Who's winning the grocery wars?
Investors know that looking back doesn't predict the future. It’s the action ahead that counts. But in grocery, a look back is a must as the top players have been busy positioning themselves for the future of what could be a flat-margin, low-growth industry for years.
The past year has brought major changes: Loblaw took over Shoppers Drug Mart in a massive, $12.4-billion deal; Sobeys parent, Empire Co., bought the Canadian assets of Safeway for $5.8-billion; Walmart continued expansion into the sector by adding food at more of its big-box centres; and Target’s entry flopped far worse than anyone expected.
READ: Metro buying Première Moisson bakery
As for Metro, minor deals excepted (in June it bought Quebec bakery chain Première Moisson and in July two Ontario No Frills), it has stayed on the sidelines. Metro is the only one of the top four chains to lose market share in the past year, so it might get in the game soon, as it has cash to make a deal.
MORE MERGERS, ANYONE?
Most of the year’s moves, or lack thereof, have yet to pay off. Depending on the metric, all three homegrown majors could be seen as winners.
Metro has had better luck passing on food inflation, according to BMO Capital Markets. But its revenue is declining and a big chunk of its sales are in Quebec, where prices are generally higher, says Sylvain Charlebois, professor at the University of Guelph, in Ontario, and noted food-industry watcher.
READ: Marc Poulin on building up Sobeys’ empire
Empire had the biggest jump in revenue on a 12-month trailing basis, but its stock has suffered the most in the past year. In June it started closing 50 underperforming stores. Loblaw’s stock has been the best, essentially flat over 12 months. Analysts were impressed with 1.8% same- store sales growth in its most recent quarter, despite a $456-million loss.
As might be expected, there has been a slowdown in deals as Loblaw and Empire digest last year’s acquisitions. But the situation isn’t expected to stay that way for long.
“We expect the industry to continue to consolidate as operators look to find more effective ways to compete against external competition from superstores and grow their market share in an industry that currently has limited potential for organic growth,” says Will McKitterick, an analyst at IBISWorld. The research firm says the number of supermarkets and grocery stores in Canada has fallen by 1.1% annually for the last five years.
READ: Store closures good in the long run, says Sobeys CEO
Consolidation can be chalked up in part to an attempt to capitalize on the growing need to offer organic and ethnic food, which are especially popular with younger shoppers, McKitterick says. (Witness Loblaw’s buyout of Middle Eastern grocery Arz in May, for example.)
These trends, in the meantime, have given small independents a chance to compete against national chains since pricing isn’t the only purchase consideration.
CITIES AND SUBURBS
In June, Euromonitor predicted 70% of consumer spending growth would come from visible minorities over the next decade.
The research firm expects large- format ethnic retailers will lead the way, especially those targeting Asians and South Asians in suburbs. If mainstream retailers can’t match those offerings, they may take a run at one of the smaller chains such as Toronto-area ethnic Oceans Fresh Food Market. Conversely, smaller chains could buy up some of the 50 underperforming stores Sobeys is closing. (A shuttered Sobeys in Scarborough, Ont., was quickly snapped up by an independent South Asian grocer this spring.)
READ: Weston says timing was right to lead Loblaw
Loblaw’s acquisition of Shoppers has little to do with ethnic. The deal is more about owning hundreds of small stores in urban areas where big boxes such as Walmart and Costco haven’t set up.
Charlebois points out, however, that price is still the No. 1 consideration where retailers and suppliers make decisions. As a result, food inflation, except for certain foods such as meat and produce, isn’t a big deal for consumers at the moment.
Some segments are even down on price, notably dairy. That’s being helped along by non-grocers, such as Shoppers, using milk and yogurt as loss leaders to entice consumers into its stores.
“More consumers are changing their ways of shopping for food,” Charlebois says. “That’s why Loblaw taking over
READ: Loblaw poised to try click and collect
Shoppers also gives Loblaw hundreds of places to sell its private-label lines, although it has only pushed President’s Choice cookies so far. It also gives Loblaw a chance to test click-and-collect e-commerce. Instead of delivering groceries bought online, which is problematic even in large Canadian cities, Shoppers stores could become grocery pick-up points.
Charlebois calls Loblaw’s purchase of Shoppers “a home run” in that regard, but there are still plenty of innings left to play. Loblaw is gearing up to test click-and-collect in Toronto stores, but Walmart has already tested a drive-through click- and-collect model in the U.S. and is planning a stand-alone pick-up building in its hometown of Bentonville, Ark. For all the talk about organic and healthier food, it seems convenience could be the factor that determines who comes out on top.