Canada - Outsiders outnumbered
Elsevier Food International Vol.8, No.2, May 2005 Len Lewis
In the ‘Great White North’, chains and retail independents thrive side by side, and giants like Wal-Mart still remain ‘small fish’ in a big pond. And yet Canada is no retail nirvana where competition for a piece of the country’s C$68 billion food retail sales is cutthroat. Even big European names like Carrefour, Metro and Lidl have discovered that Canada can be a challenge too tough to crack.
Imagine a marketplace where chains and independents live side by side, food prices are among the cheapest in the world, unions and retailers have friendly working relationships and Wal-Mart is just a small fish in a big pond. Welcome to Canada! Or, if you happen to be in Quebec: Bienvenue vers le Canada!
However, the ‘Great White North’, which stretches some 5,000 miles from the eastern provinces on the Atlantic through the Prairie Provinces to the Pacific, is no retail nirvana. Competition for a piece of Canada’s C$68 billion in retail food sales is fierce. Development of fresh food formats, hard discounters and alternative retailers are making conventional supermarkets all but obsolete. Moreover, Canadian retailers have consistently beat back foreign competition, including Carrefour, Lidl and even Wal-Mart.
The grocery industry is still one of the few sectors of the nation’s economy where Canadian ownership prevails and this is unlikely to change, making it a challenging, if not impossible market for outsiders to crack. This is also due to the unique and somewhat incestuous nature of the industry in which the major chains like Loblaw’s, Sobey’s and Metro Richelieu not only operate corporate chain stores, but own and franchise most of the independent banners and control a portion of the wholesalers that supply them.
Self-competition
“You probably won’t see this anywhere else in the world. You can actually be in competition with yourself,” said John Scott, president of the Canadian Federation of Independent Grocers. “Obviously, our competition laws have not addressed this particular issue.”
This situation probably works to the advantage of both retailers and consumers. “Each company has a number of arrows in their quiver. So when they compete in a market and find a corporate store doesn’t work, they can put in an independent operator. In northern Ontario which contains some of the country’s most rural regions, corporate stores don’t go over as well as the local grocer who is a respected person in the community,” he said.
To understand Canadian retailing, one must be familiar with the country’s geography. Canada is composed of 13 separate provinces and territories. Its landmass is 600,000 square kilometres - six per cent bigger than the US. But the population of 32 million is only ten per cent that of its southern neighbour. Moreover, approximately 90 per cent of the country’s population lives within 160 kilometres of the US border and more than half of them are concentrated in Canada’s top ten cities.
Ethnic influx
Nearly 40 per cent of the population is concentrated in the eastern Province of Ontario. In recent years, this area has seen an influx of immigrants from Asia, India, eastern Europe, South America and Russia, a development that has prompted some chains and independents to focus their efforts on ethnic stores or create stronger ethnic presentations within existing supermarkets. Dr Ken Jones, geographic analysis professor at the Center for the Study of Commercial Activity at Ryerson University, Toronto, said the bulk of Canada’s population growth is in Toronto, where growth is at a rate of 90,000 to 100,000 people per year due to immigration. He noted though that more people are settling elsewhere in Canada.
In recent years, the Canadian economy has seen its ups and downs. Although unemployment remains at a relatively high seven per cent and Canadians are among the most heavily taxed in the world, economic growth this year is expected to reach 2.5 to 3.2 per cent - not spectacular but fairly robust considering lacklustre results in previous years when the US recession had a cross-border impact. These and other factors continue to have an impact on supermarkets. In 2003, industry sales grew 5.7 per cent, the best performance in a decade. Last year, sales were only up 3.5 per cent totalling C$68 billion, according to a Canadian Grocer survey. This was a healthy middle-of-the-road performance, affected by price wars and food sales by alternative formats. A big part of the gain was attributed to mass merchants that are expanding their food offerings.
Chain control
Countrywide, chains control 59 to 60 per cent of the grocery industry and their domination is highest in the Atlantic Provinces, where chains hold an estimated 78.3 per cent share. The tables are turned in Quebec where national chains only have a 35 per cent share. However, Scott noted that full independents actually hold 20 per cent of the Canadian market or C$11 billion in sales. “We don’t define independents as having ten stores or less. We define them as stores which are not traded publicly,” he said.
Overall, fewer than half of Canada’s provinces and territories account for over 90 per cent of volume. The largest is Ontario with C$22.2 billion in sales and a 32.6 per cent share, followed by Quebec, C$16 billion or 23.5 per cent; Alberta C$8.6 billion, 12.7 per cent; British Columbia, C$9.9 billion, 14.6 per cent; and Manitoba/Saskatchewan, C$4.9 billion, 7.2 per cent.
Looking at market share for individual companies, Loblaw is by far the top dog with a 29.1 per cent market share. Its closest competitor is Sobey’s at 13.7 per cent and Wal-Mart discount stores, 10.9 per cent. Metro claims a 6.9 per cent share; Costco, 6.4 per cent; Safeway 5.8 per cent; A&P, 5.4 per cent, The Jim Pattison Group, 3.9 per cent and Couche-Tard, 2.3 per cent, according to statistics from Planet Retail, London. Jean Coutu, a convenience store operator has a two per cent share while Shoppers Drug Mart holds a 4.3 per cent share of grocery sales. The balance of the market is held by smaller co-ops, family-owned stores and petrol station operators.
Loblaw, which rang up sales of C$26 billion in 2004, has invested heavily in new store development and the upgrading of existing units. Last year the chain opened 86 new franchise and corporate stores. Loblaw seems to be pulling away even further from the rest of the pack as it expands its store base, private label offerings and non food, according to Planet Retail’s senior retail analyst Bryan Roberts in London. Loblaw’s operates under 17 different banners and formats.
The Real Canadian
The Loblaw banner that is keeping Wal-Mart at bay is the Real Canadian Superstore, a 140,000 to 150,000-square-foot big box format with an extensive grocery and non-food assortment. Loblaw has nearly 60 of them, primarily in eastern Canada. “Originally, this was a very successful concept in the west. They are building them very quickly in the Ontario area in an attempt to discourage Wal-Mart. Loblaw’s believes this is where the big fight will be,” added Tutunjian.
Some observers believe that Loblaw’s success with the superstore format has been the result of a deal with the union for a two-tier system under which employees at superstores receive lower salaries and benefits than employees at conventional supermarkets. The United Food and Commercial Workers union, which represents nearly 250,000 workers, was not happy about it. But in order to fight Wal-Mart, Loblaw threatened to keep the superstores non-union unless there was some wage relief, sources said.
To some, Loblaw’s is the Canadian equivalent of Wal-Mart in the emotional sense. “In some communities, word that Loblaw’s is coming to town has been greeted with the same warmth as news of invading barbarians,” according to a report on the Canadian market by Euromonitor. “The vast majority of consumers, however, have been quick to embrace the relentlessly ambitious grocer (Loblaw) and it remains to be seen whether Canadians will hand over their food dollars to Wal-Mart.” Loblaw also operates the Real Canadian Warehouse Club as a direct response to Costco. However, Costco was the first warehouse club in Canada and with 63 stores across the country it is the clear leader in this arena.
Sobey’s, which operates under about 13 banners, is in the process of restructuring its portfolio. “Sobey’s is the flagship and they are in the process of trying to rationalise their brands,” said Planet Retail’s Roberts. “They realise that all these banners are unwieldy in terms of marketing and brand equity. They’re trying to get down to five or six in the next several years,” he said, noting that the chain will be focusing on Sobey’s, Sobey’s Express, IGA, IGA Extra and Price Chopper. Sobey’s operates some large stores, but not supercentres and it intends to remain a mainstream grocer by focusing on smaller food stores under 5,000 square metres, Roberts noted.
Metro is the leading supermarket and convenience store chain in Quebec where it operates under six different banners. The company, like Loblaw and Sobey’s has been on an investment binge, opening 18 new stores last year and renovating 26 others. Meanwhile its financial position is fairly strong, with earnings increasing for 14 consecutive years. “One of the reasons is that they are converting some of the Metro stores to Metro Plus, smaller, high-end stores with greater variety,” Tutunjian noted.
The Wal-Mart factor
The full effect of Wal-Mart has yet to be seen and they are more of a medium-sized fish here rather than the Great White Shark they are in the US and elsewhere. “They had a fairly disastrous start to their Canadian career with the Woolco stores taking a lot longer to turn around than they thought. Additionally, their impact has been limited to non-food merchandise and only recently have they rolled out pantry departments in discount stores,” said Planet Retail’s Roberts.
Roberts does not believe Wal-Mart officials who say they have no immediate plans to open supercentres in Canada. Besides, Loblaw’s had pre-emptively beaten its rivals in the supercentre arena. “They (Wal-Mart) also haven’t gotten the discount stores to where they want them in terms of rolling out grocery and sorting out the range of clothing they want to carry,” added Roberts. Nonetheless, Wal-Mart is making headway and picked up three share points in 2004. It has about 260 stores, including six Sam’s Clubs, and opened 30 new discount stores last year. It has yet to reveal plans for Canada in 2005 but is expected to open an additional 20 Wal-Marts and about ten club stores.
Wal-Mart, which employs around 65,000 workers in Canada, may face more union battles. Two Wal-Mart stores in Quebec received union certification without a vote by employees. But in early February, Wal-Mart said it was closing one of them this month, citing unreasonable demands by union negotiators for a store (the first in Wal-Mart history that would have a union contract) that was losing money. But intense competition and the fact that food prices are about as low as they can go may be a greater factor inhibiting Wal-Mart. “When they come in with supercentres, they’re going to have a hell of a time doing any better on price than anyone else. I’m also not sure they’ve resolved the distribution issue,” according to Scott.
Meanwhile, Safeway, a veteran operator with 215 stores across the country, continues to increase sales from a fairly static store base. Rumours are also rife that Safeway is a potential acquisition target - possibly by Sobey’s or Loblaw. A&P, also mentioned as a takeover target, is a far stronger entity than Safeway and has a firm hold on the Ontario market where its Food Basics store is very strong and the Dominion chain is largest in terms of store numbers.
Foreign intervention
Roberts said he would not be surprised if Canada were to become an attractive destination, adding that immediate candidates would be US retailers Walgreen, Albertsons and Target. “Albertsons would be my prime candidate for a big cross-border move in the next year or two. They have lofty ambitions. Sobey’s and Metro would be attractive for them in the supermarket business and Shoppers Drug Mart in the drug arena.” From Europe, Tesco and Metro are up in Robert’s list. “Tesco always said it was going to be one of the big global players and right now they’re limited to Europe and Asia. Presence in the Americas is one of the credentials you need to stake your claim as a global business.”
Projected food sales by outlet (C$bn)
| 2004 | 2005 | 2006 | 2007 | 2008 | |
| Chains | 40.7 | 42.3 | 44.0 | 45.6 | 47.3 |
| Independents | 24.3 | 24.9 | 25.6 | 26.2 | 26.9 |
| Indep. specialty stores | 2.8 | 2.9 | 3.0 | 3.1 | 3.1 |
| Convenience stores | 1.8 | 1.9 | 2.0 | 2.1 | 2.2 |
| Mass merchants | 0.8 | 0.9 | 1.0 | 1.1 | 1.2 |
Grocery market share (%)
| 2004 | 2003 | |
| Loblaw | 29.1 | 30.4 |
| Sobey's | 13.7 | 14.4 |
| Wal-Mart | 10.9 | 7.9 |
| Metro | 6.9 | 7.1 |
| Costco | 6.4 | 6.6 |
| Safeway | 5.8 | 6.7 |
| A&P | 5.4 | 4.9 |
| Shoppers Drug Mart | 4.3 | 4.5 |
| Jim Pattison Group | 3.9 | 4.0 |
| Couche Tard | 2.3 | 2.4 |
| Jean Coutu | 2.0 | 2.1 |
| Others | 9.3 | 9.0 |
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