It's a "pricing paradise" for Canadian grocers that hasn't happened in almost two decades: They've been able to keep prices high.
Supermarkets have benefited from relatively little price competition this year, while a weaker dollar helped boost prices and revenue. Cash-strapped shoppers have continued to head to the grocer, sometimes spending extra on takeout rather than splurging on a restaurant outing.
But that's changing.
Inflation is unwinding and, according to the country's largest grocer, sales volumes in the sector are starting to decline. Now Loblaw Cos. Ltd. has signalled it's ready to drop prices on thousands of products to keep customers coming to its stores. Its rivals vow to remain competitive, which could spark a price war.
Last week, Loblaw slashed prices by between 10 and 25 per cent on about 3,000 products in its stores in Atlantic Canada.
This week, Loblaw followed suit at its Zehrs stores in the hard-hit region of southwestern Ontario, while also providing a 10-per-cent break to unemployed people shopping at those outlets. If shoppers are receiving federal employment insurance benefits, they can get up to $15 off a $150 purchase until Nov. 15.
"We're not prepared to lose market share," Dalton Philips, chief operating officer at Loblaw, said in an interview Monday. "You've got to keep current and you've got to be prepared to fight to keep strong. We have no intention of backing down and not retaining our No. 1 place."
Even as profit at many retailers has suffered in the recession, major grocers have managed to generate healthy gains. Their profit margins stayed relatively high as they passed on higher costs to consumers.
It created a "pricing paradise almost unparalleled in the last 20 years," Perry Caicco, an analyst at CIBC, said in a report. "This soft pricing is padding gross margins for everyone in the business, causing company after company to exceed earnings estimates."
And while just two years earlier the grocers were engaged in a price war as discount giant Wal-Mart Canada Corp. rapidly expanded into food, this year they faced "an easy pricing environment," he said.
But now that Loblaw has made the first move, others will be forced to do the same, other industry observers said.
"To say that competitive intensity will increase is an understatement," predicted Pierre Lavallee, a Toronto-based partner with consultancy Bain & Co. "More consumers are price-sensitive ... The optimism that has grasped the financial markets in the last couple of weeks is a long, long way from grabbing the average consumer."
Anne Choy is one of those consumers. She said she has noticed that prices of fruits, vegetables and packaged snacks appear to keep rising, making it harder to fit them into her budget. "I've always used coupons but now you have to stretch your dollar even further."
The mother of two said she's especially price-sensitive given she has been laid off twice in two years.
"I usually buy stuff on sale," said Ms. Choy, an airline customer service representative. "You have to be more price-conscious."
She usually shops at a Metro because it's the closest grocery store to her Toronto home. But she said she would be willing to travel to another store if the prices there were significantly lower.
Mr. Philips said Loblaw has noticed lower sales volume across the industry over the past several weeks, and no signs of the trend reversing.
The company decided to begin its price cutting in areas of the country that have been hardest hit by the recession. The reductions affect a wide array of products that consumers buy frequently, such as fruit, milk, cereal, canned soup and meat. "In these key items of milk, butter, eggs and bread, we're now going toe-to-toe with Wal-Mart," he added. "We're not going to give an inch away on this stuff."
He wouldn't comment on specific plans for the coming months, but said Loblaw believes that the second half of the year will be tough for all grocers. Unemployment rates are high, and consumers are "concerned about what they spend," he said. "If you've got a market that's tough you've got to be aggressive."
Still, Metro Inc., the country's third-largest chain, hasn't noticed any recent sales downturn, Eric La Fleche, its CEO, said last week. "We will remain competitive," a spokeswoman added Monday, without commenting on Loblaw's latest price markdowns.
Bill McEwan, chief executive officer of Sobeys Inc., Canada's second-ranked grocer, said: "We will continue with our very competitive pricing and promotional programs and we expect to continue to grow volume as a result of consistent quality and in stock positions, irrespective of how others are trying to regain their volume losses."
Keith Howlett, retail analyst at Desjardins Securities, said Loblaw's price cutting will inevitably have an effect on rivals because it is the market leader and price setter. As well, "consumers appear to be closing their wallets and tightening their belts."
But he cautioned that the price-slashing strategy failed for Loblaw in the fall of 2007, when it touched off price wars during a restructuring, but ended up bruising its own bottom line.
With files from Jennifer MacMillanReport Typo/Error