Desjardins Securities’ Chris Li sheds light on Canada’s economic recovery
Though inflation and interest rates are cooling, many Canadians are still feeling the pinch when it comes to essentials such as food and housing. But there’s reason to be optimistic. We asked Chris Li, industry analyst, consumer staples discretionary at Desjardins Securities to shed light on the current economic landscape, the role of discount banners and how competition in Canada’s grocery industry might evolve. This interview has been edited for clarity and length.
Inflation has slowed and interest rates are falling. Is Canada’s economy on the road to recovery?
That’s a great question. I think so, although, the big unknown is the timing of how long that recovery will take. Given the long duration of the interest rate hikes, the impact that’s had and the time it takes for reductions to filter through to the consumer, it could take a little bit longer to recover than previous economic downturns.
There are glimmers of hope, yet headlines suggest Canadians are still frustrated by the economy. Where is the disconnect?
Even though, as you mentioned, inflation is normalizing, on a cumulative basis inflation is still a lot higher than it was two years ago. Unless we get to a situation of deflation, which we’re not expecting, things are still a lot more expensive compared with two years ago. Secondly, is the unemployment picture. While it’s held up generally well throughout the downturn, it’s still a bit uncertain and we’re starting to see a bit of an uptick in the unemployment rate. And the U.S. election and the implications that could come from that is also having an impact. But, when we talk about the grocery space, the accumulating impact of inflation is still top of mind.
READ: Inflation is down, wages are up. Why are Canadians still frustrated with the economy?
Is the economy in better shape than it was a year ago?
I think so, yeah. I mean I think at the minimum, as you mentioned, inflation is tamer. It's helpful that rates are starting to come down … I think generally we are in better shape, but not back to a more normal environment. I think there's still some ways to go.
Is it fair to say we skirted a recession?
I feel like “recession” is a very technical definition … But, generally, it's been a bit better than what people had expected in terms of the impact. And I think part of the reason is perhaps the jobs market has generally held up relatively well up to this point. And I think that's been helpful. But going forward, I think [the jobs market is] where there's still more uncertainties.
How is Canada’s economy impacting consumer spending at grocery?
When we look at the publicly traded companies, I think they’re still seeing consumers gravitating to value in the form of trading down to discount, they’re still seeing very strong sales in private label over national brands, they’re still seeing an increase in promotional intensity … and it’s still a reflection of the consumer trying to fight against the massive amount of inflation they’ve seen over the last couple years.
What role does the in-store shopping experience play in all this?
Still, in-store is super important. As good as e-commerce is, there's a lot of services that in-store can provide—that’s going to be a key way to attract people to shop at a particular grocery store. From a promotional perspective, the flyers are still very relevant, the high-low price strategy, the loyalty programs are pillars of the brick-and-mortar model.
READ: How innovative store design is reshaping the shopping experience
Canada’s major grocery retailers have increased their investment in discount. What’s the role of discount banners?
They have a huge role to play. They provide a good sense of relief for consumers who are struggling. And, the last two or three years, we’ve obviously seen a huge wave of population growth from immigration—I think the discount banner has also played a huge role in making sure there’s enough supply to serve a lot of the increase in population.
Is this strategy sustainable? Will the pendulum swing back to conventional?
I have seen a structural shift towards discount, I would say, ever since Walmart came in. Then, after the great financial crisis in 2009, we’ve seen discount as a percentage of grocery gradually increasing. And I think it’s increasing partly because of immigration and partly because of the propensity for consumers to go after value. Those are structural factors that aren’t going away anytime soon. I think discount will continue to grow—not to say conventional is in a decline. There is a place for conventional because, as you know, there are certain advantages that conventional banners provide that discount doesn’t. When the economy returns, [conventional grocery] will capture some of the lost market share. So, there will be a balanced approach for both.
Where does Canada’s grocery industry go from here?
I don't see any sort of big game changer, to be honest. I feel like it's going to be the same in terms of building on the various platforms they have currently to sell to consumers. So, we mentioned e-commerce. There's probably more room for that model to evolve to get even better from a user perspective. Loyalty is another potential area. Metro, for example, has done some changes to its program, Sobeys as well, and Loblaws always has a strong program. I think there's a lot of potential for them to elevate the game, even on the loyalty side, to be more effective on promotions. Loyalty and e-commerce, I think those are still areas that could evolve and further enhance the experience and be a more important differentiator going forward.
How do you see competition in Canada’s grocery sector evolving?
Going forward, it should be relatively stable. Even though we’re more consolidated than the U.S., overall it is a very competitive market. The risk of Aldi coming in the foreseeable future is low partly because they still have a lot of white space to grow in the U.S. and supply chain wise, it’s very expensive to expand to Canada. So, I see that as a low risk. Though e-commerce has grown, I don’t see that changing in any significant way anytime soon. I don’t get the sense Amazon is ready to expand their grocery offering beyond the dry products they offer now, so that’s also a low risk. I think it’s going to be more or less the same. Of the big three, I don’t think anyone is looking to grow more than 1%.
READ: What the grocery report recommends to improve competition
What’s stopping foreign players from setting up shop in Canada?
Even though we don't have a hard discount chain like Aldi here, we do have a well-established discount sector with Walmart, No Frills and all those guys. Probably one consideration is that we already have a well-established discount business in Canada. Secondly, again, I think it's the lower population density and the higher cost of supply chain in Canada. Thirdly, as I mentioned, for Aldi there's just more in terms of which markets have better opportunities. I feel like the U.S. is still the one where they'll probably get a higher rate of return versus trying to expand into a new market like Canada.
What challenges could grocers face in the year ahead?
The challenge for grocers is with the inflation now moderating back to 2% to 3%, there’s less pricing to play with. And in an environment where consumers do stretch their dollars, I think grocers need to continue to come up with ways to keep their tonnage and keep their market share in a low inflation environment.
This article was first published in Canadian Grocer’s December 2024/January 2025 issue.
