Canada's largest supermarkets are putting money and space into cheaper stores like No Frills, Food Basics, and FreshCo as shoppers try to spend less on food due to the higher cost of living.
Experts say it's relatively simple for grocers to change regular grocery stores into discount stores, and this is helping them make steady profits despite people trying to reduce their spending.
Michael von Massow, a food economy professor at the University of Guelph, said, "There are many things people are doing, but one of them is looking for cheaper options. And so they are going to discount stores."
Each of the major Canadian grocers has different types of stores, from high-end to regular to discount. Loblaw’s main discount stores are No Frills and Maxi, while Metro owns Food Basics and Super C, and Empire owns FreshCo.
Recent earnings reports from all three Canadian grocers have shown that sales at discount stores are a major factor in overall sales growth.
Loblaw is leading the way in expansion, with more than 30 new Maxi and No Frills stores opened last year, either through new locations or converting full-service stores into discount, according to the company’s annual report.
Melanie Singh, president of Loblaw's new "hard discount" division made up of No Frills and Maxi, said, "There is a shift to discount, and we see the opportunity that exists for discount stores."
The growth isn't slowing down. Just before its February earnings release, the grocer announced a capital investment plan worth more than $2 billion that will lead to over 40 new discount stores.
Lisa Hutcheson, a retail analyst at J.C. Williams Group, said, "I think it's a great strategy for them."
"They're investing in this approach because they're recognizing people need that budget-friendly approach, but it will also be a very strong strategy for them financially," she added.
A recent industry report from commercial real estate firm JLL said the grocers are taking different approaches to discount. Empire isn't focusing on expanding discount stores, instead concentrating on its current portfolio.
In 2018, Empire acquired Ontario chain Farm Boy and has since grown it. They also bought a majority stake in specialty grocer Longo's in 2021.
The report said, "By sticking to its full-service approach, Empire is betting on a time of decreasing inflation and interest rates, when customers might prioritize the shopping experience over big discounts."
However, the report noted that Empire has already made some conversions and is taking a strategic approach in Western Canada.
Empire has opened 52 new FreshCo stores in Western Canada and Ontario in the last six years, bringing the national total to 147 stores, said spokeswoman Tshani Jaja in an email. The company has also expanded its private-label and value-size offerings, and it launched a program mid-February to lower or lock in prices on around 1,000 items for 11 weeks.
Metro currently has 247 Super C and Food Basics stores, up from 236 in 2020, said spokeswoman Stephanie Bonk in an email. Three Super Cs opened in the company's latest quarter, and another Food Basics is scheduled to open this year.
“Customers are now preferring our discount brands over regular ones. Our sales of store-brand products are growing faster than national brands, and we still have a lot of sales from promotions,” said Bonk.
According to Singh, discount stores are usually smaller than regular stores and have a simpler way of working with fewer types of items.
At a regular store, you might find additional services like a deli or freshly baked bakery items, Singh noted.
But both regular and discount stores are influenced by the local community, Singh mentioned.
“We use a lot of data to make those decisions,” she said.
Hutcheson pointed out that discount grocery stores have simpler signs and displays, stock more of their own brand items with higher profits, and have fewer employees.
Von Massow mentioned that discount stores have fewer promotions, and are often located in less expensive areas.
All these factors result in similar profits to a full-service store, he said.
“I think that the grocers don’t really care where we shop, as long as they can adjust to it,” he said. “And that’s what we see them doing.”
Grocers are strategically converting some stores to discount stores, von Massow said: “They’re choosing to change underperforming stores into discount stores.”
Loblaw has noticed that when it converts a store into a discount store, sales go up at that location, said Singh, and yet its other discount stores in the area don’t lose sales.
Turning a regular store into a discount store is easier than building a new one, said Singh. Sometimes they can even keep the store open while making the changes, with only a short closure.
“We’ve turned several Maxis into Maxi stores where we would close it for two weeks, put the sign up, and then reopen it as a Maxi, while still doing construction in different parts of the store.”
According to RBC Dominion Securities analyst Irene Nattel, Loblaw is in the best position as inflation leads consumers to buy cheaper products, followed by Metro and then Empire.
Nattel mentioned in a previous note that Empire’s focus on full-service stores puts it at a disadvantage compared to its competitors in the current price-sensitive market.
But Hutcheson believes that having specialty or high-end brands is not necessarily a problem.
“As long as they understand their value to their customer and provide what they want, I think that’s fine.”
Hutcheson said that if consumer behavior shifts back towards full-service stores in the long run, the grocers can continue to adapt.
“I believe this type of change is not very risky, since discount stores are easy and relatively cheap to build or convert, and then they can change accordingly.”