by John F.T. Scott
The effects of the stubborn inflationary trends have continued to plague world economies in recent months. Efforts by central banks to stem the tide have been met with only modest success, leading most economists to believe that consumers will need to adjust to living in an era of higher costs in almost every aspect of life for some time. This implies that society will continue to experience rising food prices albeit at a declining rate of increase. Many consumers harbour a hope that prices will fall after the inflation lion has been tamed. Unfortunately, other than a brief annual period of lower prices for seasonal products, that will not be the case. Price increases of 4 or 5% this year will be on top of the 9 – 10% of last year. There will be no retreat; just a slower upward migration. Given this reality, consumers have little choice other than to seek solutions to maximize a shrinking food budget.
Their actions are changing the grocery retail landscape. The first indication of the new and discerning consumer has been the rapid flight to discount stores particularly for packaged goods. After all, consumers spent a great deal of time cooking at home during the COVID era and have learned the value of discount brands. As a result, growth in every facet of the discount sector over the past year has been nothing short of dramatic. Large-sale volume increases have been reported by long-term low- cost operators like Costco and Walmart. Even greater percentage growth in food tonnage sold has been reported from rock bottom operations like No Frills and Food Basics.
What does that mean for the traditional supermarkets? Frankly, it has created a very challenging environment for those companies because, while they work hard to provide competitive pricing, the operating structure does not allow packaged goods prices to equate to those offered at discount. Consequently, for most, sales volume has generally fallen along with profitability. In response, renewed focus with aggressive pricing has been placed on quality fresh and unique products. Each operator has honed their points of differentiation to provide the consumer with optimum value. And most have gone a few steps further, reducing service levels; moving to self-serve checkouts; keeping a high emphasis on value private label; reducing shelf space on expensive, underperforming brands; and absorbing portions of the supplier price increases have all become commonplace.
The question should be asked – if all of that is true – why then have the sales volumes and profitability of huge companies like Loblaw continue to increase? The simple answer is that over 65% of the retail floor space of that particular company is discount (Superstores and No Frills). Add to that the immense popularity of the Loblaw discount “No Name” private label brand together with a drive to minimize operating costs through technology and efficiencies in every store and you can readily see a strategy that accommodates the needs of the consumer while continuing to maximize profits.
At their 2023 annual meeting, Sobeys, another Canadian grocery giant, promptly announced that, because of the pressure on their traditional offering, there would immediately be an increased emphasis on discount stores and value house brands. Now this company presently boasts the least amount of discount floor space of any of Canada’s large chains, but don’t expect that to continue. Sobeys now has a large number of underperforming traditional stores because of the new consumer purchasing behaviour and I expect that many will be converted to discount formats in the months ahead.
Many other smaller and specialty stores have been caught in the middle as have unique brands. Stores in this category have seen significant reductions in both customer count and sales as consumers revert to purchases only on special occasions. Similarly, recently in vogue but expensive products, including animal protein substitutes have seen their fortunes decline in tandem with the pressure on the consumer’s wallet. In those cases, retailers have reduced shelf space in favour of products which currently carry greater appeal.
It will be interesting to watch the industry continue to rapidly adjust in order to cope with the reality of new product preferences based more on affordability and less on curb appeal. Regardless, consumers can be confident that this industry is resilient and will always find a way to maximize their satisfaction.