Hard Discount – Ready For Launch?

Freshco Expansion Breathes New Life into the Format

By Jeff Doucette

When I started my career in the CPG industry, I was based in Toronto and managing Loblaws national procurement for one of my employers major categories. While we always were keen to jump on the plane and head to Calgary for meetings and an extended weekend in the mountains (those were the days), I must admit that it was hard to understand just how different the competitive dynamic was in the West compared to Ontario.

In Ontario, we were obsessed with the growth of No Frills and to a lesser extent Walmart and we barely had any Superstores back then. Meanwhile, my colleagues in the West were hyper-focused on Superstore. It was a bit “exotic” to stop into an Extra Foods in Airdre or a Save On Foods on the Island and see the players that we did not have in Ontario.

In Ontario, the Hard Discount format dominates the grocery landscape with No Frills, Food Basics and Freshco all doing battle with Walmart and RCSS for the lowest priced basket. It has been many years since the Hard Discount format made up over 50 per cent of total dollar sales in Ontario.

The West on the other hand has had a different path. Superstore was predominately the price leader with the rest of the market happier to keep its distance and playing in the proximity / full-service space with higher service and higher margins. Before it was purchased by Sobeys, Safeway seemed to flex its strategy from aggressive to passive depending on the needs of the US business when it came to volume or profit. Save On Foods used to be this sleepy little business but in the past decade has turned on the afterburners to stretch all the way east to Winnipeg and north to Whitehorse.

Of course, the No Frills banner has been in the West for quite a while now, although it was more of a convenient cover story to consolidate the Extra Foods banner than it was a play to truly bring the Hard Discount model to the West, which would have had a significant impact on its big brother – RCSS.

Looking eastwards, we see that Ontario has 173 No Frills locations to serve a population of 14.8 million (1 store per 86,000) while the West has just 80 No Frills stores to serve a population of 12.3 million (1 store per 153,000). Additionally, many No Frills stores in the West can be found in the smaller communities that were previously served by Extra Foods, instead of the major urban centers where the yellow stores are found in Ontario.

But there is a new player in the Hard Discount space in the West which has been rather quietly building out a network of newly renovated and well-located stores, inheriting many under-performing Sobeys and Safeway locations as Sobeys looks to shore up their business in Western Canada.

There are already 28 Freshco stores in the West and many more in the pipeline. This compares to the 94 Freshco stores in Ontario, many of which were converted from the Price Chopper banner in the 2000s.

Aside from price, Hard Discount’s recipe for success includes three major elements including local franchisees who know their local market extremely well, proximity to population centres and transit and serving ethnic communities in a hyper-local way, truly competing with ethnic focused retailers in a range of communities.

Freshco’s “Chalo” sub-brand is a great example. These stores are designed to serve the South Asian community through assortment and location and we already have four of these store in the West and room for more in communities like Chestermere and East Calgary in Alberta and throughout the Lower Mainland in British Columbia.

How many Hard Discount stores could the West support? As a guide we can look at the 406 No Frills, Food Basics and Freshco stores in Ontario, which works out to one store for every 36,000 residents. In Quebec, there are a total of 213 Maxi & Super C stores; or one store for every 40,000 residents.

Using the mid-point of Quebec and Ontario, the Western market could support about 325 Hard Discount stores based on population, compared to the 108 stores we have today. This means that Freshco has quite a bit of runway ahead of it to grow.

Sobeys has some great real-estate across the West, thanks mainly to its Safeway purchase and this could lead to a quick explosion of green stores popping up from the Lakehead to the Coast. Just how fast they can close and convert without disrupting short term volumes and profits will be a delicate balance, but it seems like Sobeys is dedicated to making this work.

Of course, there is always the “nuclear” scenario, where one of the true Hard Discounters like Germany’s Aldi or Lidl (both of whom are in the US already) decides that they want to enter our market. They grow store count and share very fast by using the hub-and-spoke model for stores and warehouses and a laser focus on private label. Supporting a made in Canada expansion of Hard Discount is the preferred option for retailers and suppliers alike by a long shot.

If Hard Discount gets bigger there will be massive challenges ahead for conventional operators who are already under pressure from RCSS, Walmart and Costco as well as their full-service competition.  Full service will always be relevant, but only the strongest will survive.

It seems like Sobeys has seen the writing on the wall and is determined to be the aggressor instead of one of the banners that slowly has its market share picked away by lower cost rivals. It will be interesting to continue to watch the Freshco roll-out across the West and see how the other players react to this new competitor.

Jeff Doucette is the founder of “Field Agent Canada” an on-demand panel of Canadian shoppers providing a suite of innovative services to Canadian retailers and brands. He can be reached at jeff.doucette@fieldagentcanada.com

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You may also enjoy reading Stopping the In-and-Out Shopper also written by Jeff Doucette