has moved some traditional products aside to make way for fruit, vegetables, and value-added products.
Smaller grocery chains have been part of this trend as well—Pusateri’s Fine Foods, a specialty grocery in the Toronto area, is supplying food halls in both new Saks Fifth Avenue locations in the city, filling 21,000 square feet in the Eaton Centre store and 18,500 at the Sherway Gardens location. And Farm Boy opened a ‘Farm Boy Fresh Zone’ at the Canadian Tire Centre, home of Ottawa’s Senators hockey team.
The Big Three: Wins & Losses
The larger grocery and general merchandise chains continue to expand, fighting the incremental encroachment of regional, local, and independent players. All of the Big Three continue to open new stores, close underperforming locations, acquire smaller chains to monitor trends and bring specialization in-house, and explore online grocery sales.
On the merger side, consolidation has slowed a bit since Loblaw’s purchase of Shoppers Drug Mart (for $12.4 billion) and Sobeys’ acquisition of Canada Safeway in 2013 (for $5.8 billion), but the major chains continue to forge smaller deals.
In 2015, for example, Sobeys bought Co-Op Atlantic, taking over operations of 10 corporately-owned stores and finalizing supply deals with most of the remaining 48 co-op member stores, and also acquired Pete’s Fine Foods in Nova Scotia.
Even as the bigger players convert some of their banners to lower-cost options, they are also moving conventional formats upscale—by imitating the moves of specialists—adding to produce assortments, strengthening natural and organic selections, enhancing the range of ethnic products, and featuring in-store food bars and in-store specialty boutiques.
Loblaw’s Provigo le Marché store in Kirkland, Quebec opened a Lebanese boutique section with 150 varieties of nuts, dried fruits, and confectionery items. Called Alrifai, the in-store selection is modeled after a Lebanese retailer of the same name with 400 stores in 38 cities around the world. Further, Loblaw’s 22 Fortinos stores in the Toronto area partnered with Procolombia for three months in the spring of 2015 to offer exotic fruits such as physalis (also known as tomatillos), pitaya, passion fruit, grenadillas, and tamarillos, supported by recipes and in-store samplings, to spur shoppers to try unfamiliar produce items.
Substantial Investments
Overall, Loblaw invested more than C$1.2 billion in its stores in 2015, building new or renovating existing locations, with one of the stated goals to create better access to fresh food and wellness solutions.
Similarly, some of Sobeys’ initiatives in 2015 included launching its extra banner in Nova Scotia, which includes a wider assortment of produce, including local and organic varieties, store-made pre-cut fruits and vegetables and salads, and Sobeys-wide programs such as organizing tomatoes by sweetness and potatoes by usage. The operator also opened a Chalo! FreshCo store in Brampton, Ontario, its first discount format devoted to South Asian foods, along with traditional FreshCo offerings. Its Thrifty Foods chain in British Columbia holds samplings from local vendors, such as organic produce from Kildara Farms in North Saanich.
For its part, Metro is upgrading many of its stores. The retailer invested C$8 million in its Metro Plus location in Levis, Quebec, expanding it nearly 10,000 square feet, improving product offerings, and adding an outdoor patio, bistro, and Premiere Moisson bakery. The store’s produce department includes a counter for fresh smoothies, juices, and fruit salads.
Metro is also expanding its range of local product offerings, focusing on the Local Purchasing Policy implemented in 2013. The company hosts local farmers selling organic vegetable baskets in 31 Metro stores and one Super C across Quebec each week, and introduced 92 new grocery products from 16 local producers in 12 Metro and Super C locations in the Lower St. Lawrence region. Renovated Metro stores increased produce assortments by 50 percent.
Online Competition
With the success of Amazon and other e-tailers in Canada, supermarkets are looking at how to position and promote online offerings, from straight e-commerce to click-and-collect programs.
Bourlier notes that while fresh foods have traditionally been challenging categories for e-commerce, an increasing number of consumers have found online ordering convenient and not fraught with risk, even for produce. “I’m reluctant to say anything can’t be done well online,” she says. She believes e-commerce will be a significant factor for food sales in three to five years, with more players launching initiatives in 2016 and beyond.
Walmart Canada continues to be a leader in the click-and-collect market. In 2015, the mega retailer added six 7-Eleven stores in the Toronto area to its ‘Grab & Go Locker’ network, a platform consumers can use to order online with purchases packed and stowed in lockers at various locations for 24/7 pickup. There were also grocery pickup services in 11 of Walmart’s Ottawa area stores in 2015, allowing shoppers to pick up online orders, including fresh food items, in stores. In addition, Walmart Canada has been expanding its fresh grocery selection, sourcing from both foreign and Canadian vendors.
Like their larger counterparts, regional chains are starting to experiment with e-commerce as well. In November 2015, Overwaitea’s Save-On-Foods chain began offering online ordering, pick up, and delivery services in the Vancouver area, with operations based at the Tsawwassen store.
Final Thoughts
For Canadian grocers that are not part of the big three or an American transplant, the future is full of contradictions. Experts expect the independents’ share of food sales in the True North to decline in the foreseeable future, as general merchandise stores and nonfood retailers take bigger slices of the fresh food pie.
That said, many smaller chains operate efficiently, have very specialized niches, and are able to stay one step ahead of their sizeable competitors when it comes to addressing trends and the changing, often fickle tastes of local consumers. Despite being considered underdogs by many, these local and regional players are expected to have a wealth of opportunity in 2016 to prosper, especially in Canada’s most populous metropolitan areas.
