Sobeys' McEwan discusses FreshCo and "disinflation"

Canada’s supermarkets are getting squeezed by rising costs on the back end, while competitors new and old are hammering away at prices on the front end.

That’s how Sobeys president Bill McEwan described the grocery environment in Canada over the last year during a speech to analysts at the CIBC Retail and Consumer Conference Wednesday in Toronto.

In the last year deflation has been “unprecedented” he said, caused by promotional discounting at the store level. “It’s what we call inside of our business 'disinflation.' ”

Still, there are early signs of balanced inflation starting, which he described as a situation in which retail prices rise in step with manufacturer prices and the general cost of doing business.

“There appears to be an appetite for that to happen but we shall see,” he told the conference. “If we behave like a mature industry, it will happen. If we continue to pursue business that is not there, we will see continued deflation.”

One pressure he doesn’t see lessening is the amount of square footage being added to the grocery industry. Although the country’s large chains have been focusing on old-store renovations rather than building new ones, McEwan rightly pointed out there is square footage being added anyway as more retailers like Walmart (and soon Target), drug stores and dollar stores sell food. The pace of new square footage is outpacing industry growth and even population growth, he said.

As a backdrop to all this, McEwan said retailers are facing huge cost increases. Minimum wage hikes alone in various provinces are going to cost tens of millions of dollars while utility prices were up 18% in Ontario last year, 11% in Nova Scotia and 9% in Quebec. “Operating costs are rising at extraordinary rates.”

Discussing Sobeys business, McEwan said the company is opening its next-generation of full-service stores under the IGA Extra banner in Quebec, Sobeys in Ontario, Atlantic Canada and the West, and Thrifty Foods in B.C. As an example of such a store he cited the new IGA Extra in ValleyField, Que., the Thrifty in Abbotsford, B.C., and the Ira Needles store in Kitchener, Ont. These stores are positioned as the “very best food retailers in the country,” he said.

He also discussed the FreshCo discount chain, launched last spring in Ontario to replace Price Chopper, which was a distant third in the province’s discount market behind Loblaw’s No Frills and Metro’s Food Basics.

FreshCo–the format is hard discount with a focus on fresh and ethnic–has performed well, though some tweaks have been made since the launch. Some produce items at the front of the store were moved back because customers always stopped to pick through them, causing bottlenecks. And the flow of the stores, which forced shoppers down certain aisles at first, is being changed slightly to give customers more freedom to choose the direction they want to go in.

McEwan noted that the launch of FreshCo–eight stores usually open at a time, every six weeks–has caused an aggressive response by competitors. But FreshCo stores won’t have higher prices than competitors, he said.

As for results, “we’re very pleased with the top-line," McEwan said. "The margins are not what they will be when the market settles out. The bottom line associated with those stores are not what we had anticipated but they are what we were prepared for.”

Regionally, McEwan pointed to the company’s conversion of IGA stores to the Foodland banner in Ontario as a success. And the company is also continuing to spread the Thrifty banner–which he said has 30% market share on its home turf of Vancouver Island and 50% in Victoria–onto the Lower Mainland of B.C.

On the distribution side the company is continuing to invest in capabilities. It recently announced the construction of a second automated warehouse in Quebec. The first is situated near Toronto. And Sobeys is speeding up the use of customer insights to drive sales. “The battleground of tomorrow will be targeted marketing of customer insights,” he said.

Yet, McEwan said the biggest advantage any grocery retailer has in the country isn’t technology, it is the experience and expertise of the store manager. “That’s not something often described as a differentiating factor, but it is.”