The new year may well bring fresh casualties in the food retailing business.
Canada just lost one player in 2013 – Safeway, Canada's No. 4 food retailer, which was gobbled up by No. 2 Sobeys. Increasingly aggressive pricing strategies in the food business have brought delight to Canadian consumers, but retailers should worry that the situation will worsen before it gets better.
In 2013, consumers benefited from considerable discounts in many food categories, such as dairy products, pasta, coffee and spices. The price of rice, yogurt, ice cream and peanut butter actually dropped, in some cases for the first time in more than two decades.
Several staple products have now become loss leaders for food vendors, and that is usually a bad sign for industry. Vendors usually place loss leaders in inconvenient locations in their stores to encourage consumers to buy items with higher profit margins. But now, retailers are more frequently promoting these loss leaders to retain market share.
Target, a small player in the food space, entered Canada in early 2013 with an aggressive goal to open 124 stores and increase its food offering in the future. Wal-Mart, a powerful threat to established Canadian food retailers, kept food prices competitively low, continuing to ensure its viability in the grocery market.
Loblaw, Canada's largest food retailer and private employer, is desperate to reach new urban markets where consumers can cope with higher price points. This is mainly why Loblaw bought Shoppers Drug Mart this year: to offset the Wal-Mart menace. Sobeys, on the other hand, had a very good year in purchasing Safeway to tap into Canada's very lucrative western market – the robust western economy makes Ontario and Quebec look like proverbial poor cousins.
Metro, which reportedly lost out to Sobeys in the Safeway acquisition, may have the most to lose in 2014. Sales are dropping and it has announced already the conversion and closure of some Ontario-based stores. More market retraction is expected if it fails to scale up.
Coupled with the highly competitive nature of Canada's food retailing landscape is the low-inflation global economy. Near-deflationary effects have been present across the global economy, which has affected food markets. It's everywhere and it may last a while. This is certainly welcome news for consumers with less means. However, the high cost of low prices in food stretches out beyond food retailing.
Case in point: Leamington, Ont., Canada's self-proclaimed tomato capital, received news in November that Heinz will close its plant there this summer, losing more than 700 employees and eliminating many regional farmers' sole client. While many Canadians will likely have access to cheaper tomato-based products as a result, many others are losing jobs in the agrifood sector. It will be a similar situation for Corn Flakes and Raisin Bran lovers, with the Kellogg plant in London, Ont., scheduled to be closed by the end of the year, taking 500 jobs with it.
Food prices skyrocketed from 2009 to 2011, creating havoc in developing countries, whose struggling consumers were confronted with the reality of investing in their nutrition instead of just buying fuel to survive. Food became less trivialized as a result, a good thing. The situation has now completely changed, however, as the food industry struggles to achieve growth.
Analysts expect food prices to increase by no more than 0.5 per cent next year. In order to reflect the true cost of distribution, food inflation's sweet spot would be somewhere between 1.5 and 2.5 per cent. That would flush the industry with more resources to innovate, while building a case for consumers that food is not inconsequential. As we embark on another year of low food price inflation, let's hope consumers don't forget how important food is to us all.
Sylvain Charlebois is professor in food distribution and policy and associate dean at the College of Management and Economics, University of Guelph.