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Posted Aug 14, 2006, 1:59 AM
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Join Date: Jun 2006
Location: Coquitlam
Posts: 39,199
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Quote:
Ontario grocers ready for battle
It is 9:30 on a Thursday morning in the parking lot of the Wal-Mart store at Warden and Eglinton in west Scarborough. The atmosphere is relatively quiet. There are still parking spots near the main entrance. The lineups at the cash registers are still reasonable.
It is the calm before the storm.
By Saturday, the store will be jammed with shoppers looking for deals on everything from the latest CD from Crazy Frog to the best-selling laundry detergent, Tide.
From a standing start just over a decade ago, Wal-Mart has come to own more than 50 per cent of the market for general merchandise in Canada, everything from tea towels to kids' clothes. It is now Canada's single largest non-food retailer, with an estimated $13 billion a year in sales.
In its wake, it has left a string of failed competitors, everyone from the upscale Eaton's department store chain to the deep discounter Bi-Way.
Now, it's preparing to take on the supermarket industry in a battle for control of Canada's $70 billion a year grocery business.
By this time early next year, the Scarborough store will be one of seven Wal-Marts — all in Ontario — that carry everything from lettuce to chicken legs. If successful, the Mississauga-based company is expected to open many, many more.
"Many Canadians are buying their dried goods in our pantry already," said Wal-Mart Canada Corp. spokesperson Andrew Pelletier, referring to the growing amount of non-perishable foods its stores have been offering since 1997.
"Customers really like the convenience. The feedback we've received is they want to buy more because of our low prices."
Scarborough won't be the first to get one of Wal-Mart's so-called Supercenters, giant retail outlets that carry both general merchandise and a full range of groceries, including fresh produce, meat and baked goods. The U.S.-based retailer has already confirmed it will open three of these behemoths this fall, one each in Ancaster, London and Stouffville.
But the Scarborough store will be the first inside the crucial Toronto market where the big traditional supermarket chains, like Loblaws, Dominion and to a lesser extent Sobeys, can still command top dollar, according to financial analysts.
The other three scheduled to open early next year are in Vaughan, Brampton and Sarnia, Pelletier confirmed in an interview late last week.
In the United States, Wal-Mart's entry in the food business devastated traditional grocers as the retailer applied its world-renowned cost controls and supply chain efficiencies to this new category.
In Canada, it's already had an impact on prices, profits and pay packets in some stores, as conventional retailers gear up for the coming onslaught.
And they're prepared to do much more to defend their turf, said Nick Jennery, president and chief executive officer of the Canadian Council of Grocery Distributors, the supermarket industry association.
"You're going to see better service to consumers, better pricing, more unique product offerings. It's going to be great for consumers," Jennery predicted.
For the average food retailer, every customer is worth between $4,000 and $5,000 a year in sales, Jennery noted. "You're not going to let them walk out of the store without a big fight."
Many market watchers are confident that Canadian retailers are prepared, having watched what happened south of the border.
"I would describe the attitude in the industry as a healthy state of tension," Jennery said.
But nobody really knows how things will play out until the first Supercenter opens its doors.
Ontario's food retailing industry could be headed for a "grocery bloodbath," Perry Caicco, a leading industry analyst with CIBC World Markets, warned in a recent industry report.
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Wal-Mart came to Canada in 1994 through the purchase of Woolco a struggling discount department store chain. The move immediately gave it 122 locations. It also shook up a complacent Canadian retail industry. Half a dozen major chains disappeared over the next decade, leaving only two major department store retailers in Canada — Sears and Hudson's Bay — and both continue to see their market share deteriorate.
But while some retailers suffered, analysts say consumers benefited as all retailers were forced to adopt sharper pricing, better cost-controls and more innovation.
Wal-Mart has been gradually adding more food to its stores along the way. But until recently, it was confined to dried goods, frozen foods and dairy products. Customers had to go elsewhere to buy fresh meat, produce or baked goods.
That's about to change with the introduction of one-stop shopping at Wal-Mart's Supercenters. Will Canadian consumers change, too?
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Wayne Hanley, whose first job was working the cash register in a Zehrs store, is now the national president of the United Food and Commercial Workers Union.
With roughly 100,000 members working in Canadian supermarkets, the union has more than most at stake in Wal-Mart's entry into the food business, especially since the retailer has so far resisted most efforts to unionize its workforce.
"Any time a new food retailer comes to town, it has an impact on everyone else. There's only so many dollars people have to spend on groceries and they're going to spend them where they think they're going to get value," said Hanley.
Some of the union's members have already felt the impact as some retailers try to cut their costs in anticipation of Wal-Mart's move into fresh food.
Loblaw Cos. Ltd. has struck a more favourable deal with the union for its new Real Canadian Superstores in Ontario, which are larger and carry more general merchandise than conventional Loblaws stores.
Now, Loblaw is pushing for more flexible language in its conventional store contracts, a move that would allow it to convert more of those stores to the new Real Canadian Superstore format, according to industry watchers.
The UFCW has been trying to for years to unionize Wal-Mart stores on both sides of the border, with limited success. In Canada, the two are locked in labour battles in stores across three provinces.
The union has come closest to succeeding in Quebec. A store in Jonquière was the first to be certified. Wal-Mart immediately closed it, saying the store was no longer economically viable. A second Quebec Wal-Mart, this one in Ste. Hyacinthe, has also been certified and is now trying to win a first contract.
Wal-Mart says its employees are happy and don't need or want a union. And it accuses the UFCW of unfairly focusing on stores in labour friendly jurisdictions, like Quebec, Saskatchewan and British Columbia, where employers have fewer rights.
The union accuses Wal-Mart of deliberately intimidating employees and violating labour laws in its efforts to keep them out.
Hanley said he believes Canada's food retailers are well prepared for Wal-Mart's entry into fresh food. The companies, each in their own way, have adopted strategies to help them either compete head to head or differentiate themselves.
He also says Canadian consumers shop for more than just price. "I think they're prepared to spend a little bit more if they see the quality and the service," he said.
And he questions the accepted wisdom that Wal-Mart is always the price leader.
"Wal-Mart tends to be associated with lower prices, which will continue to work well for them," he said. "But what the consumer sometimes misses is that while Wal-Mart will have a great deal on beach towels or laundry soap, when you get into the aisles and compare the price of things like soup, the stuff everyone has in their cupboards but don't use every day, there's not a great price difference.
"I think your Food Basics and your No Frills will be very competitive with Wal-Mart, if not cheaper," he said, citing two low-cost subsidiaries of major Canadian supermarket chains.
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As it currently stands, Canada's food retailing industry is dominated by a handful of generally strong, well-financed players with good prices, innovative offerings and great real estate, according to industry analysts.
That doesn't mean they're bullet proof.
In fact, since Wal-Mart announced last December that it would enter the fresh food business, almost every financial analyst has downgraded the publicly traded supermarket chains. There's hardly a "buy" recommendation among them.
That could change after Wal-Mart opens its first Supercenters and the real impact becomes clearer, analysts said. Still, some of the entrenched players are more vulnerable than others, analysts said.
At the moment, Loblaw Cos. Ltd. dominates the industry with a one-third share of national food sales, followed by Atlantic-based Sobeys Inc., then Quebec's Metro Inc. (which also owns A&P and Dominion in Ontario), and in western Canada, Safeway Inc. and Overwaitea Food group, a Jim Pattison company.
The initial battleground will be Ontario where Wal-Mart can leverage the distribution network it set up a couple of years ago to supply its first Canadian Sam's Club warehouse-style stores. The club stores carry fresh food.
To some extent, Canada's food retailers are already well insulated from Wal-Mart through their own discount formats, noted Don Povilaitis, an industry analyst with the Canadian division of debt-rating agency Standard and Poors.
Unlike their U.S. counterparts, all the leading Canadian players are already in the low-priced segment, he noted. Loblaw has No Frills, Sobeys has Price Chopper and Metro's A&P has Food Basics.
The fact these chains already exist is thought to be one reason it has taken Wal-Mart more than 10 years to enter the perishables business in Canada. And, in recent years, those discount stores have come to command an even greater market share, Povilaitis noted.
In fact, the old-fashioned supermarket, with its in-store butcher, wider selection of perishables and higher labour costs, is gradually being replaced with low-cost formats "due to increasing consumer price sensitivity," Povilaitis said.
In Toronto, these so-called "hard discount" stores now represent half the market, Povilaitis noted in an in-depth report on the industry last month.
And he questions whether Wal-Mart will be able to undercut those stores. Comparing prices on food products already offered in Wal-Mart stores, Povilaitis reached the same conclusion as the UFCW's Hanley.
"Wal-Mart's existing Canadian food prices are no lower than those found in competitors' discount stores," Povilaitis said.
Still, some Canadian supermarket chains are more vulnerable than others, analysts said, despite taking steps to gear up for Wal-Mart.
Loblaw's strategy is to meet the challenge head on by building bigger stores that also offer general merchandise as well as food. In the last two and a half years, it has opened 20 Real Canadian SuperStores in Ontario, a format that has done well for it in western Canada for more than two decades.
Non-food items now account for 20 per cent of Loblaw's annual sales. Still, the transformation has taken a bigger toll than it expected. Its stock price hit a four-year low recently after the company lowered its sales and profit forecast for the year.
Quebec-based Metro boosted its sales by acquiring the Canadian assets of The Great Atlantic & Pacific Tea Co., last August. The move gave Metro key assets in the Toronto market, where Dominion has some of the best real estate in the country.
Meanwhile, Sobeys is investing heavily to update its conventional stores while experimenting with a new smaller, more upscale urban format called Sobeys Express.
Toronto accounts for nearly half of all food sales in Ontario and differs from the rest of the province because traffic gridlock tends to make consumers captives of their closest store, CIBC's Caicco wrote in a report. Those stores are able to command higher prices because consumers are less likely to shop around, he wrote.
Conventional full-service stores in suburban markets are far more vulnerable, Caicco wrote, though many chains have already started converting more of those stores to their discount formats.
"Wal-Mart's success in food will not be automatic," Caicco concluded.
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Back at the Wal-Mart store in Scarborough, retiree Harry Harding is scrutinizing the prices in the frozen food aisle on a box of Highliner's Wild Pacific salmon in dill sauce and kicking himself.
Wal-Mart is charging just $9.96. Harding says he paid nearly two dollars more than that at another store. Still, he's saving a dollar on the 12 pack of canned Nestea he's got in his cart.
Like a growing number of Canadians, price is a big factor in many of his food purchases and if Wal-Mart carried more products, he'd buy them there.
"I'm a senior on a pension," he says. "Why would I throw my money away?"
But price isn't his only criteria, Harding admitted. In fact, he shops at two or three different stores, including the big Shoppers Drug Mart in his neighbourhood, on a regular basis depending on what's on his list.
"I go to Loblaws for their seven-grain bread because you can't get it anywhere else. And I go to Dominion for hamburgers because I like their meat," Harding said.
Two aisles over at the Wal-Mart, Sharon Birmingham, of Lindsay, Ont., is shopping with her daughter Kelly for basic household products.
"We don't have a Wal-Mart in Lindsay," she explained, so they decided to stock up while visiting relatives in Toronto.
At home, Birmingham said she splits her grocery bill between Food Basics and Loblaws because she likes the prices at Food Basics but prefers the meat at Loblaws.
Would either of them buy all their groceries at Wal-Mart if they offered the full range?
It would depend on the quality, the products and the price, both Harding and Birmingham said.
"It's not a slam dunk for Wal-Mart," said Chris Holling, executive managing director of Global Insight, Inc. "Wal-Mart in the U.S. went after extremely traditional grocers, who enjoyed near monopolies in their communities and had themselves taken away business from local neighbourhood stores.
"I see the Canadian competitors being better prepared."
Holling said he also thinks smaller stores focused on quality and service will find a healthy niche in this market.
When the first Supercenters open their doors, a lot of Canadian consumers will go out of curiosity to see what they have to offer, the grocery distributors' Jennery predicts.
"But at the end of the day it will come down to which store gives me the most compelling reason to shop there. The price will go to the store that gives the best answer to that question," he says.
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