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High stakes in the low-frills grocery game Add to ...

The battle over okra and karela is just heating up.

Sobeys Inc., angling for a bigger share of the discount grocery market, is taking aim at Loblaw Cos. Ltd. with a store format called FreshCo, which will focus on fresh foods, while catering to budget-conscious multicultural customers.

Sobeys is launching the new concept in eight of its former Price Chopper stores starting Wednesday. The country's second largest supermarket chain plans to rapidly expand FreshCo, converting more of its 87 Price Choppers to the new format and adding new outlets.

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If successful, FreshCo will give Sobeys an important weapon in the increasingly crowded battle for the culturally diverse grocery shopper. That segment is being hotly contested as retailers attempt to take advantage of a massive change in Canadian demographics. By 2031, one in three Canadians will belong to a visible minority - and one in four will be foreign-born, according to Statistics Canada.

Already, a growing number of bargain-hunting customers are new Canadians who look for dried shrimps or kecap manis along with their paper towels. In the fight for those customers, Sobeys is taking on Loblaw, the market leader, which last year acquired T&T Supermarket Inc., a specialist in Asian foods, and continues to beef up its No Frills chain.

Metro Inc.'s Food Basics discount chain is also broadening its low-frills offerings, while discount giant Wal-Mart Canada Corp. is adding new "super centres" with full grocery sections that attempt to lure local ethnic shoppers.

For its part, FreshCo aims to combine discount prices and ethnic appeal with a focus on freshness.

"It's not just about low price in a cheap environment," Sobeys chief executive officer Bill McEwan said in an interview. "It's about low prices with less compromise … And importantly it's about tailored product assortments by store."

Especially important is catering to the needs of the fast-growing South Asian and Chinese Canadian communities. Both tend to shop at discount supermarkets such as No Frills or T&T, according to a 2008 study by Solutions Research Group. "It's essential that their grocery dollar go as far as possible," said Kaan Yigit, president of the market researcher. "You're dealing with a population that is generally new to Canada, and larger families with two or three kids in the home."

Sobeys' Price Chopper has lagged its main competitors in Ontario, the country's largest discount market, Perry Caicco, retail analyst at CIBC World Markets, said in a recent report. A much-needed makeover of Price Chopper could raise the profit of Sobeys' parent Empire Co. Ltd. by between about 8 and 16 per cent in Ontario over the next three to five years, Mr. Caicco predicted.

At FreshCo, shoppers enter a "fresh hall" that devotes as much as one-third more space than other discounters to fresh products, Mr. McEwan said. From fruits and vegetables to meat and seafood, fresh items can generate up to twice the margins as packaged goods.

"Shoppers have consistently told us that they are tired of having to make the compromises associated with shopping at ordinary discount stores," said Rob Adams, FreshCo's general manager and a former No Frills executive.

The stores have a multicultural section close to the entrance that carry products such as Kohinoor basmati rice and Bikano fried potato chips. Other features: gluten-free, diabetics-friendly and organic products.

The first stores are in Brampton and Mississauga, which have a high proportion of new Canadians. In Brampton, for example, the South Asian community has grown 245 per cent over the last 12 years and makes up about one-third of the population, Mr. McEwan said.

"It's a bold move," said Alan Middleton, assistant professor of marketing at York University's Schulich School of Business. "Now they have got to deliver on being lower cost."

That requires a relentless war on overhead. FreshCo significantly scales back labour costs by offering self-serve meat, seafood, deli and bakery sections, and bag-your-own-groceries at the checkout, Mr. McEwan said.

The chain also trims costs by placing products on the shelf in open boxes. That reduces restocking time to just three minutes per box rather than the 35 minutes that would be required to hand-stock individual items. Dairy coolers are replenished from a back door, eliminating the need for employees to lug merchandise into the store to stock shelves.

Sobeys' investment in more efficient inventory management allows it to reduce the size of its storage rooms by up to 10 per cent as products move more quickly to the shelves, he said, and its advanced systems help it better track local shopping preferences.

"Clearly we're expecting improved sales productivity and increased profitability or we wouldn't be making this substantial capital investment," Mr. McEwan said.

Follow on Twitter: @MarinaStrauss

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