Canada鈥檚 biggest grocers are investing money and space in discount stores such as No Frills, Food Basics and FreshCo as shoppers look for ways to save on food amid the higher cost of living.

Converting grocery stores to discount is a relatively easy move, experts say, and one that is helping the grocers keep profits steady despite consumers seeking ways to rein in their spending.

鈥淭here鈥檚 all sorts of things that 鈥� people are doing, but one of them is looking for cheaper options. And so they are going to discount stores,鈥� said Michael von Massow, a food economy professor at the University of Guelph.

Each of the major Canadian grocers has several different store brands, also known as 鈥渂anners鈥� 鈥� from high-end to conventional to discount. Loblaw鈥檚 main discount banners are No Frills and Maxi, while Metro owns Food Basics and Super C, and Empire owns FreshCo.

All three Canadian grocers鈥� recent earnings reports have shown sales at discount stores are major drivers of overall sales growth.

But when it comes to expanding, Loblaw is leading the pack with more than 30 new Maxi and No Frills stores opened last year, through new locations or converting full-service stores into discount, according to the company鈥檚 annual report.

鈥淭here is a shift to discount, and we see the opportunity that exists for discount stores,鈥� said Melanie Singh, president of Loblaw鈥檚 new 鈥渉ard discount鈥� division, made up of No Frills and Maxi.

The growth shows no sign of stopping. A few days before its February earnings release, the grocer announced a capital investment plan worth more than $2 billion that will result in more than 40 new discount stores.

鈥淚 think it鈥檚 a great strategy for them,鈥� said Lisa Hutcheson, a retail analyst at J.C. Williams Group.

鈥淭hey鈥檙e investing in this approach because they鈥檙e recognizing people need that budget-friendly approach, but it will also be a very strong strategy for them financially.鈥�

The grocers are taking different approaches when it comes to discount, said a recent industry report from commercial real estate firm JLL 鈥� Empire isn鈥檛 pursuing further significant expansion into discount, focusing instead on its current portfolio.

Empire bought Ontario chain Farm Boy in 2018 and has since expanded it, and bought a majority stake in specialty grocer Longo鈥檚 in 2021.

鈥淏y maintaining its full-service approach, Empire is banking on a period of decreasing inflation and interest rates, when customers might prioritize the shopping experience over steep discounts,鈥� the report said.

However, it noted that Empire has already made some conversions, and is taking a strategic approach in Western Canada.

In the last six years, Empire has opened 52 new FreshCo stores in Western Canada and Ontario, bringing the national total to 147 stores, said spokeswoman Tshani Jaja in an email. The company has also expanded its private-label and value-size offerings, and it launched an 11-week program lowering or locking in prices on around 1,000 items mid-February, she said.

Metro currently has 247 Super C and Food Basics stores, up from 236 in 2020, said spokeswoman Stephanie Bonk in an email. Three Super Cs opened in the company鈥檚 latest quarter, and another Food Basics is slated to open this year.

鈥淲e鈥檝e seen a shift in customers shopping our discount banners over conventional. Private label sales are continuing to grow at a faster pace than national brands and promotional penetration remains high,鈥� said Bonk.

Discount stores tend to be smaller than market stores, said Singh, and they have a simpler operating model with less variety among items.

You鈥檙e also more likely to see certain 鈥渧alue-added鈥� things at a market store, such as a deli counter, or bakery items being baked on-site, she said.

One thing that the market and discount stores have in common, however, is that their offerings are partly informed by the local community, said Singh.

鈥淲e lean into a lot of data to inform those decisions,鈥� she said.

Discount grocery stores often use simpler signage and displays, said Hutcheson. They also often carry more of the company鈥檚 private label products, which generally have better profit margins, and employ fewer staff, she added.

Discount stores are also less likely to have specials and promotions, said von Massow, and the stores are often in lower-rent districts.

All this adds up to likely very similar margins to a full-service store, he said.

鈥淚 think that the grocers are agnostic to where we shop, as long as they can adjust to that,鈥� he said. 鈥淎nd that鈥檚 what we鈥檙e seeing them doing.鈥�

Grocers are likely picking conversions strategically, said von Massow: 鈥淭hey鈥檙e going to convert underperforming stores to discount stores.鈥�

One thing Loblaw has noticed that speaks to demand: when it converts a store, it sees sales rise at that location, said Singh, and yet its other discount stores in the area don鈥檛 take a hit.

Converting a market store into a discount store is simpler than building a new one, said Singh 鈥� often, they can even keep the store open while changes are being made, with just a brief closure.

鈥淲e鈥檝e converted several Maxis where we would close it for two weeks, put the sign up on the building, and then reopen it as a Maxi, but construction still goes on in different parts of the store.鈥�

With inflation driving consumers to trade down, Loblaw is best positioned, followed by Metro and then Empire, according to RBC Dominion Securities analyst Irene Nattel in a note about Loblaw鈥檚 latest earnings.

In an earlier note on Metro鈥檚 earnings, Nattel said Empire鈥檚 鈥渙verweight exposure鈥� to the full-service part of the sector is a 鈥渞elative disadvantage鈥� against its competitors amid ongoing price sensitivity.

But Hutcheson says she doesn鈥檛 think having specialty or higher-end brands is necessarily a hindrance.

鈥淎s long as they are understanding their value proposition to their customer and they鈥檙e delivering what they want 鈥� I think that鈥檚 fine.鈥�

If consumer behaviour does shift back toward full-service stores over the longer term, the grocers can continue evolving, said Hutcheson.

鈥淚 think that making this kind of shift is fairly low risk, because discount stores are easy and rather inexpensive footprints to build or shift to, and then from there they can adjust accordingly.鈥�

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Rosa Saba, The Canadian Press