"The era of cheap food is coming to an end, the boss of Tesco warned yesterday.
Philip Clarke, chief executive of Britain’s biggest supermarket chain, said rising global demand meant the low prices could not continue for much longer."
It doesn't feel like it when you lug groceries away from the checkout at the supermarket, but North Americans in particular as well as Europeans, pay a much smaller percentage of their income on food than most in the world. Climate change, production of biofuels, a quickly growing middle class in China and India, are all pushing food prices up. But there was one more interesting bit of information in the above story (I'll include it at the end):
"Clarke spoke as a new poll indicated that consumers would be prepared to pay more for their groceries if they thought it would benefit British farmers."
And I suspect that's precisely what won't happen. Yes consumers will pay more, but there are a lot of pockets to fill between the supermarket checkout and the farm gate, and farmers just don't have the economic clout to demand their fair share no matter what consumers might hope for.
We've received some much needed insight into Canada's food retailing behemoths over the last two weeks. Both Sobeys and now Loblaws (Atlantic Superstores) went on their own shopping sprees, spending billions to buy up competitors and bulk up for the continuing food fight with Walmart. So Canada's big chains have a lot of new loans to pay back, so guess who will grab those extra dollars we'll all be paying.
And this week Moody's (the bond rating people) have given us some indication of how well the supermarket chains are doing (pretty well). I'll include some of the stories below.
The end of cheap food? Tesco boss warns rising global demand will spell the end of low prices
- No more bargain buys during your weekly show, supermarket boss warns
- Due to rising global demand, food prices will rise, say Tesco's Philip Clarke
Not so super: Philip Clarke, CEO of Tesco, warns that the days of bargain buys are over
Philip Clarke, chief executive of Britain’s biggest supermarket chain, said rising global demand meant the low prices could not continue for much longer.
He spoke as a new poll indicated that consumers would be prepared to pay more for their groceries if they thought it would benefit British farmers.
Tesco’s reputation was badly damaged by the horsemeat scandal at the start of the year and Mr Clarke has promised to rebuild customers’ trust.
But it faced accusations of profiteering yesterday after raising the price of its basic bottled water by 40 per cent as the country sweltered in the heat.
Food price inflation was 2.7 per cent last month, up from 2.4 per cent in May.
Mr Clarke is the second supermarket boss, after Waitrose’s Mark Price, to back experts’ warnings that rock-bottom prices would eventually lead to quality being sacrificed.
Last month a UN report predicted world food prices could rise by as much as 40 per cent over the next decade, driven by the demands of a growing middle class in China and India.
‘There was a time when we could go to South Africa to buy fruit and be the only retailer there,’ Mr Clarke said, adding: ‘Not any more.’
And he pledged to fulfil a promise to the National Farmers’ Union, made after January’s scandal, to give British producers a better deal.
But he admitted the discovery of horsemeat in beef products had damaged customer trust. ‘Tesco was big and Tesco was bad,’ he said.
Oh no, Tesco: The chief executive of Britain¿s biggest supermarket chain, said rising global demand meant the low prices could not continue for much longer
The poll, by YouGov for The Prince’s Countryside Fund, also indicated that more than 80 per cent of consumers think it is important to buy British.
Donald Curry, a trustee of the fund, said: ‘The public are prepared support British farmers, even if that means paying more for food – provided extra money goes directly to the producer.’
What sent Shoppers and Loblaw down the aisle? Wal-Mart
Not only will Loblaw now be able to sell many products with higher margins – such as pharmaceutical products – the merger will create many co-branding opportunities, such as private labels and loyalty programs.
The addition of downtown stores across small-town Canada will give Loblaw a key real-estate edge in managing socio-demographic shifts as suburbia continues to push the borders of our cities outward.Some experts have gone so far as to claim that this deal will be transformational for Canadian food retailing. It is indeed significant – the biggest industry transaction our country has ever seen – but is it transformational? Not quite.
Wal-Mart’s purchase of Woolco in 1994 remains the most transformational transaction in Canada’s food retailing industry. Everything happening in food distribution today continues to be affected by it. Most Canadians didn’t realize it then, but Wal-Mart’s entrance into the Canadian market would change everything: the way we shop; what we buy; and, most importantly, how we buy and value food.
Ever since Wal-Mart entered the Canadian market, it never hid its ambition of becoming Canada’s top food retailer, as it has in the United States. Many believe it is just a matter of time. In fact, Wal-Mart added close to $700-million to its food sales this year alone. Loblaw’s latest response suggests that it’s not eager to let go of the top position and that it views Wal-Mart as a serious threat.
Wal-Mart’s purchase of Woolco generated a few copycats, including Target’s recent purchase of Zellers. As Target’s first destination outside the United States (with almost 200 stores by 2020), Canada is considered fertile ground for future growth. Sobeys, desperate to penetrate the Canadian food market and Loblaw’s closest rival in food retailing, agreed to become Target’s key food distributor for a limited time. The strategy seems to be paying off as Target predicts to top $300-million in food sales in 2013. Given a very stagnant market, these sales are coming at the expense of its competition. But after last month’s $5.8-billion purchase of Safeway’s Canadian grocery stores, Sobeys might not prop up Target’s effort for long, as it has other plans for future growth in a very condensed, mature marketplace.
In Quebec, meanwhile, Metro saw in Safeway the deal that got away. Metro, which was part of the United Grocers buying group with Safeway, will likely see its purchasing power diminish for several products, reducing its bottom line significantly in the near term. With Loblaw’s purchase of Shoppers, many are now speculating that Metro will hunt down Jean Coutu, the large Quebec-based pharmacy chain. Jean Coutu himself stated that the company was not for sale, but that was before the Loblaw-Shoppers announcement. Equally affected by the acquisition, both Metro and Jean Coutu may be ready to talk.
Whether or not the Loblaw-Shoppers tie-up will work is difficult to tell at this point. Loblaw Cos. Ltd. has a poor track-record of streamlining processes quickly. The Shoppers purchase will likely add more pressure and could create opportunities for the competition. The market is evolving quickly, and while convenience and accessibility are imperatives in food retailing, price is still paramount. Wal-Mart understood decades ago that logistics are critical if you want to offer competitive prices to consumers. That will be Loblaw’s main challenge.
Ever since Wal-Mart’s big deal in 1994, food retailers have been looking at the Canadian market very differently. More consolidation is expected. Metro may consider B.C.-based Overwaitea Food as its consolation prize, but that is highly doubtful. Certainly, after the Quebec government’s hostile reaction to Lowe’s attempt to purchase Rona last year, it is highly doubtful anyone would want to touch Metro.
Both Sobeys and Loblaw have made their moves. Metro could be next. But let’s not kid ourselves: Wal-Mart is still calling the shots.
Sylvain Charlebois is professor in food distribution and policy at the University of Guelph’s College of Management and Economics.
Moody's likes the outlook for Canadian supermarkets
The credit rating agency does not usually look at the big three Canadian grocers — Loblaw Companies Ltd., Empire's Sobeys and Metro Inc. – but was asked for its opinion in the wake of Loblaw’s $12.4-billion merger with Shoppers Drug Mart and Sobey’s $5.8-billion acquisition of Canada Safeway.
"Our main finding is that although the Canadians are smaller and less diverse, they have good margins and superior credit metrics," Moody’s said.
It had a generally beneficial view of the Loblaw's takeover, saying the company’s debt load will rise following the Shoppers deal, but should come down within two years. Loblaw will pay for Shoppers in cash and stock.
Moody's called the merger "complementary" and predicted Loblaw will see sales grow, especially in health and wellness products, following the acquisition.
The three Canadian supermarket chains compare well with European stores, which are seeing margins flatten and earnings shrink, despite being larger and offering a more diverse range of products.
Comparable European supermarkets — Tesco PLC, Carrefour S.A., Koninklijke Ahold N.V. and Delhaize Group – are exposed to non-food products, such as clothing and consumer electronics, which has left them vulnerable to the economic downturn, Moody’s said.
The European grocers lag behind their American and Canadian counterparts in terms of same-store sales growth, it added.
America in the middleU.S. supermarkets are seeing stronger same-store growth, but are in a more competitive market, with flatter margins.
Moody’s estimates Metro leads the Canadian grocers with a profit margin of nine per cent of earnings before certain Items. That compares to 7.5 per cent at Sobeys and 7.0 per cent at Loblaw.
It says the expansion of Wal-Mart and Target into Quebec could squeeze Metro's profit margins but believes all three chains can weather the competition.
"We think the Canadian supermarkets' margins are somewhat protected to the downside by ongoing cost reduction measures, tight inventory management, improving store offerings and an increased focus on loyalty programs."
"We expect the impact of rising competition to be manageable for the Canadians and that their aggregate margins will be better than those of the Europeans in the medium term."