- Food Basics is Metro inc’s discount store in Ontario. Photo: Wikimedia Commons
Honey let’s go grocery shopping, milk is on sale!
You may have noticed that discount grocery stores in Ontario have been blasting out aggressive front-page ads lately featuring everyday items like milk, juice, bread, bananas and sugar at lower than expected prices, this high-cost/low-profit battle has led to Metro Inc.’s sluggish numbers in 2014.
In fact Metro Inc. might be close to losing the discount grocery market battle in Ontario because of it. It could also work out to being a smart move that decreases sales, but increases profits.
For years Metro’s Food Basics was a major force in the cheap food business, but heavy competition from Sobeys’ FreshCo, Loblaws’ No Frills and Wal-Mart has pushed their market share down.
Food Basic’s re-entered the staple-item-driven front-page flyer advertisements once again this year after the banner took a significant hit in market share in 2013. Basic’s went toe to toe with competitor’s ads, but three quarters into 2014 they are once again rethinking the strategy to preserve profits.
Perry Caicco is an analyst for CIBC who researches Metro for investors. He notes that Metro had stayed in the fight throughout the first half of 2014, but has significantly reduced their aggressive ads this summer.
This can be seen in their Canada Day ad that was less note-worthy than their competitors.
The impact seems to be most evident in their EBITDA (Earnings Before Interest, Taxes, Depreciation and Amortization) across the board which is down in Q3 and annually from 2012 and 2013. EBITDA is down 3.5 per-cent from last year.
According to their third quarter report net income is up slightly from a year ago, but Metro has not met the earnings projections made by CIBC. In Q3 sales were up 1.4 per-cent from 2013.
Rising commodity prices factor into cost and may be responsible for the sluggish stock price following the release of the third quarter results this week.
Generally stores keep prices in line with the competition and try to avoid shocking consumers with fluctuating prices every week, but over time they tend to sway with the longer market trends.
With staple items seemingly on the front-page of every competitor’s flyer every week, it remains to be seen how sales will be affected by Food Basics’ lack of aggression.
For example a 4L bag of milk may cost the customer $3.97 at a discount grocery store, but the company is losing nearly 2$ on that same bag.
For Food Basics this loss in margin might be too much to stomach.
Metro inc. declined to comment citing “competitive reasons” .
Price matching
Sorry we don’t do that here.
Another difference between Food Basics and their foes in the discount grocery business in Ontario is their price-matching policy.
Unlike FreshCo, No Frills and Walmart, Basics is not in the business of price matching competitors’ specials.
Where a customer can bring in a major competitor’s flyer into these stores and receive the advertised price, they can’t do this at Basics.
Walmart and No Frills have the most aggressive price-matching policies and FreshCo has a limited one. This may be causing a riff with Basics shoppers.
A 2013 poll done done by Redflagdeals.com, a popular consumer information website found that 60 per-cent of shoppers preferred No Frills, 29 per-cent FreshCo/Price Chopper and only 11 per-cent said they preferred Food Basics. Although the sample size was small it is likely indicative of Basic’s perception in the eyes of consumers.
Red Flag Deals visitors and commentators are informed consumers that care about getting a deal. Commenters are required to provide significant personal information to comment and partake in polls on the site including location. Many of the commenters on this subject have posted thousands of times on the site. The commenters praise FreshCo and No Frills’ price match policies as why they shop where they do.
Price-matching is costly to stores, but they know it is a strong factor in customer retention.
Both FreshCo, Walmart and No Frills advertise price matching on the front-page of their flyers every week.
Many retail companies see price-matching as a cost of doing business.
Cost of food and the front page
Bringing home the bacon might not be as easy as it used to be.
Recently released data from Statistics Canada shows that bacon prices in Canada are up over 25 per-cent in 2014 from a year ago.
Despite the aggressive advertising, as a whole Canadians are paying more for many staple food items in 2014.
Of the top ten food items costing Canadians more in 2014, 9 of 10 were meats, including hot dogs up nearly 18 per-cent and ground beef up 15 per-cent from 2013.
This might be why chicken has been a prominent front-page item amongst the discount banners this year. Chicken is costing consumers only one per-cent more this year.
Meat items are frequently featured on front-pages of flyers because they are not considered to be “Pantry Items”, meaning that customers are less likely to stockpile significant quantities as they would cans of soup.
The overall higher prices of these items increases the importance of aggressive promotions on them to shock and awe would-be customers.
Celery was the product that saw the biggest decline in price, costing consumers more than 20 per-cent less than a year ago.
Of the 10 food items costing Canadians less none were meats and 8 of 10 are pantry items including: peanut butter, flour and coffee.
Celery and Grapefruit were the only fresh items to make the list.