Podcast June 14, 2024

The Implications of Loblaws’ $2 Billion Small-Format Grocery Store Play

The Future of Grocery Stores – A Spotlight on Loblaws’ $2 Billion Investment

The grocery store landscape is undergoing significant transformations, and Loblaws, Canada’s largest grocery retailer, is at the forefront of these changes. In the accompanying podcast episode, hosts Charles and David delved into Loblaws’ substantial $2 billion investment slated for 2024. This investment aims to revamp its Canadian network and includes the opening of about 40 discount grocery stores. This move is particularly noteworthy against the backdrop of rising food prices and changing consumer behaviors.

Understanding Loblaws and Its Market Position

Loblaws, a household name in Canada, is not just a local giant but also one of the largest grocery retailers in North America and globally. It competes with other significant players like Sobeys and Metro within Canada, alongside international competitors such as Walmart and Costco. Loblaws has built a strong reputation, partly due to its innovative private label brand, President’s Choice, which revolutionized consumer perceptions of private label products.

Why the Focus on Discount Stores?

The core of Loblaws’ new strategy involves the launch of approximately 40 discount stores under the “No Frills” banner. These stores will be smaller, about 15,000 square feet, compared to traditional grocery stores. This move is seen as a direct response to the current food inflation crisis, aiming to provide more affordable shopping options for Canadians. The investment is expected to generate around 7,500 jobs, indicating a significant positive impact on the economy.

The decision to open smaller, discount-oriented stores seems to be a strategic response to both market conditions and consumer trends. With rising grocery prices and increased scrutiny over profit margins, Loblaws appears to be positioning itself to cater to cost-conscious consumers. Moreover, there’s a growing trend towards smaller basket sizes but more frequent shopping trips, which smaller stores are well-suited to accommodate.

A Defensive Strategy Against Potential Competitors and Boycotters

One intriguing perspective is the notion that Loblaws’ investment could be a preemptive strike against potential new entrants like the German retailer Aldi. Aldi has made significant inroads in the U.S. market with its small-format, low-cost grocery stores. By expanding its own discount store footprint, Loblaws may be aiming to create a competitive environment that is less attractive for new entrants, thereby protecting its market share.

Additionally, Loblaws’ announcement comes at a time when the company faces criticism over perceived profiteering during a period of high food inflation. While Loblaws has reported record profits, it’s essential to understand that these are a result of inflation rather than increased profit margins. The new discount stores could help mitigate some of this negative perception by demonstrating a commitment to providing affordable options for consumers.

The Importance of Real Estate in Grocery Retail

A critical aspect of the grocery business highlighted in the discussion is the importance of real estate. The success of a grocery store often hinges on its location. Loblaws’ strategic placement of these new discount stores, particularly in urban and potentially rural areas, will be crucial. The smaller footprint allows for more flexibility in site selection, enabling Loblaws to enter areas that may have been previously underserved.

Looking Ahead: The Future of Grocery Shopping

The grocery retail landscape is clearly evolving, with Loblaws’ significant investment being a testament to this change. The move towards smaller, more efficient stores reflects broader industry trends and consumer preferences. As grocery retailers navigate the complexities of inflation, competition, and changing shopping behaviors, the focus will likely remain on innovation, efficiency, and meeting consumer needs.

In conclusion, Loblaws’ $2 billion investment and the opening of new discount stores represents a proactive approach to addressing market challenges and opportunities. Whether it’s about fending off potential competitors or providing more value to consumers, Loblaws is positioning itself strategically for the future of grocery shopping in Canada. As these changes unfold, it will be interesting to see how other retailers respond and how consumer shopping habits continue to evolve.

🔗 The Episode:

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If you have more questions about the grocery industry and their supply chain footprint, reach out to Charles & David at LIDD.com/contact.


[00:00:05.350] Hey, Charles.

[00:00:06.320] Hi, David. How are you? Very good. End of the week. How can you not be happy? Yeah, exactly.

[00:00:11.170] End of the week is good. Summer’s coming. It’s great. So today we’re doing an episode about Behind the Headlines, where we take-Right.

[00:00:20.860] A Behind the Headlines episode. Yeah.

[00:00:23.760] I’m French. So we take a news story and we talk about it, basically.

[00:00:30.240] Love it. What are we talking about today?

[00:00:32.170] Today, we’re talking about La Blas. La Blas said that it’s investing-I had a neighbor who was a La Blas. Really? Yeah.

[00:00:42.080] Bob La Blas.

[00:00:44.790] On It has nothing to do with it. Never mind.

[00:00:46.650] It’s the dumbest… It’s an old joke. When I was a kid, we used to say… Bob La Blas? Yeah. My best friend is Bob La Blas.

[00:00:54.730] First time I hear it. Pretty good?

[00:00:56.320] Yeah. Not good, but anyway.

[00:01:00.670] So Labla is investing about $2 billion in 2024 in its Canadian network, and part of that investment is going to be the opening of about 40 discount stores, right?

[00:01:15.860] Yeah, and I think it’s important. I think it is important always to remember, our audience, it’s basically global. Just to say, Labla, we take it for granted that everybody everybody knows, but of course not. I mean, in the vast reach of this podcast, there are people who have no idea who La Blas is. So maybe some background on who La Blas is.

[00:01:42.010] So La Blas is the largest grocery retailer in the country.

[00:01:47.550] Right. And in the country being Canada. And one of the largest grocers in North America and one of the largest grocers on Earth. So one of the things that’s really interesting, I for the audience to think about is Canada, at least from one perspective, can have the look of an oligopoly when it comes to groceries. I don’t think that’s a very fair statement. I don’t think we’re so under competitive relative to our American friends who also have a similar dynamic going on. We have Walmart Walmart is a major player. Costco. Costco is a major player. But then we have the three giant traditional grocery chains of lovlas, which is Coast to Coast to Coast. Sobeys, which has a bunch of different banners, Coast to Coast to Coast.

[00:02:47.540] Empire.

[00:02:48.420] Yeah. And then Metro, which really is contained within Quebec and Ontario. But anyone who knows Canada, knows Quebec and Ontario is already 60, 65 % of the population. So so Loablas is the number one player and became very famous pretty much everywhere in the grocery industry with their President’s Choice private label brand. They innovated on the private label, which up until that point, the consumer would walk into a grocery store and think of private label as being the junk because I can’t afford or I don’t want to pay the premium for a national brand. And it was these two products in particular, the chocolate chip cookies, President’s Choice decadent chocolate chip cookie. And the President’s Choice, white cheddar mac and cheese. A lot of people don’t understand, but Canada is the highest consuming mac and cheese country on planet Earth. And craft dinners, which still dominates, is is what every child thinks of as an amazing winter snack, winter lunch, and summer lunch, and spring, and fall, and student, and there’s just nothing more delicious. So that’s loblas. It’s the giant. All right. And then I think it’s also important to set the context of this conversation being we have this oligopoly, perceived oligopoly is what I would argue it is.

[00:04:28.590] And then Because I think there are sufficient competitors and that there are opportunities to enter the market if you want. One of the things a lot of people don’t understand is grocery is very much a real estate play. So the hard part is you lock in the real estate. The convenience of your location makes you a winner or a loser or the inconvenience of a bad location, no matter how good. I mean, you have to really push destination shopping to its limit to have a bad location and a successful grocery store.

[00:05:05.530] Yeah. And just as a side, what Amazon buying Whole Foods is, to your point about a grocery being a real estate plate is something Net Supports. Right.

[00:05:16.580] And then so then what we were saying is as we were looking through the headlines- Forty discount stores. In this food inflation crisis, which is certainly something Canada has suffered from. There’s been a lot of negative publicity, particularly towards lob loss, right? More than others. Yeah. And there was something about a boycott, right? There was this social media move to boycott lob loss. And I think, I don’t know if you remember when the gas wars, not the gas wars, but whenever the gas prices escalate beyond what the consumer thinks is acceptable, Facebook, I mean, you’re We’re on Facebook, but I’m not. But all these social media platforms explode with people saying boycott and they’ll choose some random retailer, boycott this gas station chain. And if we boycott them, they’ll be forced to cut the price and everyone will be forced to follow. That’s the logic. It never works out because, well, human beings, social media is a lot louder than it actually is in real life. And I’m sure the lo-blah boycott is the same thing. I certainly I haven’t changed my consumer behavior because of some boycott. But then again, we’re grocery industry veterans, so we have a different take on it.

[00:06:40.570] But anyway, all that leads up to what is this article that we’re going to talk about Well, the article ultimately is LaBla’s saying that they’re going to invest that amount of money.

[00:06:52.000] There are going to- Two billion dollars, you said? Two billion dollars in 2024.

[00:06:56.040] And this is the article we printed out, hopefully, but the link will be there. It’s, Laplace testing out small format, no frills, grocery stores.

[00:07:05.080] Yeah, no frills being the banner for those discounts.

[00:07:08.420] Yeah, and they… Lobla’s has a no frills banner, grocery stores already, right?

[00:07:13.140] I believe so. They do.

[00:07:15.040] Yeah, you’ll find them in Ontario. And yeah, they’re about 30, 35,000 square foot grocery stores. They’re very small. Which in, in, in, in Quebec, the no frills equivalent is… Maxi? Maxi. That’s the loblox banner in Quebec.

[00:07:31.820] No, Maxi is… Yeah.

[00:07:34.310] Yes. Super C is Metro’s and Maxi is… The yellow racking. Yeah, exactly. So they actually look a lot alike. And Yeah, it’s not a sexy store to walk through, but the prices, apparently, are better.

[00:07:50.800] Limited variety. I wouldn’t say question the quality of the produce, but again, less variety, sometimes maybe not the best.

[00:08:00.160] That is funny. It’s something that people often think is that the quality of the produce will be lower. However, how would that work supply chain-wise? Yeah, it would be a very complicated. Imagine. So just for the audience to understand, your apples and bananas are coming from the same warehouse. In fact, David designed, remember, 15 years ago, a massive one here in Quebec. And You don’t have two pick slots, crappy variety of apples, crappy quality, great quality. And then you say, tell the pickers, Oh, it’s a maxi, send the bad apples to maxi. That just isn’t productive. It would be too complicated. No, everything goes through the same chain. Maybe, but this would be a different issue, maybe the product sits longer in a maxi store. That could be, but that had nothing to do with the operators. That has to do with the consumer.

[00:08:59.130] Yeah, correct. So they are going to open these stores, a smaller footprint, a lower-How big? Smaller variety. How big, sorry?

[00:09:08.250] Yeah, I think they said 15,000 square feet. Yeah. Well, I believe you because- You’ll just trust me on this. Yes, I do. 15,000 square feet. So really half the size of a traditional grocery store.

[00:09:21.510] Much smaller. I haven’t read anything about the locations of these stores, but one could think that they’re probably in very well positioned urban areas. Given the footprint that they have, you don’t need the same space to install or to implement these stores. The articles are For the opinions that I’ve read about are two ways. One side is like, Oh, this is great for the economy. It’s going to create… And they’re talking about 7,500 jobs. It’s good that Walmart is doing its part to Walmart. Not Walmart. Lobla’s is doing its part to lower the price and give back to the consumer. And on the other side, you’ve got also the opinions about this is a move where exactly there’s been bad publicity towards a company given the Skyrocketing grocery prices. Yeah, skyrocketing and excellent financial performance and profits from the company saying, well, you haven’t done much to help or you’ve contributed to that inflation. So you really have those two opinions.

[00:10:32.600] I mean, it is important for people to think. When they say it’s true, Blablas has had record profits, right? That is a consequence of inflation. In fact, all of our food, whether it’s manufactured a distributor or retailer, they’ve all had record profits, not record sales and to some extent, record profits. But all of them are scared of the same thing. They know it’s not real. They all know it’s inflation driven. And I think people have a very wrong idea about it, because if you look at the… You say, oh, blah, blah, it’s record profits. Yeah, but not record profit margin. It’s not like they’re more profitable. They are in the absolute, but they’re not, say, per case. And the worry is, of course, with inflation and deflation can happen as well. Food prices can come down. And then if you haven’t worked on efficiencies and you haven’t worked on increasing basket size, then that was just a temporary inflation, like a sugar high. It crashes at some point.

[00:11:39.250] Correct. And you bring a good point here as well with smaller stores, smaller footprints, less variety. I think also it’s a way to adapt to consumer behaviors where smaller baskets size, but more frequent orders is also a trend that you can see in consumers.

[00:11:59.760] Absolutely. I was I was reading an article this morning in Morning Newsbeat, which I love. And they were saying the grocery trips in the United States went up eight % in 2023. And while the behemoth retailers are trying to capture 100 % of your grocery basket, that really isn’t, especially in this inflationary era, this isn’t happening. People are willing to spend more time hunting for the deals and going to more places to get a lower priced basket. So there you are. No Frills, 15,000 square foot facility is stores in urban. Well, so this article that we’ve read does seem to suggest that it’s an urban strategy because the entire conversation is around putting groceries, these no frill grocery stores in urban locations. I noticed the press release that Lobla’s issued related to this actually does talk about rural locations and thinking about solving problems for rural locations. And I think that makes sense that it’s not necessarily a deep urban solution because the issue of urban food deserts and the lack of grocery stores in downtown areas has been a problem for forever. And a lot of, at least here in Canada, but I think elsewhere, a lot of our grocery companies have responded and have put up…

[00:13:40.170] I mean, if you think of downtown Montreal from when Lid was founded in 2010 to today.

[00:13:46.900] There’s at least three or four that you can think of.

[00:13:50.000] I’m going to say there’s three or four. There’s an IGA, there’s a Metro, there’s an Adonis, and there’s an Avril, all within eight Yeah, it’s good. It’s eight minutes. It’s okay. It’s five to 10 minutes. Depending on traffic. And David walks a lot faster than everyone else. And that’s just here in the old part of the city. And then if you go further west, that phenomenon repeats itself. By Bell Center, and so on and so forth. So anyway, it’s interesting what this is. And I have a theory. I have a cynical theory. So all the politicians have gotten very hot and heavy. It’s always good politics, at least for a while, to find people to beat up, especially if they are giant corporations. And the grocery chains have had, in Canada, a lot of bad press. And Lobla is always the poster child. It’s the largest. Right. It’s the largest the President, or at least the former President, I think he’s backed out of his executive duties, is somebody that they use in their advertisements. So he becomes a lightning rod.

[00:15:12.820] A no-name brand, yeah.

[00:15:14.600] For There are all sorts of things. One of the missions that our industry minister in Canada was handed was to find foreign companies who might be interested in entering the Canadian market and enticing them. Now, enticing them generally means throwing a bunch of my and your hard earned money and your tax dollars at them. We’ll shovel tax dollars your way if you open a couple of stores here. And the number one candidate that they’ve talked about is the German retailer Aldi, who has taken the United States by storm without a single a tax dollar, I would point out. And their stores, what do you think? They’re about 15,000 square feet, aren’t they? They’re small stores, very limited variety, focused. Oh, they also have no frills. They are a hard discount store that sounds awfully like this no frills store. And so my theory is, I think that Loblaz is building a defensive moat by spending $2 billion on these stores to let Aldi know, you ain’t coming here without losing a lot of money. Because we will spend you out of business. That’s what I think.

[00:16:50.150] It’s very interesting. That’s a very interesting theory, which makes a lot of sense.

[00:16:56.990] Well, it’s so funny. I remember I did a network study, but this is now 20 years ago. I had a shock of blonde, gorgeous blonde, wavy hair. I had no belly. I was like a size 28. I was very young.

[00:17:14.020] Very young. I was very thin.

[00:17:15.310] Okay, maybe I wasn’t 28. Maybe I was 16 when I had a size 28. I don’t know. But we did this network study. And typically the instinct, especially the more junior you are when you’re doing a supply chain optimization study, is you think the more you consolidate, the more you save. They had these very particular characteristics of a few things, almost everything, even down to the last mile delivery, was full truckload.

[00:17:49.530] That’s number one. Sorry, you said which geography was that?

[00:17:54.520] This was Canada. Canada, what? Okay. So we’re thinking the typical thing of like, well, Edmonton and Calgary, why? You’re losing so much money. And you can go on with all of that. Quebec City? Why? You only need one thing. But either by internal transfer or last mile delivery was full truckload. There’s some nuance there, but let’s just take that for granted. And then 90 % of the inventory sat outside in the yard and moved in pallet quantity. There wasn’t an amazing opportunity opportunity to save money through consolidation. There was some, but not amazing. There was some on the margins. And it’s depressing. You go and you’re showing these results to the customer. And there’s a whole bunch of executives there. And you’re like, they’re going to be so disappointed with us when we say, yeah, a lot of these ideas don’t make any sense. And I remember this incredibly, I thought, but only because it fits with this story. Executives said, no, actually, I think what you’re missing from this is that it’s not all about logistics. What this says to me is I can defend my market really easily. If my competitor wants to come into Canada and they decide to open a warehouse in Fort McMurray, Alberta, I’ll open one in Fort McMurray, Alberta, because I know I’m not going to lose I’ll go to Fort McMurray.

[00:19:31.970] I’ll go to Prince George. I’ll go to Trois Rivières. I’ll go to Moncton. I’ll go to Windsor. I can open as many. And every time I’m opening it, at least from the customer’s eyes, I’ve improved service levels And I’m not going to lose money. And I can do that so long as I need to, to defeat any competition that comes in.

[00:19:52.530] Interesting.

[00:19:53.270] I know. I thought that was a fascinating way to see the world when I was a junior guy. And that’s why when I hear this, no the frills, lob-loss story, and I think I’ve read articles about rumors that Aldi has been courted by our federal government to come into the Canadian market, I think, if I’m lob-loss, it’s a shot across Aldi’s bow.

[00:20:17.200] Interesting. Have you ever been in an Aldi store?

[00:20:19.810] No.

[00:20:20.690] I have in Europe last summer. And I thought it was actually- How fancy of you. Well, very fancy. But I thought it was a very easy Very good shopping experience. Obviously in a vacation setting, but found everything I needed. It was some pallets on the floor, but didn’t feel cheap, wasn’t efficient.

[00:20:42.100] I don’t think it’s cheap. I just think it’s no frills. No frills. The way they do it is very limited assortment. You’re not going to have 12 different types of brands of yoga. You’re going to have Aldi’s and maybe one other. Or you might only have Aldi’s brand as your option in certain product categories.

[00:21:01.020] It was striking how when you have that limited set of SKUs, how the… How could I say? The large items, the paper, the litter for dogs and cleaning take on a significant part of the store. Even if you have one SKU and you reduce the variety on the others, to me, it felt striking in a very small store how these products were visible. But anyway.

[00:21:26.260] It’s funny. That reminds me the first time I went into a large scale direct consumer e-commerce warehouse. This was, again, this would be 15. No, this also would be almost 20 years ago. Just after we got through the dot com, the bubble burst of 2001, And because Coca-Cola products in normal retail formats, in normal supply chains, are direct store delivery. So when you’re designing a warehouse for a retailer, Coke is not a product. And so you don’t appreciate its relative scale. Then when you put it all under one roof and you understand the volumes of Coca-Cola, and Pepsi, of course, but Coca-Cola that goes through the system, it’s incredible. And that’s why we have an obesity epidemic, because Coca-Cola.

[00:22:25.010] All right. So thank you for your views. Very interesting.

[00:22:28.790] I think we’re good. I think so. That’s behind the headlines. Thank you. Have a good weekend.


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