The forecast: more floor space, but fewer new shoppers

6/27/2012

Those who think there's oodles too much retail space devoted to grocery can grumble some more now.

That's because a new BMO Capital Markets report calculates the amount of grocery square footage to be added over the next three years in Canada will easily outstrip population growth.

The result will likely be intensifying competition and lower margins for retailers as they duke it out with more floor space but not so many new consumers to draw from.

BMO expects grocery square footage will grow 2.5 per cent to three per cent per year in 2012, 2013 and 2014.

Even taking into account immigration, Canada’s population is only anticipated to rise one per cent a year during that period.

About half of the additional square footage will come from large U.S. retailers like Walmart, Target and Costco, according to the report by BMO analyst Peter Sklar.

“With the large majority of incremental grocery square footage coming from U.S. players, incumbent grocers such as Loblaw, Sobeys and Metro will likely lose market share as the U.S. entrants will be competing for the same customers,” Sklar wrote.

He expects square footage to rise 2.5 per cent this year, 2.9 per cent next year and 2.6 per cent in 2014.

“This state of supply being well in excess of demand 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,” Sklar wrote.

“The only factor that could potentially provide relief for the Canadian grocers would be an appreciation of the Canadian dollar; a scenario that we believe is unlikely,” he added.

Walmart, which is in the midst of its biggest expansion year ever in Canada, will contribute a disproportionate amount of the additional floor space.

This year alone it will be responsible for nearly half (46 per cent, or 1.58 million square feet) of all new grocery square footage, followed by 24 per cent next year and 26 per cent in 2014.

Target, the other big American entrant into Canada, isn’t expected to have as much impact in terms of food floor space.

Estimates are that each Target store in Canada will devote about 15,000 square feet to grocery.

Based on Target having 76 stores across Canada by the end of next year, the company’s grocery square footage will total about 1.14 million square feet, according to the BMO report.

By comparison Canada’s overall grocery industry will encompass 147.1 million square feet by the end of 2013.

The first Target stores, which will be converted Zellers stores, are expected to open next March.

Of Canada’s Big Three grocery chains, BMO says that Sobeys will add the most square footage this year (580,000 square feet), followed by Loblaw at 400,000 and Metro at 119,000.

Smaller chains, such as Longo’s and Overwaitea, as well as ethnic stores, will collectively add 634,000 square feet of grocery space this year.

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