Discount grocery chains are expected to outperform traditional supermarkets in 2023 as consumers seek cheaper foods to protect themselves from skyrocketing prices, a new report finds.
According to the DBRS Morningstar document, soaring inflation and interest rates are influencing consumer behavior and increasing sales volumes at lower-cost grocery stores.
Efforts by consumers to cut spending are also expected to further promote cooking at home, which will benefit the grocery industry in general, as people forgo eating out to cut spending.
Still, low-cost grocers are expected to see the biggest increase in sales, according to the report.
Efforts to cut spending “should favor low-cost grocers over their mainstream peers as consumers seek promotional discounts on individual items, replace branded offerings with private label products, and migrate to more affordable in the same product category,” the document said.
Grocery prices rose 11.0% in December compared to the same month in 2021, Statistics Canada reported last week. Overall, food prices in Canada rose 9.8% in 2022 from a year earlier, their fastest increase since 1981.
Phenomenon already observed in the United Kingdom
In the UK, where food inflation was even higher than in Canada, low-cost grocery stores saw strong sales growth.
Budget retailer Aldi, for example, saw annual sales growth of around 23%, 24% and 27% in October, November and December 2022, respectively, according to the report.
Its competitor Lidl, which also offers low prices, saw similar growth over the same period, ranging from 22% to 24% year-on-year, the document added.
“This is significantly higher than the sales growth of their traditional competitors, including Tesco, Sainsbury’s and Asda, which all recorded growth of no more than 6.4% in the same months,” the report said.
At the opposite
The expected growth of the low-cost format is the opposite of what has happened during the COVID-19 pandemic, when public health and safety concerns, the desire for convenient “one-stop-shops” and ordering… groceries have boosted sales in traditional supermarkets.
For example, Loblaw Companies’ brick-and-mortar stores saw comparable store sales growth of 10%, 7% and 9% in the last three quarters of 2020, according to the report.
By comparison, the company’s low-cost division, which notably includes the Maxi brand, recorded growth of 5%, 5% and 7% during the same period.
The strength of traditional grocery stores began to decline as the cost of living began to rise, the report noted.
“Even though low-cost grocery volumes were, for the most part, overtaken by conventional stores during the […] pandemic, given the shifts in consumer behavior in the wake of soaring inflation and rising interest rates, we expect the opposite during this sustained period of economic distress,” said the vice – president of consumer and retail at DBRS Morningstar, Moritz Steinbauer, in a statement.
Sales trends between discount stores and conventional stores should gradually return to their usual levels as economic conditions stabilize.
However, low-cost grocery stores could see a “structural advantage” if they are successful in retaining new customers, the report found.
This could “amplify the long-term growth and market share gains of discount stores,” the report said.