Why is Walmart expanding into groceries?

Rotman’s David Soberman on the new era of supermarkets.

In early February, Shelley Broader, CEO of Walmart Canada, announced her chain was moving fully into the grocery business. Walmart’s Canadian stores had added full grocery lines to some of its larger outlets, but Broader’s plan now is to inject $500 million into expanding the number of Walmarts that offer groceries.

So, Canada will have hundreds of additional grocery stores added to what seems to be a full complement already, with Loblaws, Metro, Sobey’s, Longo’s, Costco and the discount stores related to some of these chains.

Are we at the point of market saturation?

We asked Professor David Soberman for his thoughts. Soberman is a professor of marketing and the Canadian National Chair of Strategic Marketing at U of T’s Rotman School of Management.

Q. Almost all Walmarts will soon offer a full line of groceries. Don’t we have enough grocery stores already?

No. The simplest explanation for why Walmart is entering the grocery market is that the population of Canada is growing, so we would expect there to be an increasing number of grocery stores.

A lot of people perceive this as being a massive increase to the number of chains but if you go back 20 or so years ago you had IGA, Food City, A&P, Dominion, and Loblaws. The bottom line is that even in those days we had five or six chains.

The major difference today is that there is a broadening of the product lines that are carried by the traditional grocery stores and, more recently, by those that previously did not sell groceries, like Walmart and Target. I’d include Costco in that group too.

Q. So it’s more about the product line, not the number of chains?

Right. The focus today is on combining a variety of product lines that used to be offered in separate stores. One-stop shopping is the key now.

People used to separate their grocery shopping from other shopping. So you might go to a mall to do Christmas shopping, for example, or to buy clothing or school supplies for your children. But for your groceries, you would have to make a separate trek to the supermarket.

Now, it’s all being combined. Evidence for this change in shopping behavior comes by thinking about the product lines carried in a traditional supermarket like Loblaws. They’ve vastly expanded their product line with Joe Fresh, which is a whole section dedicated to clothing. You can also buy all sorts of household fix-it products in Loblaws. That section used to be about 12 feet long and it’s much bigger now. In addition, most supermarkets contain pharmacies where you can get prescriptions filled. Loblaws perceives itself as not just competing for your supermarket dollar but also for your dollar for clothing and doing things around the house.

That’s the main reason Walmart is expanding into groceries. They already carry household products and clothing. The bottom line is that people will be spending an increasing amount of their shopping dollars in a place like Target or Costco if they carry groceries. Potentially this can put Walmart in a bit of a pickle because they have something like 400 stores but half of them don’t really have complete grocery sections. Now they are ramping that up so that the majority of their stores include the full grocery section. The idea is that when people think of going grocery shopping they’ll actually go to Walmart.

It’s also interesting that many of the Walmarts are located in malls where there’s also a supermarket. This means that even within malls there is an added dimension of competition and this is a departure from the past.

This might result in people not just deciding which mall to go to, but with a Walmart supermarket and another supermarket in the same mall, they might decide which part of the mall to go to in order to do their shopping or where to park their car.

Q. How do grocery stores distinguish themselves? Don’t they really all offer pretty much the same products?

No, I think they do actually create distinct images. Sobey’s, Loblaws and Metro all have discount stores, so that enables them to compete by reaching different audiences. And even the discount versions, like FreshCo, No Frills and Food Basics, each offer a somewhat different approach from each other in the discount sector of grocery shopping.

But the gold standard is Loblaws. They’ve created very much their own image with their pioneering efforts in private labels, with President’s Choice and No Name, and the collection of products they’re offering. That approach has really helped them to create differentiation.

Q. Still, I drive through the city and I see a grocery store every few blocks.

But pay attention to how physically close they really are. You have to remember that retailing is largely a location-based competitive context. This is the reason why when you look for a Sobey’s store you tend not to find a Loblaws store right next door. These stores know how to compete and they find locations that are under-served.

One of the things about grocery shopping is you don’t want to have to travel too far to do it. This enables each of these stores to create their own retail trading area. As I say, they know how to compete and one of the ways they compete is by not competing. And they do that by not co-locating.

Q. Is the same approach taken in all retail sectors?

The grocery markets don’t co-locate but it’s very different from what you see in the clothing industry. In Toronto, for example, there’s the Mink Mile on Bloor Street, just west of Yonge, where you find all the high-end clothing shops, like Armani, Boss, Harry Rosen and Holt Renfrew. They are all located next to each other.

Or at a big mall like Yorkdale, you find all the more popular clothing stores in one part of the mall. That’s because people go in there to shop for clothing and those retailers know that when people are in the mind to shop for clothing they want to be there.

But they also understand the shoppers will sometimes buy multiple items from different stores. In that kind of business, you don’t have to necessarily win with each shopper every time he or she shops. You may not have the person who buys on every trip but if on one out of every three trips they buy something at your shop, then you can still create a successful business. It’s a very different form of business when you’re a supermarket.

Q. What about the higher-end grocery stores, like Pusateri’s and McEwen? Do they make a difference to the overall grocery industry?

This is called segmentation. In cities like Toronto, Vancouver, Calgary or Montreal you have a certain segment of the population, maybe 5 or 10 percent, who are high income earners who like to spoil themselves with exotic foods or imported items that cost a bit more but that offer different tastes and experiences. This is not the sort of thing sold en masse by a Sobey’s or Metro because the turnover isn’t there and these kinds of products are not part of their model.

In contrast, the objective of a Pusateri’s or a McEwen is precisely to allow shoppers to find the exotic foods or imported items that cannot be found elsewhere. They charge a higher price so they don’t need the volume of a prototypical supermarket: as long as a specialty grocer like Pusateri’s has a steady flow of customers, the business model is viable. Whatever big city you go to you’ll see these types of stores. In London, England, you see Fortnum and Mason and in Paris, you see Fauchon which is the same sort of shopping experience, for wealthier people who want special jam or imported escargots imported from a certain region of France. But these grocery stores don’t have a negative influence on the business of the larger chains.

Any final thoughts?

We’re going to see a lot of change in the retail environment. Target is maybe having a harder time here than they imagined. But on the other hand, coming into a country and trying to make your organization fit the Canadian marketplace is something that cannot be done overnight. Overall, Canadians have a wide selection of places where to do their shopping. It’s convenient to be able to go to a Walmart or Costco and buy many different types of products and get things done all at once. So I think this is a good development for customers.

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Noreen Fagan | December 18, 2014

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