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Sticker shock no more! Well, sort of

Recent data shows Canadian consumers are beginning to overcome their fears of rising food prices, signalling a shift in spending behaviour despite economic uncertainties
Woman grocery shopping
The Canadian food market is undergoing significant changes.

On Friday, Statistics Canada reported a notable 1.7% increase in national food sales, marking the first growth observed since December 2023. This increase, though modest, is significant in the context of Canada's growing population and persistent inflationary pressures. These factors are expected to drive food sales upward in dollar terms over time. Since mid-2021, food sales in Canada have exhibited a rollercoaster pattern, reflecting economic uncertainties and consumer hesitancies during the pandemic and post-pandemic periods. However, recent data suggests that consumers are beginning to adjust and overcome their fears of sticker shock.

Consumer behaviour has shifted notably. Shoppers are now more willing to spend at grocery stores, a change from their previous tendency to save every penny for other rising expenses, such as housing and energy costs. This shift can be partially attributed to the normalization of higher interest rates, particularly for those with variable-rate debts and mortgages. However, approximately 40% of households with mortgages will face renewals within the next year, likely encountering higher payments that could reduce their disposable income for food and other necessities.

Despite the current lack of sympathy for grocers, managing a consumer base that is increasingly frugal presents a significant challenge. Sobeys’ recent quarterly results provide some insight into this issue. The company's sales amounted to $7.4 billion, remaining largely unchanged from the previous year. Same-store sales saw a slight decrease of 0.3%, but excluding fuel, same-store sales experienced a modest 0.2% increase. These figures suggest that while overall sales volume is stable, there is a nuanced shift in consumer purchasing behavior. Similar figures can be anticipated from Loblaw and Metro, although these companies might report slightly better performance due to their stronger portfolios of discount stores, which attract cost-conscious consumers more effectively than Sobeys.

In response to these challenges, Sobeys has strategically scaled back its e-commerce operations to optimize existing resources. They have paused plans for an e-commerce centre in Vancouver and ended their partnership with the UK's Ocado. This decision reflects a pragmatic approach to the changing market dynamics. Online total Canadian food sales, which peaked at 3.6% of all food sales in 2022 according to NIQ, have since declined. While Sobeys might not have anticipated this drop, they have navigated the challenges relatively well, considering the competition from Amazon, which continues to expand its footprint in the Canadian market. Sobeys' decision to re-evaluate its e-commerce strategy underscores the difficulty of covering the last mile to reach consumers and highlights the logistical challenges of competing with a giant like Amazon.

Historically, profiting from online food sales has been difficult, and the current market conditions exacerbate these challenges. Today, consumers are increasingly diversifying their shopping habits to find the best deals, often visiting multiple stores rather than relying solely on online purchases. This behaviour is driven by the desire to avoid delivery costs and take advantage of in-store promotions and discounts. Although online shopping might regain popularity in the future, this shift will take time as consumers balance convenience with cost savings.

Additionally, Statistics Canada has updated the Consumer Price Index (CPI) basket, increasing the food weighting to 16.72% from 16.13%. This adjustment reflects the growing importance of food expenditures in the average Canadian household budget. Notably, food consumed at restaurants accounted for almost 70% of this increase, indicating a significant shift in dining habits. On average, 35% of our food budget is now spent dining out, a substantial rise from previous years. This shift came at the expense of furnishings and equipment, which saw a significant decrease in their weight within the CPI basket.

In line with current trends, the relative weight of alcoholic beverages, tobacco products, and recreational cannabis has decreased from 4.47% to 4.17%, reflecting recent sales data. This decline suggests a change in consumer preferences and spending priorities, possibly influenced by economic pressures and health considerations.

The Canadian food market is undergoing significant changes, as evidenced by recent reports from both Statistics Canada and Sobeys. The landscape in 2024 is markedly different from 2023 and 2022, reflecting evolving consumer behaviours, economic pressures, and strategic adjustments by major retailers. As consumers continue to navigate these changes, the food industry will need to adapt to meet new demands and challenges, ensuring sustainability and competitiveness in an increasingly dynamic market.

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