Skip to main content

Simon Hayter

Let me show you the cheese!"

Sobeys Inc. executive Rob Adams strides briskly between bins of produce and beams before an array of more than 100 types of cheese-not package sizes or flavours, but types, from regional ricottas to the Dubliner Irish Cheese. This might not be noteworthy in a standard Sobeys, but we're inside a discount supermarket, the kind with pallets of product on the floor, where you go to load up on a week's necessities expecting minimal service and limited variety of stock.

Up until early May, that's what you'd have found in this Mississauga store. It was one of 87 Price Choppers, scattered around mainly low-income neighbourhoods in Ontario cities, that Sobeys acquired in 1998 as part of the Oshawa Group Ltd. Since then, the chain has been the unloved step-sibling in the Sobeys grocery family-which includes IGA, the rural Foodland chain, organics-heavy Thrifty Foods in B.C. and the eponymous flagship-lagging well behind rivals No Frills, owned by Loblaw Cos. Ltd., and Metro Inc.'s Food Basics. Today, however, the banner above the door reads "FreshCo," announcing discount with a novel spin: focusing on fresh fare such as produce, baked goods and meats; catering to the neighbourhood's ethnic tastes; and offering more choice-including three times as many types of cheese as you'd find at a typical discounter.

View the full table

The new FreshCos-eight of which opened this spring on the western edge of the Greater Toronto Area-are a key part of an ongoing transformation that has put Canada's second-biggest grocer on a roll. While its $15-billion in revenues is just half that of market leader Loblaws, Sobeys has led the industry in same-store sales growth in the past five years. But it's in Ontario, long Sobeys' weak spot, where changes have been most dramatic. Hobbled by outdated warehousing and inferior locations, the Ontario operation accounts for only 25 per cent of the company's revenue, estimates CIBC World Markets analyst Perry Caicco, even though it's home to about 40 per cent of Sobeys' square footage.

The province is also where the company-a division of Stellarton, Nova Scotia-based Empire Co.-is most heavily pressing its positioning on fresh food. While FreshCo brings the focus to the discount sector, Sobeys Urban Fresh, another new banner, spins it for the upscale, downtown market. "Sobeys is probably the most successful grocer in Ontario at the moment," says George Condon, a consultant and former editor of Canadian Grocer magazine. "And they've done it by dedicating themselves entirely to making their supermarkets fresh-food stores."

View the full table

To regulars of this Mississauga store, it looks like a new company has taken over the space. That's intentional. "The most important thing about FreshCo is that it's nothing like Price Chopper, and in our view that's a positive," Caicco wrote in a recent report. For two decades, Price Chopper has been an unprofitable also-ran. Repeated turnaround efforts produced no lasting improvements. The chain's limited private-label offerings weakened its gross margins, and its one point of differentiation-a deli counter-proved an expensive and little-used feature. "FreshCo is a complete retooling of what we had," says Sobeys CEO Bill McEwan. "The discount model in Ontario hasn't changed in 25 to 30 years, with limited selection and a very routine shopping environment."

From the bright green accents to a layout that funnels shoppers into an expanded produce section, the store lives up to its moniker. Rob Adams, the discount division's general manager, notes that there is up to one-third more space devoted to fresh products than at other discounters, including double the linear footage of refrigerated produce counters. The deli section offers cut fruit, FreshCo-branded sliced meats and sandwiches. "It feels fresh and store-produced, but they're actually sourced from and prepared by outside vendors," he says. The bakery stocks breads from local bakeries. You'll even find fresh fish.

It's the multinational flavour of the offerings, however, that's most striking. From red bananas to Punjabi namak para snacks, the store is full of foods unrecognizable to most Canadians. Passing by thick stalks of sugar cane, Adams admits he's not sure what shoppers use them for, but they're apparently hot sellers. In the large aisle stocked with ethnic packaged goods, he pulls out a clear bag of nuts. "We found that in local grocery stores, the bestselling products are just clear bags with simple labels. So we developed that with a vendor. Now we're selling it authentically, and it's lower cost."

More from ROB Magazine's Top 1000:

  • Rankings of Canada's top 1000 public companies by profit
  • Rankings of Canada's 350 biggest private companies
  • Definitions for Top 1000
  • Overview: Canada's top companies facing capital crunch
  • Retail sector: How Sobeys is taking on Loblaws
  • Mining sector: Goldcorp's Big Shoes
  • Finance sector: Banks' Last Frontier -- Insurance
  • Telecom sector: Why the wireless war is good for you
  • Oil and gas sector: The oil sands -- redeemed by fire?

While supermarkets have long carried small selections of ethnic foods, they didn't aggressively pursue immigrant communities, says Condon. Yet visible minorities already comprise about half the population of the GTA, and will represent one in three Canadians within 20 years. Recently, as more and more ethnic supermarkets have popped up, the grocery giants began to take notice, expanding their ethnic stock. In 2009, Loblaws bought T&T Supermarket, a B.C.-based chain that caters to Asian communities. Sobeys has opted to make ethnic food a core of its discount format, likely noting that immigrants tend to have lower-than-average incomes and larger-than-average families. This part of Mississauga, for instance, has a high proportion of South and Southeast Asian immigrants, and a growing Caribbean community. As we pass by the meat fridges, Adams pulls out a cellophane-wrapped container. "Here, take some for your dinner." Inside are four fresh pigs' feet.

Luring Adams-a 26-year veteran of the supermarket business, most of them spent in the discount sector-away from Loblaws' No Frills a year ago was a major coup for Sobeys, and he is credited with many of the FreshCo innovations. A discount store is a very different business model from a standard supermarket. It has half the labour costs due to the absence of delis, pharmacies and other service counters. As well, a FreshCo will carry a maximum of 10,000 unique items; a full-service Sobeys has 30,000. To test shoppers' reactions to the new format, last year Sobeys converted an empty store into a FreshCo "stealth lab," equipped with the new branding, fixtures and layout. The "controlled flow" design (think Ikea), a first for a Canadian grocer, was a source of some concern. It forces shoppers to pass through produce, bakery, meat and the ethnic aisle before they can get to other departments. McEwan says test shoppers liked the layout, but you can picture bottlenecks on busy days as people try to get to the milk or diapers.

Check out our glossary

Still, Sobeys had to try new things, because Price Chopper was wasting a major opportunity. These days, more than a quarter of Canadians shop at discount supermarkets. In Ontario, where discounters are most heavily concentrated, 40 per cent of food sales come from this segment. Price Choppers' share of the roughly $10-billion in total discount sales is a measly 13 per cent, compared to 22 per cent for Food Basics and No Frills' 34 per cent.

Sobeys plans to convert most Price Choppers to FreshCos within the next 18 months. Ethnic and fresh foods, even at discount prices, offer better margins than mainstream groceries. As well, the company has added a new low-end line, named Signal, to beef up its private-label penetration. In the end, the discount division may end up smaller as Sobeys shutters some stores or switches them to other banners, says Caicco, but if sales go up 20 per cent, as he expects, the discount division's earnings before interest, taxes, depreciation and amortization could improve by 50 per cent. "FreshCo," he concludes, "is more about repairing a profit problem than taking market share."

If a full-service Sobeys is your basic sedan and FreshCo represents the family minivan, Urban Fresh is the Cooper Mini: compact, chic and pricey. Inside the year-old Urban Fresh store at the foot of a new condo tower near the Rogers Centre in downtown Toronto, the clientele is decidedly upscale-one of the hotelier/restaurateur Rubino brothers is over there fondling produce-and the exotic product mix isn't aimed at the ethnic consumer so much as the sophisticated foodie. You won't find just bok choy; you'll find gailan, and there's a display case stocked with 16 types of dried mushrooms. FreshCo may boast more than 100 types of cheese; here, in a space barely half its size, you'll find more than 300. "The Food Network has totally changed the industry," says Mary Dalimonte, Urban Fresh's general manager. "Ten years ago, people would look at Italian rapini and ask, 'What is it?'"

First introduced in 2003 and rolled out more widely in 2006, Urban Fresh appeals to busy professionals living in small square footage but on a grand scale. They rarely cook, but when they do, it's gourmet fare. They have little storage, so they often shop daily. They want organic, local, new and different. While GTA chains like Rabba and the Kitchen Table already serve this market, McEwan felt Sobeys could do it better. Dalimonte implies that Urban Fresh aspires more to the large-deli category of luxe GTA mini-chains Bruno's Fine Foods and Pusateri's. The 11 stores in Toronto, as well as two in Edmonton, range in size from 4,500-square-foot "convenience formats" to 20,000-square-foot locations like this one, and all the way up to 30,000. All are dotted around high-traffic areas with lots of nearby condo dwellers who usually walk to the stores-parking is scarce and rarely subsidized. Dalimonte describes the clientele as "transient": "Not everyone who shops here actually lives downtown. They may work here and shop during the day." Indeed, the store's rush times are weekday mornings and late afternoons.

The gregarious Dalimonte strolls through the store like it's her own kitchen, tasting samples and joshing with the staff. As we walk by a tester tray of specialty blue cheese on toast, she chows one down and observes: "It's a honey fig jam underneath. Yum!" The Sobeys emphasis on fresh is most visible here in the form of prepared meals. Near the centre of the store sits a large deli bordered by 30 metres of fridges filled with prepared foods. An in-house chef-certified, Dalimonte stresses-oversees a staff that whips up meals, pizzas and sandwiches to order. Across the aisle, a salad bar converts to full breakfast fare in the morning. The store even does corporate catering.

Dalimonte, another industry veteran lured from a rival, says that while an Urban Fresh may have fewer units of everything, in smaller serving sizes, it has as much variety-and in some areas, more-than a standard supermarket. By way of illustration, she asks: "Have you ever had a dirty chip?" Not the kind off the floor, she makes clear when she pulls down a bag of salt-and-vinegar Dirty Chips (a brand she found in an airport in the Caribbean).

It's a challenging format to operate, however. City bylaws limit truck delivery times, as does the need to keep vehicles from blocking traffic. The store on Toronto's busy downtown Yonge Street strip has only a small alley and no receiving docks, forcing staff to drop everything to empty each truck immediately. "It's like a ballet," says Dalimonte. Sobeys has its own fleet of smaller trucks to service its Urban Fresh locations, which require smaller, more frequent deliveries. The compact stores have no room to store garbage, and inventory is managed in individual boxes, not cases or pallets. And because so much of the traffic is walk-in, sales go up and down with local events or the weather.

Most critically, finding available locations is exceedingly hard. That's why, seven years after the first Urban Fresh opened, there are still only 15. "We're opening stores as fast as is reasonably possible," says McEwan. "But there aren't any downtown locations left!" Rival Metro scored some choice city-centre sites when it acquired A&P Canada's Dominion brand in 2005, and Dalimonte can't hide her envy when she compliments the Metro supermarket in the young, hip Liberty Village neighbourhood a few blocks west of this Urban Fresh outlet. Loblaws is chasing the urban consumer as well, next year planning to open a supermarket on fashionable Queen Street West, over a Joe Fresh store. As it hunts for existing locations, Sobeys is making do with "new build," signing leases with condo developers to situate stores in their buildings. And in B.C., it plans to use the 23-store Thrifty Foods chain it bought in 2007 to carry the urban format there.

While fresh, market-tailored assortments are winning converts to Sobeys, all three majors refined their strategies in the lead-up to Walmart Canada's entry into groceries, says Ken Chernin, an analyst with Jennings Capital Inc., "and all three are in excellent shape." Loblaws continues to gain market share and increase profits-in its most recent quarter, the company posted stronger same-store sales growth than Sobeys, according to one analyst. But to Sobeys, the game isn't about size. Chernin notes that Sobeys has focused less on expansion than on "sweating the assets" it has. As major retailers get sucked into the gravitational pull of general merchandise-with Loblaws carrying clothes, Canadian Tire adding food, Shoppers Drug Mart peddling laptops-Sobeys has opted to specialize in food. "We have absolutely no intention" of moving to big-box formats, says McEwan. When someone asks where to find the Dubliner Irish Cheese, they'll never hear, "Turn right at the power saws."

Report an error

Editorial code of conduct

Tickers mentioned in this story