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Specialty, organic and sustainable foods are now featured at he Metro store at Lakeshore and Southdown Road store in Mississauga.J.P. MOCZULSKI/The Globe and Mail

Metro Inc.'s store No. 46 is a testing ground for the mid-market supermarket of the future, one that is decidedly more upscale than its predecessor.

The Mississauga store features a lush "wet wall" of fresh vegetables stacked in colourful arrangements, an eight-foot-long display of mushroom varieties, hot gourmet pizza, plus local and organic pork and chicken.

Montreal-based Metro isn't alone in transforming the traditional mid-priced supermarket into a premium foodie's destination. After a rush to roll out discount formats in response to new competition and a budget-conscious consumer, grocers are now upgrading their shrinking array of conventional supermarkets, as a way to differentiate them from low-cost competitors.

An upmarket strategy also has the benefit of bolstering financial returns, as the discount grocery wars start to leave a void in the middle, which takes a toll on profit margins. Last year, grocery stores' operating profit fell 9 per cent from a year earlier, according to industry publication Grocery Trade Review.

Conventional grocers are losing ground to discounters. In 2013, the mid-market segment fell to 60.4 per cent of the total estimated $87.54-billion grocery industry from 63.9 per cent in 2009 and could drop to 50 per cent within five years, said Carman Allison, vice-president of consumer insights at researcher Nielsen Co.

"Over the years, the discount stores have raised their game," said Johanne Choinière, senior vice-president of Metro's Ontario division. "Conventional stores cannot be stuck in the middle. They really have to elevate their game. It's not only us but everybody in the conventional market. It's our mission to offer stuff that consumers cannot find at the discounters."

"If you stay in the middle you're going to get run over," said Tom Stephens of food specialist Brand Strategy Consultants and a former executive at industry leader Loblaw Cos. Ltd.

From Metro to Loblaw and second-ranked Sobeys Inc., grocers are dressing up their mid-market conventional supermarkets with walls of cheeses, rows of cupcakes and racks of local lamb. They're peddling freshly squeezed juices, 40-item salad bars and made-to-order stone oven pizza to entice customers to spend more.

Even U.S. luxury chain Saks Inc., which was bought by Toronto-based Hudson's Bay Co. last fall, plans to bring a tony food hall to its new stores in Canada.

Italian-based Eataly, the upscale mega-food-emporium that had to close its new store in Chicago for a day last December because it was selling out of key items, is looking for space here. Some sources say the company is talking to the Galen Weston family, whose holdings include Loblaw and Holt Renfrew, about buying the rights to run Eataly in Canada. (Spokeswoman Cristina Villa said Canada is "one of the countries we are looking at;" a Weston spokesman declined to comment.)

"The middle is disappearing," Anthony Longo, chief executive officer of the high-end Longo Brothers Fruit Market Inc., said. "Conventional stores have to figure out what role they play. ... A lot of them are moving upmarket."

In a more crowded field, upscale players such as Longo's and U.S.-based Whole Foods Market are being forced to raise their game as Loblaw and others borrow from their playbook.

"Competition is pretty fierce at the moment, in terms of Canadian grocery retailing," said Michael Bashaw, who heads the Whole Foods' region that includes Canada. "I don't think that's going to change for three to five years. At the end of that time there are going to be some winners and losers."

Whole Foods, with eight stores in Canada, is looking to expand to 40 outlets in all and generate $1-billion in sales here (it doesn't disclose its current revenues here.) It has been able to maintain its Canadian margins over the past few years even as it lowers some prices, partly by getting better deals from its suppliers and pumping up its overall sales, Mr. Bashaw said.

Other grocers, nevertheless, "are cutting margin," he said. Metro, which will report its second-quarter results on Wednesday, saw its first-quarter gross margin slip to 18.8 per cent from 19 per cent a year earlier.

Longo's has cut some prices to draw shoppers; it recently started to sell 4L bags of milk at cost, for $3.99, from its previous range of $4.29 to $4.49, Mr. Longo said. A year ago it shaved the price of a 24-pack of its water bottles to $2.99 from $4.99 to compete with the likes of Costco Wholesale Corp.

But to offset the margin pinch, the 26-store Ontario chain is adding higher priced items and completely new merchandise such as local Ontario beef (coming soon), rather than beef from Western Canada. It is even looking at emulating Eataly concepts such as stand-up eat-in bars to keep shoppers in the stores longer.

Still, with the key competitors all focusing on improving their fresh and prepared foods and "doing the exact same thing, the risk is that they mostly negate each other" and capture just "modest" market share from small grocers, Michael Van Aelst, retail analyst at TD Securities, said.


How conventional grocery stores are moving upscale:


Loblaw's store at Maple Leaf Gardens in Toronto has become its blueprint for its growing number of outlets that it refers to internally as "inspire" stores, marked by a "higher end experience," spokesman Kevin Groh said.

The stores include a 12-foot high wall of cheese with full and half wheels or wedges, including more than 450 varieties from around the world. They tout more than 100 organic products, including tropical fruit. Other features include a coffee bar with espresso and customized lattes and iced coffees; a sushi bar run by T&T, the Asian chain owned by Loblaw; a tea emporium; ACE bakery goods, baked in an in-store stone oven; a patisserie with an array of cupcakes, cakes and chocolates; dry aged beef, aged up to 28 days to keep it tender.

Last year, Loblaw refurbished two Ontario outlets into the "inspire" model and more are planned in 2014. "These stores don't just offer a premium shopping experience for our customers, they offer a premium learning ground for our business."


Sobeys began rolling out Sobeys Extra stores last fall, offering fresh stone-oven-made pizza made; freshly grilled sandwiches; hot roast beef, coffee and smoothie bars; a sushi bar and a noodle bar.

The stores include an in-store chef who offers advice, food tastings and classes; a "well-being counsellor" who answers health and diet questions; and a "cheese ambassador" who provides guidance in selecting from hundreds of cheeses.

An expanded bakery features artisan bread baked in store with "pure" ingredients; store-made Montreal and New York style bagels; cream topped fruit cakes; all-butter pastries and gourmet cakes. Expanded produce department offers ready-to-eat, cut fruit, vegetables and salads, organic and local produce and potatoes displayed by usage and tomatoes by sweetness. The stores have "well-being departments" with organic and natural products and more than 600 gluten-free items.


About a year ago, Metro set up an internal innovation team to oversee the transformation, which is playing out at a test store in Mississauga, Ont. For example, Metro's produce section carries green, red and black kale, both regular and organic; it stocks red, gold and striped beets – regular and organic – and yellow, orange, purple and white carrots. Depending on availability, it carries mushrooms that include shitake, chanterelle, king oyster, enoki, oyster, lobster, morel and porcini.

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