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Loblaw Maple Leafs supermarket in downtown Toronto May 06, 2013. The grocery giant said Wednesday it is testing a new discount store in Calgary called The Box by No Frills.Fernando Morales/The Globe and Mail

Grocery giant Loblaw Cos. Ltd. is testing a new discount store in Calgary as it braces for intensified competition from low-cost U.S. titans and incumbent Canadian rivals.

Loblaw recently rolled out a 10,000-square-foot outlet in Calgary called the Box by No Frills, which is a smaller version of its discount outlet that it started in Ontario and has expanded to western provinces.

Now the Brampton, Ont.-based retailer is experimenting with a new twist to its high-performing No Frills stores for city locations in a race among all grocers to find coveted urban locations to respond to growing demand from consumers who are moving back to cities.

Most retail expansion in the past decade and more has been in the suburbs, particularly in big-box stores such as Loblaw's Real Canadian Superstore. The grocer's Box format could help it in its search for new, smaller outlets to deal with its dearth of urban stores.

"We are trying that as a pilot to see, is that something we would be able to infill in a lot of areas of Canada?" Sarah Davis, chief financial officer of Loblaw, told a conference call on Wednesday morning as the company prepares to spin out a real estate investment trust.

Loblaw's exploration of new store formats, especially in cities where it is under-represented, comes as U.S. discounter Target Corp. opens its first stores in Canada with some groceries, while archrival Wal-Mart Canada Corp. is rapidly expanding its grocery aisles as it adds more outlets over all.

Sobeys, this country's second-largest grocery specialist after Loblaw, is beefing up its presence in Western Canada with the announcement last week of a $5.8-billion deal to buy Safeway Inc.'s profitable Canadian division. Both Sobeys and Metro, Canada's third-largest grocery chain, have been racing to add new, smaller supermarkets in urban centres, leaving Loblaw trailing in running shops in those locations. Other players, such as Shoppers Drug Mart Corp., the premier drugstore retailer, are revving up their food offerings.

Loblaw's Box is essentially a smaller version of a No Frills with "everyday low prices," Julija Hunter, spokeswoman for Loblaw, said in an e-mail on Wednesday. Its 10,000-square-foot size compares to 25,000 square feet in a regular No Frills.

The Box offers "a quick and convenient shopping experience with low prices on fresh food, grocery and general merchandise items," she said, including private labels No Name and President's Choice, as well as seasonal merchandise "spotlight specials."

Launched on May 31, the Box has generated positive customer feedback about its offerings and prices, she said. It highlights $1 items in most aisles, she said. "We are pleased with the performance to date."

Ms. Davis told analysts that the Box will not be part of existing Loblaw real estate but new space being developed for this purpose. "It's not formatting properties that have gone into the REIT. It's trying out new formats with new real estate."