Canadian shoppers have been paying more at supermarket cash registers, but a price war could be on the horizon if the loonie continues to trek higher and consumers react to the weak economy, some industry watchers suggest.
Supermarket chains across the country who have chosen to pass on the ballooning costs of food ingredients and workers’ wages to consumers could face pressure from disgruntled shoppers who continue to worry about the possibility of job losses and tight credit.
Sylvain Charlebois, an associate dean at the Johnson-Shoyama Graduate School of Public Policy in Regina, believes that stores will launch an aggressive deep discounting campaign in the coming months.
He said it could be triggered by the recent announcement from Loblaw (TSX:L) to slash the prices at some banners in both Altantic Canada and Ontario to keep them competitive.
At its Zehrs stores in Ontario, for example, the company will cut an average of 10 and 25 per cent on up to 3,000 items.
“Coming from Loblaw it’s significant,” he said on Wednesday. “Others are likely to follow suit.”
Charlebois said the country’s biggest supermarket chain made the announcement at a touchy time for Canadians, when many are still operating on a tight budget and some industries are starting to ponder a gradual economic recovery.
Toronto shopper Merle Pierre said higher prices have left her with some bitter choices about where she’ll buy food, forcing her to choose between quality and quantity when she decides which store to visit.
“For people whose incomes are low, like mine, you have to go to No Frills,” she said on Wednesday, while standing outside a Metro supermarket where she had just finished buying her groceries.
Pierre said living on a pension leaves her with a tight food budget, which means she buys most of her groceries at low-cost stores that offer only the basics. However, this week she decided to splurge and shop at the higher end Metro store, which offers a wider variety of selections.
“When you come to these places, you pay more for the area,” said the downtown Toronto resident.
“If you want to get the best you have to pay for it — and lots of money.”
Ronan O’Leary, another Toronto-area shopper, said he also chooses lower-priced supermarkets over the more aesthetically-pleasing stores.
“The staples — milk, eggs, butter, cheese — it’s always cheaper there,” he said, while noting that he’s also changed his eating habits to save money.
“I buy less red meat, and less vegetables.”
No Frills is owned by Loblaw, while Metro owns Food Basics, a similarly themed discount supermarket.
Calls to Canada’s largest grocery chains did not lead to any comments about food pricing. The industry is represented by Canadian Council of Grocery Distributors, which doesn’t discuss industry trends to protect the competitive nature of its members, it says.
Brian Yarbrough, retail analyst at Edward Jones in St. Louis, said grocers could start to see a backlash from consumers who become dissatisfied with their reluctance to lower prices.
“It’s going to remain challenging for the back half of the year and they’re going to have to discount somewhat to drive traffic to the stores,” he said.
“We’ve probably seen bottom on how bad it gets, but consumers remain concerned about job losses and credit card issues. The consumer is going to continue looking for a good value.”
Desjardins Securities analyst Keith Howlett wrote in a recent note that moderating food price inflation could pose a significant challenge over the next year.
“Consumers continue to alter their behaviour as the recession wears on,” he said.
“Grocers are recession-resistant but not recession-proof. As the recession lengthens, consumers continuously adjust their behaviour with respect to food consumption.”
Howlett said grocers should keep nimble to thrive in this environment, though he expects the economic recovery to help the industry’s sales.