There’s never been a better time to shop the aisles of your local supermarket. Retailers have ramped up deals and lowered prices like never before in this ultra-competitive marketplace. This may be a big win for consumers, but it comes at the expense of the bottom line of grocery retailers. And, as discount grocers struggle with their earnings due to competition, it’s negatively affecting their shareholders.
Grocery Market Competition Heats Up
There’s a good reason Amanda Lang from The Lang & O’Leary Exchange often says you should hug your grocer. Grocers have among the lowest profit margins of any industry. When the market is only growing at less than one per cent and grocery square footage is growing at three to four per cent, something has got to give. Finance Minister Jim Flaherty once described the mortgage market as “a race to the bottom,” but that seems to better describe the grocery industry.
Grocery chains are increasingly competing purely on price, as they try to gain new customers and maintain their market share. Discount grocers like No Frills and FreshCo introduced price matching a while back to attract price-conscious consumers to their stores. Food Basics, who is lagging in the competition, is trying to address one of the most frustrating parts of being a grocery shopper; don’t you just hate it when your local supermarket is “sold out” of advertised products? Its newly-launched in-stock guarantee will offer customers a rain check and a 10 per cent discount when an item is out of stock. This may sound like a game-changer, but when you read the fine print, each customer is only limited to one rain check.
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Pressure From Mass Merchants
Traditional grocers like Loblaws and Metro are facing competition on two fronts. Not only are they competing among grocers, they’re also competing against mass merchants like Walmart, Target and Costco. Walmart was a big threat to grocery leader Loblaws when it entered the market in 1994. With Target recently entering the mix and e-commerce giant Amazon soon offering same-day grocery delivery, traditional grocers are being squeezed like never before. Although grocers still own the lion share of the food and beverage business in Canada, that’s slowly changing. Ten years ago grocers owned 87.5 per cent of the marketplace; today that figure is down to 81 per cent.
Hurting the Bottom Line
Lower prices may be good news for consumers, but it’s having a negative impact on the bottom line of retailers. Loblaws saw its retail gross margins fall 32 basis points in the most recent quarter, blamed mostly on lowering its prices to maintain its market position. Meanwhile, Metro took a hit on the sales front, as sales fell 1.8 per cent at stores open for over a year, as shoppers were lured to the competition. Shareholders weren’t happy with the outcome, as both grocers saw their shares prices take a hit.
Grocers Respond With Quality Cutbacks
As consumers become more price-conscious, Metro has responded by closing its higher end stores and opening discount Food Basics in their place. With the competition ramping up its square footage dedicated to grocery, things only look to get more intense. In Ontario, where competition has reached a peak, grocery staples like milk and bread have started appearing on the front page of flyers, as grocers look to win customers at any cost. With grocers no longer able to lower their profit margins, suppliers are getting pressured to lower their costs.
As 2013 comes to a close, it will be interesting to see what 2014 has in store. Consumers should look for deals galore, as grocers look to win market share. As for shareholders, it’s short-term pain for long-term gain, as grocers look to keep their customers and turn around profitability over the long haul.