Each day TFO Canada publishes a sample of trade news on the Canadian import market along with any new, updated or changed regulations and legislations regarding international trade; countries in which TFO Canada offers services and on the export sectors which it promotes.
Supermarket Shakeup: Canada抯 Food Fight Rages OnTuesday, September 08, 2015 > 10:25:57
(IBISWorld by Will McKitterick)
Developments in Canada’s Supermarkets and Grocery store industry have been fast moving as of late. An influx of new operators over the years has left the market for foodstuffs completely saturated. As a result, the industry features rising competition, aggressive pricing and perpetual discounting. Macroeconomic factors, including the falling Loonie, rising food prices and high consumer debt have led shoppers to turn to more affordable food retailers, such as supercenters, wholesale clubs and discount stores that fall outside the industry (IBISWorld considers Supermarkets and Grocery Stores to consist of operators primarily involved in selling groceries).
The industry’s shakeup began during the recession. While Canadians faced a shorter downturn than their American counterparts to the south, the economic slump convinced shoppers to search for more affordable products. Many found the promotional items they craved in the isles of supercenter and warehouse club competitors which have steadily and deliberately expanded their foray into the food retail sector. Canadian supermarkets and grocery stores fired back with their own price cuts in order to maintain market share amid heightened competition. All of this discounting has resulted in relatively stagnant revenue growth and lower margins over the past five years to 2015.
Operators have reacted to this squeeze in a variety of ways. Some, like mid-market Metro Inc., attempted to move upmarket. While many conventional grocers raced to discount, Metro opted to sell more premium products, appealing to higher income customers looking for premium products. Loblaw and Sobeys have followed suit, rolling out more ready-to-eat foods, organic products and coffee bars to entice customers looking for quality.
Others have used this moment to acquire and merge in an attempt to boost efficiencies and expand market share. M&A activity in the food sector in 2014 was at its highest level since 2003, according to the Food Institute, a nonprofit information source on the food industry. There were 37 supermarket M&A deals in 2014, compared with 28 deals in 2013. Sobey’s acquisition of Canada Safeway Limited at the end of 2013 significantly boosted the company’s market share. The industry’s leading company, Loblaw Cos. Ltd. acquired Shoppers Drug Mart Corp. for $12.4 billion in that same year in order to better position itself to compete with rising stars like Wal-Mart.
Furthermore, retailers have already begun scrambling to snatch up Target’s empty store fronts—the company exited Canada in January after a failed attempt at entering the Canadian market. Walmart has been the primary beneficiary of Target’s demise adding 1.6 million square feet of retail space to their portfolio and a distribution center. Loblaws could still make a move to gobble up additional store space from Target lingering outlets in the near future.
Where does all this leave Canadian grocers moving forward? The industry is likely to continue to struggle through another period of price pinching as the economy takes a turn for the worse. Fears of the effects of falling oil prices on employment are anticipated to constrain consumer spending over 2015, limiting growth over the next five years. For retailers, this could mean more years of discounting and price competition to come. With limited ability for organic growth, the industry could see another bout of M&A activity in the next year. Either way, it seems likely that we haven’t seen the end of Canada’s supermarket wars yet.