Report suggests discount grocers could play bigger role in Canada.

Canadian market share 3%: report

TORONTO • There is plenty of room for discount food retailers such as No Frills to play a bigger role in Canada and the U.S., a new report suggests, given that low-cost supermarket chains now account for close to half of the grocery market in some European countries.

Discount grocers had a small impact in most markets around the world a decade ago, but now the players, spurred by powerhouse businesses such as German discount chains Aldi and Lidl, are stealing more and more market share from conventional grocery companies, says a new report from Boston Consulting Group.

“Their customer base has grown beyond low-income shoppers to include savvy, high-income consumers, who are increasingly asking a fundamental question: ‘Why should I pay more?’” according to the analysis, How Discounters are Remaking the Grocery Industry.

Discounters first began to gain traction in Europe in the 1990s, exemplified by the expansion of Aldi and Lidl in Germany. Between 2003 and 2013, the two chains grew to 20,000 stores from 8,000.

In the early days, discount stores “were cramped and had a low-budget feel, but customers felt they were getting better value — a key differentiator that was sufficient to increase traffic,” the report says. Prices at discounters on branded products can be as much as 200 per cent lower than those of the same branded products at traditional grocers.

Initially, the trade-off for great prices was the less than inspiring store environment and a smaller selection of goods.

But in the last decade discounters have been opening larger stores, increasing in square footage by an average of 16 per cent during the period, and selling a broader range of goods.

“As store sizes increase, discounters typically add fresh-food categories, such as produce and baked goods, that are prepared onsite.”

The stores have also added niche products such as organic and gluten-free products, or ready-to-eat options, such as sushi.

Given the growth juggernaut of the format between 2000 and 2015, full grocers can’t ignore the influence of discounters in the current climate, BCG report says.

And the growth in some markets has been impressive. In Denmark, discount grocers now account for 40 per cent of grocery market share, up from 19 per cent in 2000.

In Turkey, growth in the same period has been the most dramatic, accounting for 60 per cent of the market, up from 15 per cent.

In the U.K., where mainstream grocers such as Tesco have suffered due to the rise of discounters and Wal-Mart-owned Asda, discounters take up almost 15 per cent of the market, and mainstream grocery margins have shrunk below three per cent from more than five per cent over the last ten years, BCG says.

In the United States, where Aldi and Lidl have a nascent presence, discounters make up about seven per cent of grocery market share, and in Canada they take up about three per cent of market share.

Boston Consulting Group predicts that discounters will increase their worldwide store count by 4.4 per cent annually through to 2020, compared with 2.9 per cent for mainstream supermarkets and 1.6 per cent for superstores and hypermarkets, a combination of a supermarket and a department store.

In Eastern Europe and Latin America, the pace is expected to be more robust, rising 30 per cent and eight per cent, respectively.

By 2018, Aldi will operate more than 2,000 locations in the U.S. by 2018 and Lidl is adding 100 U.S. stores by the end of the same year.

One way established grocery brands can compete is by narrowing the price gap between discount and conventional food stores, BCG says, though analysts in Canada have noted such moves put pressure on fullline grocers’ margins because they engage in more aggressive promotional pricing.

Another way grocers have hedged the market is by acquiring or creating a discount brand, much like Loblaw did with No Frills in 1978. The chain now has 250 stores across the country.

Sobeys and Metro have also expanded their discount banners. The latter closed a number of its fullline Ontario grocery stores in recent years and replaced them with its faster-growing Food Basics discount chain.

Sobeys operates FreshCo, but the national chain has no FreshCo locations east of Ontario, a factor frequently cited as an impediment to the retailer when the oil economy took a steep downturn in Alberta.

IN THE EARLY DAYS, DISCOUNT STORES “WERE CRAMPED AND HAD A LOWBUDGET FEEL.”