Vertical Industry Sector Overview of the Canadian Supermarket Sectorintroduction

Introduction

The focus of this paper is the supermarket sector in Canada. In this sector the development of a company strategy is of utmost importance as the goods are typically commodity goods. The goods sold in supermarkets usually are of little or no comparative advantage. We found that some interesting developments have occurred in this sector, as we will see in this paper. We will identify the leading companies, and determine how the inter-company strategies differ from one another. Before we do so, however, we will first have a look at the retail industry in Canada as a whole, and the supermarket sector.

Overview of Retail Industry in Canada

The retail sector is responsible for providing the last process of the manufacturing/processing lifecycle. Firms participating in this sector distribute to consumers the finished goods produced by manufacturers. Industry Canada defines the sector as follows: "the retailing of merchandise in small quantities to the general public generally without transformation, and rendering services incidental to the sale of merchandise" .

In 2005, the industry as whole represented $367 billion in sales contributing to 5.7% of the total value of production in the Canadian economy.

Over the past decade, the retail sector has grown at a faster rate than most other sectors in the economy. Between 2004 and 2005 the growth rate was 5.1% above average. Industry experts predict that the growth will continue at least until 2010 due to high levels of consumer confidence and low unemployment rates. There is a direct correlation between the state of the economy and the state of the retail sector. As the economy grows, so does the retail sector.

The retail sector is divided into several categories. The Supermarket sector is found in the Food and Consumer products category. Chart 1 shows the proportion of sales this category has within the retail sector.

Chart 1

Supermarket Sector in Canada

The Food and Beverages category is one of the largest industries in Canada with almost one quarter of the total commodity sales in 2004 .

With over 24,000 retail outlets and with sales of over $71.8 billion, which have grown at a steady rate of between 4 and 5 percent over the last decade, this sector employs over 428,000 people.

Revenues (chains versus non-chains)

In the retail food and beverages sector, the revenue from chains is almost the same as from non-chains.

The vast majority of goods sold by the food and beverage sector (i.e. supermarkets) are commodity goods. As the commodity goods market is highly competitive, margins are relatively low. However, the profit margins differ widely between chain and non-chain stores. In the Canadian landscape the market leaders are nationally operating chains. Chart 2 describes the revenues and profit margins of chain stores versus non-chain stores. Clearly, while revenues between chain and non-chain stores are almost evenly divided, chain stores are able to create higher profit margins.

Chart 2 Comparisons of Revenues and Margins for Chain and Non-Chain Stores

Channels

Chart 3 depicts the distribution of the market share by channel. While supermarkets currently represent the largest channel, other channels are emerging into the market. Mass merchants and Club stores are steadily gaining market share representing a significant threat to the supermarket channel . Chart 4 demonstrates this trend in that within the food retail market, the leaders are not all members of the Supermarket channel.

In short, with the high competition and the blurring of clear lines among players within the industry, major grocery stores find themselves competing with big box retailers, such as Wal-mart, on food items, and vice versa.

The industry has been increasingly marked by an over-supply of retail square footage, consumers' desire for a value driven shopping experience and the presence of low cost global retailers.

Chart 3 F & B Category by Channel

Chart 4 Industry Leaders

Leading Companies

Chart 4 clearly shows that, in 2005, the industry leaders are Loblaw Companies, Metro Inc and Sobeys Inc. In the next section we will take a closer look at each of these industry leaders, their key indicators, performance drivers and strategies. Table 1 summarizes the various company names operating under each of these parent companies.

Table 1 Leading Companies Operating Banners

Loblaw Sobey's Metro

CORPORATELY OWNED

Category Banner

Supermarket - Atlantic Superstore Dominion

- Extra Foods

- Loblaws

- Maxi

- Maxi&Cie

- Provigo

- The Real Canadian Superstore

- Zehrs outlets

Markets

Wholesale - Cash & Carry

- Presto

- The Real Canadian Wholesale club

FRANCHISES AND ASSOCIATED STORES

- Atlantic SaveEasy

- Fortinos

- Lucky Dollar Foods

- no frills

- Shop Easy Foods

- SuperValue

- Valu-Mart

- Independent Grocer

Category Banner

Full service

- Sobeys

- IGA extra