November 12, 2014 2:37 pm
Updated: November 13, 2014 10:05 am

Loblaw tests new grocery stores offering ‘hard discounts’

Loblaw's discount banners, like No Frills, are seeing increased competition from Walmart and others, like Target.

Brent Lewin/Getty Images

The country’s largest supermarket operator is developing a new “hard discount” chain that caters to the most thrifty or value-conscious customers among us.

“We’ve been working on a concept we call the Box,” Galen Weston, executive chairman and president of Loblaw Cos. Ltd., said Wednesday.

The so-called hard discount grocery store model has thrived in markets like the United States and United Kingdom since the 2008 recession, appealing to shoppers stuck in part-time jobs or who’ve seen limited income growth during the recovery.

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The model is based on selling a limited assortment of household essentials, and primarily store brand goods — all in an effort to keep costs as low as possible.

On a conference call with Loblaw management, analysts asked Weston if the idea could work in Canada. The Box “really is designed to answer that question,” he said.

“Is there [an opportunity] in that area that the customer will respond positively to in Canada. We think so, but we’re not sure,” the Loblaw executive said.

Three locations

Loblaw has opened three trial locations; two in the Ontario cities of Hamilton and Windsor as well as a third location in Calgary. Each location heavily features Loblaw’s No Name and President’s Choice store brand products.

The Box is “Canada’s new discount grocery store,” an August news release announcing the Hamilton location, said.

Most of Loblaw’s sales already come from its discount banners, including its No Frills and Valu-Mart stores, analysts say. But those stores are facing sustained pressure from competitors, chief among them Walmart Canada.

Increasing grocery sales is an imperative for Walmart Canada next year, company officials said last month.

MORE: Wal-Mart turns focus to grinding down grocery prices

Walmart is wrapping up the expansion of more than 300 Canadian locations to include food aisles.

“We’ve laid down a huge amount of food space,” David Cheesewright, head of Walmart’s international division, which includes Canada, said on Oct. 15. “Now it’s time to develop and innovate that space.”

Following trends

Development of a hard discount chain at Loblaw also comes as growth at other low-cost retailers, like Dollarama, is booming.

Lower cost retailers are benefiting from a Canadian labour market that has generated more part-time jobs this year and muted upward pressure on wages, experts say.

Canadian households are also grappling with near-record debt levels, something that’s expected to increasingly force consumers to reduce spending where they can.

MORE: Dollar stores in expansion mode as more Canadians feel cash pinch

Rising income inequality could also feed into the development of a new deep discount banner, experts say. Last week, the World Economic Forum highlighted the continued trend of rising income inequality as the pressing theme of 2015.

Loblaw executives didn’t disclose any plans to broaden out its hard discount trial. Weston said Loblaw was figuring out whether the hard discount line could be “strategically complementary” to its existing stores.

“We’re working our way through that,” Weston said.

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