Full-service stores will outperform discount as we move beyond the pandemic, even in the face of an economic slowdown, creating a 50/50 balance between the two retail formats, and growth from bricks and mortar will be used to invest in rapidly expanding e-commerce businesses, predicts Michael Medline, president and CEO of Empire Company Limited.
Medline and Dr. Sylvain Charlebois, a Dalhousie University professor in the Faculties of Management and Agriculture and senior director of the Agri-Food Analytics Lab, participated in a National Capital Markets webinar, “The Future of Grocery Disrupted” and discussed the changes they expect to see in the future of grocery retail.
“We’re seeing basket sizes tripling since before the pandemic, reaching $100 and above with online growth across the country like we’ve never seen before,” says Medline. The pandemic has also led to changes in shopping behaviour that Medline says will lead to full-service stores outperforming discount.
“Safety and one-stop shopping are trumping everything now. In the 2008 recession, we saw discount rise, but with this situation, people are balancing their pocketbooks with their concerns for health and safety. People will not shop at as many stores as they once did because they will want to shop at the one store that offers everything they want from grocery and where they feel safe.”
One of the biggest challenges facing grocers is food inflation, says Charlebois.
“It’s costing more to do everything and the challenge for grocers will be to ensure consumers can continue to afford food. It will be a challenge for grocers to justify price increases because of cost pressures coming up the food chain.”
Indeed, despite the strong financial performance of grocers early in the pandemic, Medline says costs associated with the crisis ran in the “tens of millions of dollars” noting that Empire does not plan to pass on these costs to customers.
“There is a lot of pressure from supplier partners facing costs of their own for PPE and other related measures, but we are trying to keep food inflation down as much as we can. The dollar fell precipitously at the beginning of the pandemic, which hurt our supplier partners. With the dollar coming up, it will ease the inflationary tone a bit and our job is to pass on value to customers as much as we can. We recognize that these are trying times for everyone.”
Finding efficiencies to counter rising costs
While grocers ended their temporary wage premiums recently, Medline and Charlebois both concur that rising costs associated with maintaining safety measures means the grocery supply chain will have to look for new efficiencies.
“I think grocers were well intended but financially, I didn’t see how it would be sustainable. If you increase salaries 10 to 15 per cent overnight, you flirt with losses,” says Charlebois, adding that grocers have been unfairly targeted because “this is an issue affecting the entire food industry.”
“First of all, when we walk about efficiencies, there will be no efficiencies in keeping our customers and teammates safe,” says Medline. “We made the choice to go to plexiglass screens in the middle of a conference call. I had no idea what it would cost but we knew it was the right thing to do. The protocols in our stores are not going to go down any time soon because we don’t know if and where the pandemic will strike next. So, we’ll be looking at innovation like automation. When done well, it makes for a better business, keeps costs down and employs more people.”
Charlebois cites Empire Company’s recent launch of Voilà by Sobeys as an example of innovation “done well.”
“I consider Voilà the new Canadian benchmark for three reasons: affordable pricing, accuracy of orders and one-hour delivery. I suspect competitors will look at Voilà and think this is what we need to do from now on.”
Medline says ecommerce is on the rise. Before the crisis, grocery ecommerce accounted for 1.5 to 2 per cent of the market but he expects it to reach 5 per cent in three years.
As for Empire's Voilà service, he estimates it will be profitable in two years as it ramps up its offering from the current 10,000 SKUs to 39,000. But to succeed, he says bricks and mortar are part of the equation.
“You need to do both very well, but bricks and mortar will provide the cash to invest in ecommerce. And we'll need to make the bricks and mortar experience more exciting. Our job will be to excite people in the store even while having protocols in place.”