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Big grocers expand discount footprint as customers keep budgets tight

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Canada’s largest grocers are investing money and space in discount stores such as No Frills, Food Basics and FreshCo, as shoppers look for ways to save on food amid rising food costs. higher life.

Converting grocery stores into discount stores is a relatively simple process, experts say, that helps grocers keep their profits steady even as consumers look for ways to control their spending.

“There are all sorts of things that … people do, but one of them is looking for cheaper options. And so they go to the discount stores,” said Michael von Massow, a professor of food economics at the University of Guelph.

Each of the major Canadian grocers has several different store brands, also known as “banners”, ranging from high-end to conventional to discount. Loblaw’s main discount banners are No Frills and Maxi, while Metro owns Food Basics and Super C, and Empire owns FreshCo.

Recent earnings reports from the three Canadian grocers showed that sales at discount stores are the main drivers of overall sales growth.

But when it comes to expansion, Loblaw leads the pack with more than 30 new Maxi and No Frills stores opening last year, through new locations or converting full-service stores to discount stores, according to Loblaw’s annual report. the company.

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

The growth shows no signs of stopping. A few days before publishing its February results, the grocer announced an investment plan of more than $2 billion that will result in the creation of more than 40 new discount stores.

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

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

Grocers are taking different approaches to discounting, according to a recent industry report from commercial real estate firm JLL. Empire is not pursuing significant expansion in discount, instead focusing on its current portfolio.

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

“By maintaining its full-service approach, Empire is banking on a period of declining inflation and interest rates, where customers may prioritize the shopping experience over deep discounts,” the report says.

However, he noted that Empire had already made some conversions and was 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 national total to 147 stores, spokeswoman Tshani Jaja said in an email. The company also expanded its private label and plus-size offerings, and in mid-February launched an 11-week program reducing or fixing prices on about 1,000 items, she said.

Metro currently has 247 Super C and Food Basics stores, up from 236 in 2020, spokeswoman Stephanie Bonk said in an email. Three Super Cs opened during the company’s most recent quarter, and another Food Basics is expected to open this year.

“We have seen a shift in the number of customers purchasing our discount banners compared to conventional banners. Private label sales continue to grow at a faster rate than national brands and promotional penetration remains high,” Bonk said .

Discount stores tend to be smaller than market stores, Singh said, and they have a simpler operating model with less variety among items.

You’re also more likely to see certain “value-added” things in a store, like a deli counter or baked goods baked on site, she said.

However, one thing the market and discount stores have in common is that their offerings are partly influenced by the local community, Singh said.

“We rely on a lot of data to inform these decisions,” she said.

Discount grocery stores often use simpler signage and displays, Hutcheson said. They also often offer more of the company’s private label products, which generally have better profit margins and employ fewer staff, she added.

Discount stores are also less likely to offer special deals and promotions, von Massow said, and the stores are often in neighborhoods with lower rents.

All of that adds up to margins that are probably very similar to those of a full-service store, he said.

“I think grocers don’t know where we shop, as long as they can adjust to it,” he said. “And that’s what we see them doing.”

Grocers are likely choosing conversions strategically, von Massow said: “They’re going to convert underperforming stores into discount stores.” »

One thing Loblaw has noticed that speaks to demand is that when it converts a store, it sees sales increase there, Singh said, and yet its other discount stores in the area don’t suffer the consequences.

Converting a market store to a discount store is simpler than building a new one, Singh said — often, they can even keep the store open while changes are made, with just a brief closure.

“We have converted several Maxis and we would close them for two weeks, put the sign on the building, then reopen it as a Maxi, but construction continues in different parts of the store.”

As inflation pushes consumers to cut back on purchases, Loblaw is best positioned, followed by Metro and then Empire, according to RBC Dominion Securities analyst Irene Nattel in a note on Loblaw’s latest results.

In an earlier note on Metro’s earnings, Nattel said Empire’s “overweight” in the full-service segment of the sector constitutes a “relative disadvantage” to rivals amid continued price sensitivity.

But Hutcheson says she doesn’t think having specialty or high-end brands is necessarily a barrier.

“As long as they understand their value proposition to their customer and they deliver what they want…I think that’s great.”

If consumer behavior shifts back toward full-service stores in the long term, grocers can continue to evolve, Hutcheson said.

“I think making this type of change is pretty low risk because discount stores are easy and fairly inexpensive footprints to build or move, and from there they can scale accordingly.”


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


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

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