Discount grocery stores are expected to outshine their conventional counterparts by 2023, as shoppers seek cheaper groceries to cope with staggering price increases, according to a new report released Monday.
The DBRS Morningstar commentary said rising inflation and interest rates are shaping consumer behavior and increasing sales at low-cost grocery stores.
Consumer efforts to reduce spending are expected to encourage more home cooking, which will benefit the grocery industry as a whole, as people forego restaurant dining to cut costs, he said.
However, discount stores are expected to see the biggest increase in sales, according to the report.
Efforts to curb spending “should favor discount grocery stores over their conventional peers, as consumers seek promotional discounts on individual items, replace name-brand offerings with private-label products, and switch to more affordable offerings within the same category of products,” he said.
Grocery prices rose 11 percent in December compared to a year ago, Statistics Canada reported last week. Overall, grocery prices in Canada increased 9.8% in 2022 compared to the previous year, the fastest pace since 1981.
In the UK, where food inflation has outpaced Canada’s, discount grocery stores have posted strong sales growth.
Discount store Aldi, for example, posted year-over-year sales growth of around 23%, 24% and 27% in October, November and December 2022, respectively, according to the report.
Discount store Lidl reported similar growth over the same period ranging from 22% to 24% year-over-year, it said.
“This is significantly above the sales growth of its traditional competitors, including Tesco, Sainsbury’s and Asda, which all experienced growth of no more than 6.4 per cent over the same months,” the report says.
The expected discount growth in Canada is the opposite of what occurred during the COVID-19 pandemic.
Stay-at-home orders, health and safety concerns, a desire for convenient “one-stop shops,” and the growth of online grocery stores have boosted sales at “market” supermarkets.
For example, the market division of Loblaw Cos. Ltd. posted same-store sales growth of 10, 7 and 9 percent over the last three quarters of 2020, according to the report. By comparison, the company’s discount division posted growth of five, five and seven percent over the same period.
The market’s grocery store strength began to wane as the cost of living began to rise, according to the report.
“While discount grocery store volumes were largely outpaced by conventional stores during the pandemic, given changes in consumer behavior following rising levels of inflation and rising interest rates, we expect the contrary during this continued period of economic hardship,” Moritz Steinbauer, DBRS Morningstar’s vice president of consumer and retail, in a statement.
Sales trends between discount and mainstream stores are expected to gradually return to historic levels as economic conditions stabilize, according to the report.
Still, discounters could see some “structural benefit” if they can retain new customers, he said.
This could “amplify existing long-term growth and market share gains for discount stores,” the report said.
Brett Bundale, The Canadian Press
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