Discount supermarkets are ratcheting up the bargains: experts

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Costco continues to muscle in on Canadian supermarkets – Jan 28, 2016

Discount supermarkets suddenly look like even better bargains for thrifty shoppers compared to conventional stores such as Loblaws, experts say.

“The price gap between [discount and conventional stores] appears to us to have widened in 2016,” retail experts at Desjardins Securities said in a research brief on Friday.

There are likely several reasons for this, but two in particular stand out to Desjardins’ analysts: Walmart and Costco.

First, some background: In addition to their flagship stores, Loblaws and the country’s other big supermarket owners also operate so-called discount banners.

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The biggest discounter, No Frills, is owned by Loblaws while banners such as FreshCo and Food Basics are owned by the second- and third-biggest grocers, Sobeys and Metro, respectively.

Higher prices

Rampant food inflation caused by a plunging loonie has rippled across all supermarkets in recent months, but it’s become most visible at flagship stores, Desjardins’ analysts said. In contrast, supermarket operators have been far more hesitant to flow big price increases onto the shelves at discount locations.

That hesitance stems in part from what Walmart and Costco are doing, the analysts say, which appears to be “strategically” opting to not pass higher costs into their prices in an effort to win customers away from supermarkets.

Higher sales

With its 400 or so Supercentres, Walmart competes directly with discount grocery stores and is arguably the bigger threat to Canada’s big grocers, experts say. But Costco, which operates about 100 big-box locations across the country, sells a sizable amount of grocery items too.

The most recent estimates of how sales are trending for each seem to suggest both are doing something to win a bigger share of Canadians’ weekly purchases, analyst Keith Howlett and associate analyst Hanbo Xiao said (see chart below).

“It appears that Costco and Walmart may be generating the highest same-store sales growth in the grocery industry in Canada,” the pair said.

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MORE: Meet the big-box retailer that’s muscling in on Canadian supermarkets

Compared to incumbent grocery stores,”Walmart and Costco are growing much faster,” CIBC World Markets analysts said in note from late January.

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