The Wal-Mart effect has hit Canada’s grocery store industry, pressuring prices in supermarkets even as Canadian food manufacturers’ margins show steady improvement, according to a year-end review by the George Morris Centre.
The agricultural industry think-tank, based in Guelph, Ont., on Tuesday posted its year-end review of Canada’s food industry, authored by senior market analyst Kevin Grier.
Food retailers’ margins have dropped on average from four per cent to three per cent when comparing the average for 1999 to 2006 to that for 2005-07, compared to a steady three per cent margin in the retail sector overall. “The once-strong spread of food over total retail is diminishing,” Grier wrote.
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Data from the Grocery Trade Review earlier this year shows supermarkets in Canada gradually losing share to “general merchandisers” such as Wal-Mart and Costco. True, supermarkets now hold about 88 per cent of food sales, but that share has dropped two per cent (worth $400 million in sales each quarter) since 2002, Grier noted.
Retailers appear to be squeezed at both the pricing and cost ends of the picture — particularly in Ontario, a market that leading grocers have characterized as a “blood bath,” Grier wrote.
Strong domestic competition, likely due to Wal-Mart’s influence, was seen as the main reason for the decrease in retail-level pricing. “Furthermore, the gradual growth and spread of the ‘Supercenter’ format has all grocers on edge with regard to price,” and the falling U.S. dollar has forced retailers to cut prices as Canadian consumers become aware of their U.S. options, Grier noted.
Grier emphasized that Canadian domestic competition was more to blame for pricing pressures at the retail level, noting that Canadian food prices have risen just one per cent from January 2006 through to October 2007, while U.S. food prices rose nearly six per cent during the same period.
Manufacturers
Canadian food manufacturers’ profits, meanwhile, were up 10 per cent in the third quarter of 2007 compared to the year-earlier Q3, although they were flat from the 2007 Q2. Operating margins for those companies in Q3 stood at six per cent in the 2007 Q3, compared to a 1999-2006 average of five per cent.
Food sales, meanwhile, are estimated to rise by about three per cent to $74 billion in calendar 2007, right around the five-year average, while total manufacturing sales (including non-food) should rise only one per cent.
From a sales and marketing point of view, food makers’ 2007 performance “is going to be average or better than recent years,” and that shows in the industry’s investment in capital expenditures, Grier said.
What’s more, with the exceptions of grain milling, dairy and meats, food manufacturing items “have not generally moved higher in price so far this year,” he wrote.
Dairy prices generally rise steadily year-over-year and don’t much influence commodity price indexes. Meat pricing rose substantially in late 2006 and early 2007, but has since declined through October.
Flour and oilseeds, however, have been “rising fairly steadily” since mid-2006. “Those are the items that have been most rapidly taking the brunt of grain and wheat cost increases,” Grier wrote, adding it will be important to see whether those increases in price flow through to breads, cereals and other goods.
“Of course grocers are pushing back on the manufacturers,” Grier wrote, but he cited a CIBC World Markets update that suggests suppliers will find other ways to make back any discounts that grocers might demand. Among those are reduced promotional support, “modest” participation in events and substituted offerings.
