Discount grocers are expected to outsell their regular counterparts in 2023 as shoppers look for cheaper groceries to offset staggering price increases, according to a new report released Monday.
DBRS Morningstar commented that rising inflation and interest rates are shaping consumer behavior and boosting sales at discount grocers.
Consumers’ efforts to cut costs are expected to encourage home cooking, which will benefit the food industry as a whole, as people avoid eating out to cut costs.
However, discount grocers are expected to see the biggest sales growth, the report said.
Efforts to contain costs “should favor discount grocers over their regular counterparts as consumers seek promotional discounts on individual items, substitute branded offerings for private-label products, and downsize to more affordable offerings within the same product category,” he said.
Statistics Canada reported last week that food prices rose 11 per cent in December from a year ago. Overall, food prices in Canada are projected to rise 9.8 percent in 2022 from a year earlier, the fastest pace since 1981.
In the U.K., where food inflation has outpaced Canada, discount grocers reported strong sales growth.
For example, discount grocer Aldi posted year-over-year sales growth of 23%, 24% and 27% in October, November and December 2022, respectively, the report said.
Discount retailer Lidl reported growth over the same period varied from 22 percent to 24 percent year-on-year.
“This is significantly higher than the sales growth of their traditional rivals, including Tesco, Sainsbury’s and Asda, which all did not exceed 6.4 per cent in the same months,” it said.
The expected increase in benefits in Canada is the opposite of what happened during the COVID-19 pandemic.
Stay-at-home orders, health and safety concerns, the desire for convenient one-stop shops and the rise of online grocery have all driven sales at conventional or ‘market’ supermarkets.
For example, Loblaw Cos. Ltd. The market division recorded same-store sales growth of 10 percent, seven percent, and nine percent in the last three quarters of 2020, the report said. In comparison, the company’s discount division reported growth of five percent, five percent and seven percent in the same period.
The power of grocery stores in the market is starting to decline as the cost of living rises, the report said.
“While the volume of discount grocery stores exceeded that of regular stores during the pandemic, given the changes in consumer behavior following the rise in inflation and interest rate increases, we expect the opposite to be the case during the continued economic stress,” said Moritz. Steinbauer, vice president of consumer and retail at DBRS Morningstar, said in a statement.
Sales trends between discount and brick-and-mortar stores are expected to gradually return to historical levels as economic conditions stabilize, the report said.
However, discount grocers could see some “structural benefits” if they can capture new customers, he said.
This could “enhance the discounters’ existing long-term growth and market share,” the report said.
This report by The Canadian Press was first published on January 23, 2023.
Brett Bundale, Canadian Press