Major grocers expanding discount footprint as customers keep budgets tight

Canada's major grocery retailers are responding to consumer demand for budget-friendly options by expanding their discount store presence. The move is proving to be a savvy strategy for maintaining profits in the face of increased living costs. Shoppers, grappling with higher expenses, are increasingly turning to discount stores like No Frills, Food Basics, and FreshCo to stretch their grocery budgets.

The transition to discount stores is a relatively straightforward move, offering an effective way for grocers to meet consumer needs without compromising their bottom line. Michael von Massow, a food economy professor at the University of Guelph, notes that amidst various measures people are taking to cut costs, opting for cheaper options at discount stores is a prominent trend.

Canada's major grocers, including Loblaw, Metro, and Empire, boast a range of store brands or "banners," spanning from high-end to conventional to discount. Notably, recent earnings reports from these grocers indicate that sales at discount stores are key drivers of overall sales growth.

Loblaw is taking the lead in the expansion race, opening over 30 new Maxi and No Frills stores last year alone. Melanie Singh, president of Loblaw’s new "hard discount" division, comprising No Frills and Maxi, sees a growing opportunity for discount stores and anticipates further expansion. The company's ambitious capital investment plan of over $2 billion, aiming to establish more than 40 new discount stores, underscores their commitment to this strategy.

Empire, on the other hand, is taking a more measured approach. While not aggressively pursuing significant expansion into the discount sector, the company has made strategic conversions and is focusing on its existing portfolio. The recent acquisition of Farm Boy and a majority stake in Longo's demonstrate Empire's commitment to a full-service approach, betting on a potential period of decreasing inflation and interest rates.

Metro, with its Super C and Food Basics banners, is maintaining a steady pace of growth, adding new stores to its portfolio. The company has observed a shift in customer preferences toward discount banners over conventional ones, signaling the success of their strategy.

Discount grocery stores, characterized by smaller size and a simplified operating model, tend to carry a more limited range of items. Singh emphasizes that, despite the differences, both market and discount stores tailor their offerings to the local community, relying on data to inform their decisions.

The move to discount stores comes with operational advantages, such as simpler signage, fewer promotions, and the potential for better profit margins through increased focus on private label products. Retail analysts view this shift as a low-risk strategy, providing grocers with flexibility to adjust to evolving consumer preferences.

As inflation prompts consumers to seek more budget-friendly options, grocers like Loblaw, Metro, and Empire are strategically positioning themselves. RBC Dominion Securities analyst Irene Nattel suggests that Loblaw is best positioned to weather these challenges, followed by Metro and then Empire. While some argue that higher-end brands may not hinder success, the consensus is that understanding and delivering value to customers is key for sustained success in this evolving landscape.

In conclusion, the expansion of discount footprints by major Canadian grocers reflects a dynamic response to consumer needs amid rising living costs. The strategy appears to be a resilient approach to maintaining profitability while ensuring accessibility and affordability for customers in an ever-changing economic environment.