Wal-Mart fires up supermarket price wars
Consumers set to gain, grocers to lose
By MARINA STRAUSS
Thursday, December 15, 2005 Page B1
RETAILING REPORTER
Supermarket price wars will heat up in the face of discounter Wal-Mart Canada Corp.'s plans to open its first giant superstores, with their expanded grocery section, in the next year or so, observers predict.
Already executives at Canada's two largest grocers, Loblaw Cos. Ltd. and Sobeys Inc., have warned that the competitive retailing landscape will get tougher as more selling space is devoted to the same type of merchandise.
Analysts point to continuing price erosion as consumers demand better value.
"It's going to get more ferocious," Cynthia Rose-Martel, retailing analyst at Jennings Capital Inc., said in an interview. "Regardless of what Wal-Mart does, pricing is going downwards, not upwards."
The arrival of the Wal-Mart supercentre "would only intensify it."
John Lederer, president of Loblaw, sees the consequences in lower profit margins.
"Margins are going to erode over the next few years, and so only the leanest competitor is going to be able to compete," Mr. Lederer told analysts last month.
"So I think we see the competitive landscape heating up as this incredible excess footage comes in," he said.
On Tuesday, Wal-Mart Canada confirmed to The Globe and Mail what retail insiders had been whispering for weeks: that the retailer is finally going to launch massive stores similar to its giant U.S. parent's dreaded supercentres, starting with two or three in late 2006 or early 2007.
The discount supercentres have a full selection of supermarket products along with general merchandise. In the United States, the rapidly expanding supercentres are eating into the business of rival grocers.
In Canada, Loblaw and others have ramped up their discount divisions and lowered prices in preparation for an eventual supercentre assault -- and in a bid to compete more effectively.
It's not only the Wal-Mart supercentre effect. Everyone from drug store chains to discounter Zellers are beefing up on groceries. Bulk seller Costco Wholesale Canada Ltd. has also had an impact.
Sobeys, which runs IGA stores, has been notably fierce in its price-cutting, analysts said.
Chief executive officer Bill McEwan said this week that he expects promotional activity to get a bit more "severe."
Just three months ago, Mr. McEwan had indicated that he thought inflation might continue to inch up.
"Things change in three months and you've got to be fast, fluid and flexible," he said on Tuesday after releasing second-quarter results, which showed weaker profit. "Clearly we have seen some increased competitive activity."
And there will be more, grocery officials warn. "This market is going to change ferociously in the next five years," Mr. Lederer told an investors' conference two weeks ago.
Retailing space will "far outstrip demand," even while consumers seek more "value" pricing, he said. "Consumers want value . . . We think the conventional [supermarket] format will be increasingly challenged."
To respond to consumer demand for lower prices, Loblaw wants to convert more of its traditional supermarkets to discount superstores or other low-priced banners such as No Frills.
Loblaw superstores are much like Wal-Mart supercentres, housing huge supermarkets along general with merchandise under one roof.
Loblaw has talked to union representatives to find ways of reclassifying employee pay scales to help reduce operational costs. The idea is to pass on savings to consumers in lower prices. For years Loblaw, has argued that Wal-Mart and Costco have an edge because they have no unions.
How severe are pricing pressures? CIBC World Markets analyst Perry Caicco points to at least one "meat skirmish" in Ontario recently in which a Sobeys flyer advertised pork loin roast at $2.49 a pound, while Loblaw superstores promoted the same product at $1.49.
On another item, Sobeys pitched prime rib roast at $3.99 a pound, while Loblaw's Zehrs chain had the slightly inferior top sirloin premium oven roast at $3.49 a pound.
"There is published evidence (in the weekly flyers) of Loblaw's new promotional pricing warpath," Mr. Caicco said in a recent report. "One little meat skirmish is not enough to make us more cautious about Ontario results, but there is similar and regular evidence from all over the market of heavy promotional battles and a real struggle to drive sales."
Indeed, he says competition in Ontario is a "bloodbath," even before the arrival of Wal-Mart supercentres. "In order to drive business in this situation, all major competitors have been forced to supplement their weekly flyers with occasional (and responsive) two-day or three-day ads, stacking promotions on top of promotions."
At Loblaw, he added, "prices must drop, and fast."
Mr. Caicco estimated that Ontario supermarket space has increased between 10 and 12 per cent over the past two years. And he pointed to the projected elimination of 3,900 General Motors jobs, which "will send a chill through an Ontario consumer already wobbly from gas price increases."
At Sobeys, prices cuts will likely cause continuing profit problems in Ontario, he predicted in a report yesterday.
On the Toronto Stock Exchange, Sobeys shares were flat at $37.39, while Loblaw fell $1.30 or 2.2 per cent to 56.35 and Metro's class A shares slipped 18 cents to $31.25.
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RETAILING
Supermarkets brace for next Wal-Mart move
Discounter to launch supercentres in Canada that add fresh food to the mix
By MARINA STRAUSS
Wednesday, December 14, 2005 Page B1
RETAILING REPORTER
Discounter Wal-Mart Canada Corp. will launch two or three massive superstores in the next year or so by bulking up on groceries and other items in a move that promises to transform the retailing landscape -- and squeeze supermarkets' businesses.
The advent of the Wal-Mart supercentre has been widely anticipated -- and feared -- in retailing circles for years as the world's largest merchant rapidly expanded its presence in Canada since arriving in 1994.
U.S. supermarkets have been devastated by the impact of parent Wal-Mart Stores Inc.'s supercentres, which combine full supermarkets with general merchandise. In Canada, grocers will feel the pinch, although they are better positioned to handle an onslaught because they already run discount divisions, industry observers say.
"This is a big deal for the supermarket industry as Wal-Mart appears to now be ready to fire a shot at the supermarket leaders," said Rick Pennycooke, president of retail development consultancy Lakeshore Group.
"Wal-Mart doesn't do things in a half-baked way . . . They're not going to do a one-off. It will impact everybody."
Industry insiders agreed. "They're a very strong company and they're doing very well with their supercentres in the U.S.," said Louise Wendling, who heads Costco Wholesale Canada Ltd.
"Whatever moves they're going to make, it's going to affect the market share of all players."
Wal-Mart spokesman Andrew Pelletier confirmed in an interview that it will roll out its first two or three supercentre-like stores in Ontario in late 2006 or early 2007.
The chain has yet to decide on future expansion, or whether to name them supercentres, as they are called elsewhere, he said.
While Wal-Mart already carries groceries at most of its 256 stores, the supercentres will also sell fresh produce and meats, delicatessen and bakery products, he said.
As well, it will add more apparel, electronics and home decor items to supercentres because consumers want more of this merchandise.
"We see this as an evolutionary approach," Mr. Pelletier said yesterday.
"It is very much a work in progress. It will be similar to supercentres in the U.S. We are just referring to them as expanded Wal-Mart stores" for now.
U.S. supercentres are almost twice as big as regular Wal-Mart stores. In Canada, the selling space will range to almost 190,000 square feet, while standard Wal-Marts are closer to 120,000 square feet, Mr. Pelletier said.
The company's key developer, First Pro Shopping Centres, has applied for municipal approvals for a superstore in east-end Toronto and in London, Ont. The latter store would be an expansion of an existing site.
Retailers have been bracing for the arrival of Wal-Mart's supercentres for years.
Loblaw Cos. Ltd., Canada's leading grocery chain, has been preparing by expanding its own superstores, which combine general merchandise and supermarket products.
The No. 2 and No. 3 grocers, Sobeys Inc. and Metro Inc., will feel the pain of the Wal-Mart supercentre the most, Mr. Pennycooke, the consultant, predicted. Loblaw may fare a little better.
Nevertheless, Loblaw has run into snags in developing new systems for its expansion. Its stock price has tumbled this year as profit slumped because of unexpected glitches and delays in its retooling. Shoppers have noticed the problems: Many haven't been able to find in-demand products on the store shelves.
Wal-Mart had originally planned to put one of its Sam's Club warehouse club stores on the Toronto site now slated for a supercentre, a city official said.
Indeed, Wal-Mart has been stalled in its expansion of Sam's Club, having opened only six of them since launching the first ones in the fall of 2003.
Industry watchers have considered that Sam's Club, which carries fresh foods, was the first step to Wal-Mart rolling out supercentres, giving the company the groundwork to move into a full selection of groceries.
"Everyone knows the Sam's Club program is halted," one source said. "They can't get the new ones working."
Some sources have suggested that Wal-Mart may convert its six existing Sam's Club stores to supercentres, although they would need to be reconfigured substantially.
Nevertheless, Mr. Pelletier insisted that Wal-Mart is committed to Sam's Club, and targeting them more to small-business customers looking to buy in bulk.
He denied that Wal-Mart plans to turn Sam's Club stores into supercentres.
Monique Dubord, vice-president of leasing at developer First Capital Realty Inc., said it's no big surprise that Wal-Mart is mapping out supercentres for Canada.
"Certainly it's not unexpected that Wal-Mart would be rolling out the food at some point," said Ms. Dubord, whose company specializes in supermarket-anchored shopping centres.
Wal-Mart has been adding more food to its namesake stores over the past few years, but they don't carry fresh produce or meat, or bakery goods.
And while Wal-Mart had no specific expansion plans for supercentres, retail insiders note that Wal-Mart's newest outlets call for a 45,000-square-foot expansion area -- presumably for a future supercentre.
In the United States, Wal-Mart has more than 1,700 supercentres at an average size of almost 190,000 square feet -- and is rapidly expanding the chain.