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Business Commentary Canadians want convenience when food shopping – and grocers are paying the price

Canada’s grocers have posted decent financial results this year, but that doesn’t mean all is well at Canada’s big food retailers. Top-line sales have been a challenge and, coupled with a somewhat weak food inflation rate, future results at the major grocers look to tumble faster than Niagara Falls. Recent Statistics Canada figures suggest the market shift toward convenience that many industry pundits were dreading is indeed happening. Loblaw, Sobeys and Metro are seeing their worlds turned upside down by consumers rapidly changing their shopping habits.

The most concerning of the recent statistics are the retail sales generated by the food sector. Supermarket and grocery store sales decreased 3.1 per cent – or by $221-million – in May. This amount is high enough that it could prompt grocers to close almost 30 decent-sized stores and put nearly 2,000 people out of work. Statscan reports that retail food sales have been down in four of the past five months. Convenience and specialty stores are bucking the trend and are faring much better. Food sales from convenience stores have increased by more than 6 per cent since last year while specialty store sales have increased by more than 10 per cent. In other words, the major chains are seeing their customers flee as food demand is becoming more fragmented.

Meanwhile, it appears that with an increasing number of Canadians getting a taste of convenience, they want more. Ready-to-eat solutions are more prominent than ever. Even vending machines are increasingly becoming go-to places for quality meals consumed outside the home. Online food shopping, mostly for non-perishable staples, is also becoming common practice for consumers, thanks to what is now known as the Amazon effect. With the ready-to-cook segment growing at an incredible rate, now worth almost $200-million annually in Canada, fewer shoppers are showing up at the grocery store. Or, at least, consumers appear to be spending less at big box stores, forcing grocers to go after consumers’ money instead of just waiting for it to come to them.

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Food inflation is another source of pressure. The national rate was 1.4 per cent in June, compared with 1 per cent in May. Prices overall are back on the upswing; however, in many parts of the grocery store, prices are relatively stagnant. Given that the cost of food eaten outside the home is showing dramatic increases, up by more than 4 per cent in June, food inflation data remain cruelly misleading for grocers. Food service is progressively winning over food retailing.

According to Statscan, at retail, almost everything is now cheaper than it was in January. Of the more than 45 items in our typical food basket, half cost less than they did at the beginning of the year. Round steak, pork chops, bacon, chicken, pasta and even eggs are all less expensive. Roasted coffee is a surprising 17-per-cent cheaper than it was in January. But consumers are not spared inflation entirely. Apples are up 11 per cent since January, and carrots are up 22 per cent. Ottawa’s reactionary measures against the Trump administration also may have enticed grocers to increase some prices ahead of the July 1 deadline, when 10-per-cent tariffs were imposed on specific U.S. imported food products. Tariff-stricken categories such as ketchup have seen prices go up in June by 4 per cent to 5 per cent. Orange juice prices were especially affected, increasing by 13 per cent in a single month.

The overall inflation rate is 2.5 per cent, which boosts chances for another hike in interest rates by the Bank of Canada. This will put even more pressure on grocers who are looking at investing as a means to compete in the era of the omni-channel business model. For consumers, borrowing money will cost more and a growing number of them could start to trade down when food shopping.

Grocers are not only trying to keep foot traffic at a decent rate in their stores, they are also extending their e-commerce strategies. They don’t have much of a choice. Costco has announced it will run a pilot project in Ontario to evaluate market potential for home delivery. Costco has fewer than 100 locations in Canada, compared with the thousands of outlets owned and operated by major grocers, but will make things interesting over the next few months. Costco’s discounting has impressed many Canadians, as its market share is already at 12 per cent in Canada, up from 9 per cent just a few years ago. Given how much one buys at Costco, buying online and having someone carry everything for you is a tempting proposition.

Grocers will need to continue to innovate and accept the fact that “business as usual” in food distribution is strategically suicidal. Canadians are deserting the old model and seeking something new, at a much faster rate than expected. Losing 3 per cent of sales in one single month is just not sustainable. This is what disruption looks like in food distribution.

Sylvain Charlebois is dean of the faculty of management, professor in food distribution and policy, Dalhousie University

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