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A new food fight has erupted in Winnipeg and is destined to hit other parts of Canada by next year.

At five stores in the city, discounter Zellers is tempting customers with shelves of fresh peaches, pineapples and peppers, as it begins a campaign to take on giants Wal-Mart Canada Corp. and Loblaw Cos. Ltd. and join a growing array of retailers that are bulking up on groceries to steal away customers.

Zellers has been racing for years to catch up to discount titan Wal-Mart amid executive turnover and shifting strategies. In late 2008, under a new chief executive officer, merchandising veteran Mark Foote, Zellers started to spotlight household needs and cheap-chic fashions for increasingly cost-conscious consumers. Now Mr. Foote is turning to food, a territory he knows well, having grappled with the risks of the segment in his former position as an executive at Loblaw.

"Food is obviously a big part of Zellers' strategy," Mr. Foote said. "But it's going to place a lot of pressure on us to make sure that the operations side of food is as strong as it's going to need to be."

The stakes are high for Zellers because fresh food is perishable and retailers' margins can vanish quickly if items wilt or go stale. Merchants need to build special logistics networks, including refrigerated warehousing, to ship food.

"It's a risky strategy," said Martin Gooch, director of the Value Chain Management Centre, a Guelph, Ont.-based food retail expert. "Zellers is not known for food ... To do fresh food well is challenging."

Still, the payoff can be enticing. Food is a retail magnet; it attracts shoppers to the store, where they are often lured to buy other goods. Gross profit margins on fresh food are among the most attractive in the supermarket, sometimes more than three times that of packaged groceries, Mr. Gooch said.

Zellers faces an increasingly crowded grocery market. Wal-Mart has added fresh fruit, vegetables and meats to its stores in massive Super centres, while Loblaw has sharpened its discount Real Canadian Superstores and No Frills stores. Shoppers Drug Mart Corp. and other drug-store chains have widened their food offerings, and Canadian Tire Corp. is testing foods.

Zellers, a unit of Hudson's Bay Co., already carried packaged and dairy foods at its stores but now plans to broaden its offerings, beginning in Winnipeg with fruits and vegetables, and soon fresh-baked goods.

The early results are encouraging, Mr. Foote said. Since last Friday, when Zellers started to feature fresh produce at a handful of Winnipeg stores, sales and customer traffic have been stronger than expected. "It did take off a lot faster than we thought," he said.

For now, Zellers has hired an outside supplier to handle daily deliveries of the fresh items, which adds between 4 per cent and 7 per cent to costs, Mr. Foote said. Eventually he plans to cut expenses by developing his own distribution network if he moves cross-country with foods, as he hopes to do. By early next year, Zellers is looking to launch fresh foods in its stores in Western Canada, where competition from Wal-Mart and Loblaw is fierce, and possibly in Ontario.

Winnipeg is a good testing ground because it isn't quite as cutthroat as other markets. Wal-Mart hasn't yet brought its Super centres to the city.

Zellers hopes its results will mirror those from other retail chains that report a lift in business from bolstering their food offerings. Shoppers Drug Mrat says customers who buy food spend three times more overall than non-food shoppers.

Mr. Foote's move to add more food to Zellers shelves is part of his wider refashioning of the stores. He's putting more emphasis on everyday needs, such as cleaning products and health and beauty items, while sharpening the styling of clothing, including Lululemon-lookalike athletic wear. He dropped about 15 per cent of goods to focus on more popular lines. In Winnipeg, he lowered prices on everyday needs between 3 and 6 per cent to be competitive with Wal-Mart, and doubled flyer advertising of those items.

Food is a key strategy because "food is a big part of how we get traffic into the store," Mr. Foote said.

Food fight

Wal-Mart Canada

The giant discounter struck fear in the grocery market in late 2006 when it started to open its Super centres with full supermarkets, including fresh foods. Food is now one of its strongest product categories. By year's end, it expects that 124 of its 325 stores will be Super centres.

Shoppers Drug Mart

Shoppers is rapidly bolstering its food offerings, It carries the fare in about half of its roughly 1,200 stores; its high-margin private labels make up more than 14 per cent of its food sales. But Shoppers' foods are generally packaged, rather than fresh produce.

Canadian Tire

The auto parts, house wares and sporting goods retailer has been testing food since late 2008. It says it's been pleased with its pilot, which is in about 10 of its 480 stores. In outlets with food, it is the "most-shopped" category . Food shoppers visit the stores more often than non-food shoppers.

Marina Strauss

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