Canada’s largest grocer is investing money and space in discount stores such as No Frills, Food Basics and FreshCo as shoppers look for ways to save money on groceries amid rising costs of living. .
Experts say grocery stores’ transition to discounting will be relatively easy, allowing them to maintain stable profits even as consumers look for ways to rein in spending. It is said that it is useful for
“People do a lot of different things, but one of them is they’re looking for cheaper options, and they go to discount stores,” said Michael von Massau, a food economics professor at the University of Guelph. Told.
Each of Canada’s major grocery stores has several different store brands, also known as “banners,” ranging from luxury to traditional to discount products. Loblaw’s main discount banners are No Frills and Maxi, Metro owns Food Basics and Super C, and Empire owns FreshCo.
Recent earnings reports from three Canadian grocers show that sales at discount stores are a significant driver of overall sales growth.
But in terms of expansion, Loblaws led the industry last year, opening more than 30 maxi and no-frills stores by converting new locations and full-service stores into discount stores, according to the company’s annual the report states.
“There’s a shift toward discounts and we think there’s an opportunity for discount stores,” said Melanie Singh, president of Loblaws’ new “hard discount” division, which consists of No Frills and Maxi.
Its growth shows no signs of stopping. Days before its February earnings release, the grocer announced plans for more than $2 billion in capital spending to open more than 40 new discount stores.
“I think this is a great strategy for them,” said Lisa Hutchison, a retail analyst at J.C. Williams Group.
“They’re investing in this approach because they recognize that people need a budget-friendly approach, but it’s also a very strong strategy for them financially.”
Grocery stores are taking a different approach to discounting, according to a recent industry report from commercial real estate firm JLL. Empire is not pursuing any further significant expansion into discounting, instead focusing on its current portfolio.
Empire expanded in 2018 with the acquisition of Ontario chain Farmboy, and in 2021 bought a majority stake in specialty grocer Longo’s.
“By maintaining a full-service approach, Empire is taking advantage of a period of declining inflation and interest rates, when customers may prioritize the shopping experience over deep discounts,” the report said. .
But he noted that Empire has already made some changes and is taking a strategic approach in Western Canada.
Over the past six years, Empire has opened 52 new FreshCo stores in Western Canada and Ontario, bringing the number of stores nationwide to 147, spokeswoman Tsani Djaja said in an email. The company is also expanding its private label and value-size offerings, he said, and in mid-February launched an 11-week program to reduce or lock in prices on about 1,000 items.
Metro spokeswoman Stephanie Bonk said in an email that Metro now has 247 Super C and Food Basic stores, up from 236 in 2020. In the company’s most recent quarter, he had three Super C’s open and another Food Basics scheduled to open this year.
“We are seeing a shift in customers purchasing our discount banners over traditional banners. Private label sales continue to grow at a faster pace than national brands, and promotional penetration remains It’s expensive,” Bonk said.
Shin said discount stores tend to be smaller than marketplace stores, have less product variety and a simpler operating model.
You’re also likely to see certain “value-added” items in market stores, such as deli counters and bakery items baked on site, she says.
But one thing markets and discount stores have in common is that some of their products are informed by local communities, Singh said.
“We leverage a lot of data to make these decisions,” she said.
Discount grocery stores often use simpler signs and displays, Hutchison said. They also often carry more of the company’s private label products, generally have higher profit margins and fewer employees, he added.
Von Massau said discount stores are less likely to offer specials or promotions and are often located in low-rent neighborhoods.
Add it all up, and you’ll likely see a profit similar to that of a full-service store, he said.
“I don’t think grocery stores care where we shop as long as they can adapt,” he says. “And that’s what we see them doing.”
Von Massau said grocers are likely choosing their conversion locations strategically: “We’re going to convert underperforming stores to discount stores.”
Singh said Loblaw has noticed one thing that speaks to demand: Renovating a store increases sales at that location, while other discount stores in the area are hurting. That means no.
Converting a market store into a discount store is easier than building a new store, Singh said. In many cases, stores can even remain open for short periods of time while changes are made.
“We renovated some Maxi’s, closed them for two weeks, put up signs on the building, and then reopened as Maxi’s, but construction is still going on in other parts of the store.”
RBC Dominion Securities analyst Eileen Nuttel said in a note on Loblaw’s latest results that Loblaw is best positioned as inflation drives consumers to lower transaction prices, followed by Metro and Empire. said.
In an earlier note on Metro’s earnings, Nuttel said Empire’s “overweight” exposure to the full-service portion of the division puts it at a “relative disadvantage” against competitors amid continued price sensitivity. He said that.
But Hutchison says he doesn’t think having a specialty or luxury brand is necessarily an obstacle.
“As long as you understand your value proposition to your customers and are giving them what they want, I think that’s fine.”
Hutchison said grocery stores could continue to evolve if consumer behavior shifts back to full-service stores in the long term.
“I think this type of conversion is fairly low-risk because discount stores can easily and relatively inexpensively build or relocate stores and then adjust accordingly from there.”
