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State of the Canadian grocery industry

Canadian Grocer's annual Market Survey found 2012 wasn't quite a banner year for traditional supermarkets and c-stores

CG Market Survey-0213

Canada’s grocery industry is stuck in low gear. New data compiled by Canadian Grocer finds that for the second year in a row traditional grocery store sales barely nudged.

Total sales in 2012 grew a miniscule 1.1 per cent over 2011. That’s the second straight year of meager sales growth. In 2011, sales rose just one per cent.

Those are not the numbers Canadian grocers were hoping for, nor ones they’ve grown accustomed to. Annual growth has historically averaged three per cent or more.

The past two years represent the worst sales growth in more than a decade. The last time things were this bad was in 1995, when sales grew just 0.8 per cent; and in 1996, when sales actually fell a half per cent.

The situation back then was different, however. In 1995 the economy was teetering on the verge of recession. That year, Canada barely escaped a dreaded double-dip economic slowdown. Today, despite lingering effects of the 2008 global meltdown, Canada’s economy appears better off, with growth of about 1.5 per cent last year and slightly better expectations for 2013.

So what’s up with grocery sales? Several factors accounted for the slow pace in 2012. First, 56 fewer franchised supermarkets were in business than in 2011, and 76 fewer unaffiliated independents. Also, more grocery products were bought at non-traditional food retailers such as Walmart, Costco and drugstores.

Walmart in particular opened more stores last year than ever before. Today, more than half the Walmarts in Canada are Supercentres, carrying all the food items of a traditional supermarket.

A third factor was the rise of Chinese and South Asian ethnic grocery stores. Perry Caicco, the managing director of equity research for CIBC World Markets, points out that ethnic stores, Walmart and Costco were responsible for more than half of all new grocery square footage added in 2012.

Given that these retailers only sell about 20 per cent of all groceries in the country, that is a remarkable statistic. “It’s why they are gaining share,” Caicco says.

But perhaps the biggest wrench in the gears last year was consumers and their penny-pinching ways. Since the recession of 2008-09, Canadians have been watching their wallets. Last year they seemed to pay special attention to food prices.

Carman Allison, director of industry insights at Nielsen, says his organization recently asked Canadians to name their top concerns. Food prices ranked third, behind debt and the economy. Interestingly, the No. 4 concern, health, was No. 1 prior to the recession, Allison says. That’s a good indicator of how dramatically consumer priorities have shifted.

As a result, Canadians are buying more products at promotional prices and shopping in greater numbers at discount stores. “Consumers are getting smarter and doing their homework,” says Allison.

Seventy-five per cent of Canadians say they are only buying on sale; 71 per cent are using coupons; 66 per cent are stocking up when products are on sale; and 62 per cent are seeking out stores with lower prices, he says.

It’s no wonder discount stores now account for more than 40 per cent of all grocery purchases in Canada.

To stay competitive, conventional supermarkets have had to discount their prices more often. “The customer base is changing faster than the traditional grocers are changing,” Caicco notes. And that’s causing sales growth at traditional grocery stores to slow down.

Before we get into the numbers, let’s first understand the grocery world being measured in this report. The annual Canadian Grocer Market Survey looks at the so-called “traditional” grocery industry. That includes chain and franchised supermarkets, major banner convenience stores and unaffiliated grocers (many of which are mom and pop operations, but a number are large, fully independent supermarkets).

In 2012 sales at these retailers added up to $86.2 billion ($86,202,534,000 to be specific). The 1.1 per cent sales hike worked out to additional sales of $910 million ($910,712,000) flowing through the nation’s grocery cash registers.

Yet the grand total of grocery sales in Canada was much higher than $86 billion.

If sales through non-traditional food stores are added in, we’d be looking at an additional $6 billion of food sales through Walmart, which grew at approximately 20 per cent last year; then adding some $8 billion of food sales through Costco, which grew about 10 per cent from the year before; and adding approximately $1 billion in grocery sales through drugstores. (Walmart and Costco sales are estimates from CIBC World Markets.)

If those additional grocery sales are counted, total grocery sales in Canada were approximately $101 billion last year. Ethnic stores could add even more, with estimates of their collective size ranging from a few billion dollars to $5 billion.

Canada’s traditional grocery industry is no monolith, of course. There are different formats and ownership structures. Growth was not distributed evenly among them last year. Corporate supermarkets and major banner convenience stores saw sales rise 1.8 per cent, to $52.3 billion ($52,324,462,000).

Voluntary groups, which means franchised independents, eked out a 0.4 per cent increase, to $30.6 billion ($30,562,431,000). Unaffiliated independents, meanwhile, saw sales drop 4.4 per cent, to $3.3 billion ($3,315,641,000). The overall effect of these changes was to increase corporate stores’ market share to 60.7 per cent, up from 60.3 per cent the year before.

The number of stores in business also fluctuated last year. There were 15 more corporate supermarkets in Canada in 2012, to total 2,384. Voluntary groups lost 56 stores, to total 4,271. Major banner convenience stores dropped three stores, to 6,916, while unaffiliated independents fell 76 stores, to 6,970.

Sales and store counts only tell part of the story, however. Despite the sluggish growth, Canada’s big grocery chains all reported passable margins, the result of careful cost control and increased supplier fees. (Still, margins are likely to decline in the coming months.)

Several of Canada’s Big Three grocery chains also experienced significant earnings growth last year. Metro Inc., the third largest grocer in the country (behind Loblaw and Sobeys) had a 24 per cent jump in profits for its fiscal year–even though sales were up just five per cent and Metro closed 11 stores during the year.

But as in 2011, the Big Three CEOs described the grocery landscape as difficult. “Competition remained intense as promotional penetration continued to rise,’’ Loblaw Companies president, Vicente Trius, commented to analysts during a conference call in November, describing Loblaw’s third quarter results.

Tracking the growth of the country’s large chains is easy. They are all publicly traded and report numbers every quarter.

Measuring the pace of independent grocers is more difficult. For one, they do not release sales figures. Also, the definition of an independent grocer in Canada is not widely agreed upon. A brief explanation of “independent store” and “chain store” is therefore necessary.

For this analysis, and for the past 50 years, Canadian Grocer has followed the Statistics Canada definition of what a chain store is: any company with four stores or more. This definition tends to somewhat inflate our chain numbers, since many people within the grocery industry recognize a number of operators with four stores or more as independent chains.

Among these are Quality Foods and Overwaitea Food Group of B.C.; Freson Market of Alberta; Longo’s and Highland Farms of Ontario; and Colemans in Atlantic Canada. There are also many more small grocery companies that operate four stores or more.

Our analysis does not have a section for independent chains so their sales are included in the overall chain category. Companies with one to three stores are classified as independents.

Based on observations of the past year, it appears independent chains are on the march. A few examples: In 2012 B.C.’s Overwaitea built a snazzy new Urban Fare Express inside Vancouver’s Olympic Village. Meanwhile, Longo’s was confident enough in its strategy to open a store (its 25th) in a Toronto neighbourhood that already counted three Loblaw stores, a Sobeys, a Metro and (soon) a Whole Foods within a five-minute drive.

Investors also seemed to pay attention to independents. Early last year, B.C. billionaire Jim Pattison, owner of Overwaitea, invested in the Vancouver Island chain Quality Foods. Later in the year, Farm Boy, the Ottawa independent, secured financing from Boston-based investment firm Berkshire Partners. The money will help Farm Boy add stores across Ontario, and perhaps, eventually Canada.

The health of franchised independents may be another matter. As mentioned, their sales grew just 0.4 per cent and the number of franchised stores dropped by 56.

“It’s clear that in an age where different stores are designed to mean different things to specific population groups, the generic franchise model is being re-examined by franchisors,” John Scott, president of the Canadian Federation of Independent Grocers, says.

“The revision of franchise numbers is an expected strategic move by the savvy franchisors in our industry. Regardless of being a chain or an independent, a store will struggle if it does not stand out in a valued manner to a discerning consumer,” he adds.

Sales growth didn’t just depend on the type of format a grocer operated. Location mattered, too. Last year, Alberta was the best place to do business. Sales increased 5.3 per cent–more than twice the pace of any other region in the country. (Ontario was second, with 2.2 per cent growth.)

Quebec, for the first time, recorded a sales decline of 2.5 per cent. Why? One reason may have been that Quebec shoppers finally succumbed to the “Walmart syndrome.” That is, they got tired of paying among the highest prices for groceries in Canada and sought out price deals and discount stores such as Super C, Maxi and, of course, Walmart, whose full-grocery Supercentre format was introduced to the province in mid-2011.

Quebec’s corporate stores took the biggest hit, but either way, it may be time for Quebec’s traditional grocery industry to “take a very close look at their offering and perhaps ‘go to school’ on the successful techniques retailers elsewhere in Canada have used to compete when these price-driven formats appear in the market,” Scott says.

As for the cost of food, Quebecers may not be content with prices, but the reality is neither they, nor the rest of Canada, have much to complain about. Last year the percentage of income spent in food stores by Canadians dropped to 8.2 per cent (from 8.4 per cent) of per-capita disposable income.

Once again, food was a lower cost to Canadians than in almost any other country in the world; good news for consumers, bad for grocers. Meanwhile, the portion of all consumer goods spending in Canada spent in food stores (vs., say, furniture, electronics and clothing) stayed nearly flat, at 9.4 per cent.

So, what’s in store for this year’s grocery sales? Unfortunately, the news is not encouraging.

The pinch on traditional grocers from additional square footage devoted to food will worsen as more Walmarts (37 Supercentres are planned for 2013) and ethnic stores open up. Oh, and don’t forget Target, which is setting up some 124 stores, starting in March, that will have food sections of their own.

True, some of Target’s sales will merely replace existing food business from the old Zellers stores. But as we’ve mentioned several times before, food is a key part of Target’s growth strategy in the U.S. and will no doubt become an important element in this country as well.

Into this swirl, we must also count the effects of added square footage by the traditional grocery chains. In a report last summer, BMO analyst Peter Sklar estimated that Sobeys would add 578,000 sq. ft. of grocery store space this year, Loblaw 400,000 sq. ft. and Metro 199,000 sq. ft.

Add in Walmart’s one million–plus additional square feet as well as expansion from other retailers, and Sklar predicted we’ll have to deal with 2.9 per cent more grocery square footage in Canada by the end of this year. And that’s despite the fact Canada’s population is growing only one per cent a year.

“This state of supply being well in excess of demand,” Sklar wrote in a report, “will only heighten the competitive pressures, with grocers fighting to maintain market share and tonnage, and margin trends will inevitably continue to decelerate and, in our opinion, become consistently negative.”

So it doesn’t seem likely that the grocery industry will return to its historic annual sales increases of three per cent in the foreseeable future. At least not with intense competition from more square footage devoted to groceries or Canadians’ ongoing determination to buy groceries at a discount.

Unless you’re an independent chain or have some true differentiation to brag about, the coming year looks to be really tough for increasing sales

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