Major grocers expanding discount footprint as customers keep budgets tight

Canada’s greatest grocers are investing cash and area in low cost shops resembling No Frills, Food Basics and FreshCo as customers search for methods to save lots of on meals amid the upper value of residing.

Converting grocery shops to low cost is a comparatively simple transfer, consultants say, and one that’s serving to the grocers preserve income regular regardless of customers searching for methods to rein of their spending.

“There’s all sorts of things that … people are doing, but one of them is looking for cheaper options. And so they are going to discount stores,” mentioned Michael von Massow, a meals financial system professor on the University of Guelph.

Each of the foremost Canadian grocers has a number of totally different retailer manufacturers, often known as “banners” — from high-end to traditional to low cost. Loblaw’s most important low cost banners are No Frills and Maxi, whereas Metro owns Food Basics and Super C, and Empire owns FreshCo.

All three Canadian grocers’ current earnings studies have proven gross sales at low cost shops are main drivers of general gross sales development.

But in relation to increasing, Loblaw is main the pack with greater than 30 new Maxi and No Frills shops opened final yr, by means of new places or changing full-service shops into low cost, based on the corporate’s annual report.

“There is a shift to discount, and we see the opportunity that exists for discount stores,” mentioned Melanie Singh, president of Loblaw’s new “hard discount” division, made up of No Frills and Maxi.

The development exhibits no signal of stopping. A number of days earlier than its February earnings launch, the grocery store introduced a capital funding plan value greater than $2 billion that may end in greater than 40 new low cost shops.

“I think it’s a great strategy for them,” mentioned Lisa Hutcheson, a retail analyst at J.C. Williams Group.

“They’re investing in this approach because they’re recognizing people need that budget-friendly approach, but it will also be a very strong strategy for them financially.”

The grocers are taking totally different approaches in relation to low cost, mentioned a current business report from business actual property agency JLL — Empire is not pursuing additional important growth into low cost, focusing as an alternative on its present portfolio.

Empire purchased Ontario chain Farm Boy in 2018 and has since expanded it, and acquired a majority stake in specialty grocer Longo’s in 2021.

“By maintaining its full-service approach, Empire is banking on a period of decreasing inflation and interest rates, when customers might prioritize the shopping experience over steep discounts,” the report mentioned.

However, it famous that Empire has already made some conversions, and is taking a strategic method in Western Canada.

In the final six years, Empire has opened 52 new FreshCo shops in Western Canada and Ontario, bringing the nationwide whole to 147 shops, mentioned spokeswoman Tshani Jaja in an electronic mail. The firm has additionally expanded its private-label and value-size choices, and it launched an 11-week program decreasing or locking in costs on round 1,000 objects mid-February, she mentioned.

Metro at present has 247 Super C and Food Basics shops, up from 236 in 2020, mentioned spokeswoman Stephanie Bonk in an electronic mail. Three Super Cs opened within the firm’s newest quarter, and one other Food Basics is slated to open this yr.

“We’ve seen a shift in customers shopping our discount banners over conventional. Private label sales are continuing to grow at a faster pace than national brands and promotional penetration remains high,” mentioned Bonk.

Discount shops are typically smaller than market shops, mentioned Singh, and so they have an easier working mannequin with much less selection amongst objects.

You’re additionally extra prone to see sure “value-added” issues at a market retailer, resembling a deli counter, or bakery objects being baked on-site, she mentioned.

One factor that the market and low cost shops have in frequent, nevertheless, is that their choices are partly knowledgeable by the area people, mentioned Singh.

“We lean into a lot of data to inform those decisions,” she mentioned.

Discount grocery shops usually use easier signage and shows, mentioned Hutcheson. They additionally usually carry extra of the corporate’s non-public label merchandise, which usually have higher revenue margins, and make use of fewer employees, she added.

Discount shops are additionally much less prone to have specials and promotions, mentioned von Massow, and the shops are sometimes in lower-rent districts.

All this provides as much as possible very related margins to a full-service retailer, he mentioned.

“I think that the grocers are agnostic to where we shop, as long as they can adjust to that,” he mentioned. “And that’s what we’re seeing them doing.”

Grocers are possible choosing conversions strategically, mentioned von Massow: “They’re going to convert underperforming stores to discount stores.”

One factor Loblaw has seen that speaks to demand: when it converts a retailer, it sees gross sales rise at that location, mentioned Singh, and but its different low cost shops within the space don’t take successful.

Converting a market retailer into a reduction retailer is less complicated than constructing a brand new one, mentioned Singh — usually, they will even preserve the shop open whereas adjustments are being made, with only a transient closure.

“We’ve converted several Maxis where we would close it for two weeks, put the sign up on the building, and then reopen it as a Maxi, but construction still goes on in different parts of the store.”

With inflation driving customers to commerce down, Loblaw is greatest positioned, adopted by Metro after which Empire, based on RBC Dominion Securities analyst Irene Nattel in a be aware about Loblaw’s newest earnings.

In an earlier be aware on Metro’s earnings, Nattel mentioned Empire’s “overweight exposure” to the full-service a part of the sector is a “relative disadvantage” towards its rivals amid ongoing worth sensitivity.

But Hutcheson says she does not suppose having specialty or higher-end manufacturers is essentially a hindrance.

“As long as they are understanding their value proposition to their customer and they’re delivering what they want … I think that’s fine.”

If client behaviour does shift again towards full-service shops over the long run, the grocers can proceed evolving, mentioned Hutcheson.

“I think that making this kind of shift is fairly low risk, because discount stores are easy and rather inexpensive footprints to build or shift to, and then from there they can adjust accordingly.”

This report by The Canadian Press was first printed March 3, 2024.

Companies on this story: (TSX:L, TSX:MRU, TSX:EMP.A)