Showdown in grocery aisle

Battle between retailers could see Safeway gobbled

Independent grocers in Canada don’t have to worry that they will be steamrolled by American multinational retailers like Walmart and Target, both of which are expanding into the grocery market in a big way in Canada.

“These guys are not grocers. They’re great general merchants, they sell a lot of groceries but groceries are not their primary focus,” said Perry Caicco, managing director of CIBC World Markets, addressing the Canadian Federation of Independent Grocers at the Metro Toronto Convention Centre Monday.

Nonetheless, Caicco said he takes a bearish position when it comes to advising his clients — multi-billion pension funds and mutual funds — on Canadian grocery retail holdings.

“I recommend to most of my clients to just avoid Canadian grocery stocks at this point in time,” said Caicco.

The burst of grocery expansion is coming from Walmart, which is in the middle of adding 4.6-million square feet of retail space to operations in Canada that will grow its number of stores to 375 by January 2013, and Target, which plans to sell groceries in addition to clothing and housewares when it opens here in the spring of 2013.

Target will have three-million square feet of food space in Canada by 2014, and five million by 2020, said Caicco. He predicts Target will do a much better job of selling groceries than Zellers did, and Zellers did an estimated $400-million a year.

Target bought the leaseholds to the Zellers stores from HBC in 2011, and then sold 39 of the leases to Walmart.

The Zellers stores are now in the process of being closed.

Caicco predicts that Target will be selling $900-million in groceries by 2014 and as much as $1.3-billion by 2017, in an annual market worth $90-billion.

He estimates food sales at Walmart in Canada to be $6.5-billion, but Walmart is not a food destination in Canada, according to Caicco.

He believes the expansion in the grocery market in Canada will inevitably lead to consolidation. He said Canadian Safeway stores in Western Canada are a prime target for retailing behemoths like Loblaws and Metro.

Safeway Inc. is one of the largest food and drug retailers in North America, with 1,666 stores in the U.S. and Western Canada. It has 96 stores in Alberta and 75 stores in Vancouver and 54 in Winnipeg.

“I suspect they’re going to sell . . . probably in the next 18 months,” said Caicco.

Loblaws declined to comment on whether it is interested in Safeway stores in Western Canada, and Safeway wasn’t saying much either.

“That’s been a rumour in the marketplace for a long time,” said Christiane Pelz, vice-president of investor relations for Safeway.

The strong Canadian dollar, used to purchase produce abroad, will remain strong in 2012, providing grocers with larger profit margins, Caicco told grocers.

Although there has been a lot of doom and gloom in the market, independent grocers are in a good position to perform strongly and have an opportunity to come through with flying colours, said Caicco.

“Laser-like focus on food will be a differentiator.”