No Frills, Food Basics, FreshCo’s discount gaps shrinking as food fight heats up
Brent Lewin/BloombergPricing is on every grocer’s mind after a year of booming square footage growth in the food retail market, which expanded at about twice the normal rate.
TORONTO • The price gap between what grocery stores such as Loblaws and No Frills can charge on goods in Canada is narrowing, a retailing industry conference heard Wednesday, as our biggest food chains try to digest stepped-up price rivalry in the market.
It used to be that grocery chains sold goods at their conventional stores at a premium of 15% to 20% over prices at their own discount banners — think Loblaw and No Frills, Metro and Food Basics, and Sobeys and FreshCo.
But unprecedented competition in the industry over the past six to seven years has taken a toll on grocery retailers’ already-slim margins, according to CIBC World Markets.
“Prices in conventional [stores] have had to come down,” and that has resulted in a “permanent drag” on the conventional stores, Perry Caicco, retail analyst at CIBC World Markets, told the bank’s retail and consumer conference on Wednesday.
The price gap between conventional stores and discounters is now about 10%, Mr. Caicco said in an interview.
The price gap between conventional stores and discounters is now about 10%, Mr. Caicco said in an interview.
“It applies to the whole offering,” not just regular shelf prices, the analyst said. “That includes flyers, retailers’ percentage of sales on promotion — the whole package across a huge range of items. The gap between discount and conventional pricing has gradually declined.”
Beyond the unusual rate of square footage growth in the market, Mr. Caicco said a weaker Canadian dollar and debt-conscious consumers have intensified competition and squeezed margins.
Pricing is on every grocer’s mind after a year of booming square footage growth in the food retail market, which expanded at about twice the normal rate.
“It remains a competitive market,” Eric La Fleche, CEO of the country’s third-largest grocer Metro, told the conference.
The climate is even tougher for grocers as the Canadian dollar weakens, and Mr. La Fleche acknowledged the lower dollar is pressuring margins on meat and produce.
Resulting cost pressure on suppliers in specific product areas gets factored into a grocer’s overall pricing strategy, Mr. Caicco said.
“It’s not just about [a grocer] raising price on a shelf,” he said. “It’s perhaps there are fewer promotions on that item than there were before.”
High Liner Foods noted in its CIBC presentation that as beef prices rise, consumers might shift some of their spending to seafood or chicken.
Brent Lewin/BloombergA shopper walks past a FreshCo. grocery store sign in Toronto.
“Although individual products may see individual increases in price because the pressure is huge, consumers may shift off to cheaper alternatives for proteins and carbohydrates. So from a consumer point of view, you are not necessarily experiencing rising prices,” the analyst added.
Metro has been viewed in the industry as the player with the most to lose after its main competitors Loblaw and Sobeys bulked up by acquiring Shoppers Drug Mart and Canada Safeway. Metro restructured its Ontario operations last year to focus more on the growing discount food category and has been defensively growing square footage in its discount Food Basics banner.
Another way grocers can keep a lid on prices to consumers is to ask for price relief from suppliers. After its purchase of Safeway last year, Sobeys asked for a 1% retroactive price cut from suppliers and said it would not accept price increases for the year except on pharmacy items and commodities.
Since then, the Canadian Federation of Independent Grocers and the Food & Consumer Products of Canada (FCPC), an agency representing major manufacturers such as Heinz, Kraft, Campbell’s and Coca-Cola, Kraft and Heinz, have been calling for Ottawa to establish grocery codes of conduct to protect manufacturers and smaller retailers.
In accepting No. 1 player Loblaw’s takeover of Shoppers Drug Mart last week, the Competition Bureau noted it was imposing “behavioural restrictions” on the retailer’s programs and agreements with suppliers, to ensure manufacturers would not get squeezed by the industry’s largest players.
Everyone can fight for the lowest common denominator
Mr. La Fleche dismissed calls for the code of conduct.
“We are are known to be easy negotiators,” he said, noting in a meeting last fall with suppliers it was clear that the “procurement synergies that some competitors are claiming are not going to be at our expense.”
For Sobeys’ part, CEO Marc Poulin told the conference his grocery chain is doing “whatever it takes to be competitive in [price].”
When asked about supplier issues, Mr. Poulin said relationship is “harmonious,” saying the way Safeway negotiated with suppliers is “very different” from Sobeys. “We are very pleased with the way it’s going with suppliers”.
Despite the drive to discount, both Sobeys and Metro are trying to draw in customers to their conventional, full-assortment stores by initiating new food marketing programs promoting healthier food and added ethnic grocery items.
“Everyone can fight for the lowest common denominator,” Mr. Poulin said. “We can move to that direction and some customers want that from the food shopping experience … but the vast majority of Canadians are seeking more” than low price, he said.
“If you try to chase everybody in the markets as this market differentiates, you’re gonna get killed.”
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