RETAIL INTELLIGENCE REPORT

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RETAIL INTELLIGENCE REPORT March 2014 Ontario Retail Scan - Market Analysis Prepared for: MINISTRY OF AGRICULTURE AND FOOD MINISTRY OF RURAL AFFAIRS 1 Stone Road West, Guelph, Ontario N1G 4Y2 Tel: (519) 826-3482 Fax: (519) 826-4333 www.omafra.gov.on.ca

Table of Contents Glossary of Terms:... 3 1.0 Introduction... 6 2.0 Canadian Retail Landscape... 8 2.1 Canadian Market Overview... 8 2.2 Canadian Retail Chain and Box Store Market Overview... 10 2.2.1 Retail Chain Banners... 14 2.2.2 Private Label - Store Brand... 19 2.2.3 National Brands vs. Private Label... 23 2.3 Ontario Independent Retail Overview... 24 2.4 Canadian Retail Landscape Conclusion... 25 3.0 Relevant Consumer Trends... 27 3.1 Internet and Technology... 27 3.2 Lasting Effects of the Recession... 28 3.3 Relevant Consumer Retail Chain and Box Store Purchasing Trends... 31 3.4 Food Trends... 34 3.5 Trend Related Product Opportunities... 35 3.6 Consumer Trends Conclusions... 37 4.0 Retail Strategies and Important Considerations for Suppliers... 38 4.1 Retail Strategies... 38 4.2 Retailers Evaluation of a Successful Product... 41 4.3 Store Organization and Space Allocation... 42 4.4 Retail Strategy Conclusions... 42 5.0 Marketing Considerations for a New Market Entrant... 44 5.1 Warehousing Considerations... 44 5.2 Listing Fees and Programs... 44 5.3 Advertising and Marketing Programs... 49 5.4 Key Areas of Focus for Selling to Retailers... 49 5.5 Marketing Considerations Conclusions... 49 6.0 Next Steps... 50 Appendix 1 - Company Profile... 51 Bibliography... 52 Ontario Retail Intelligence Report Page 2

Glossary of Terms: National Chains Reflect those retail food outlets that have stores in each or most of the Canadian provinces. Typically their head office will reside in one province and in some cases they may have regional merchandising offices. Most national chains are comprised of various different store names and formats to appeal to a wider market. They will also have a number of store formats including corporate owned stores, franchised stores and in some cases affiliated independents. Regional chains Reflect those retail food outlets that are concentrated in one particular area of the country. Typically their needs and stores comprise more regional based items. They typically have a strong presence in one geographical area. Banners Banners represent specific store names, merchandising criteria and store formats that are comprised to make up one retail food company. For example, Loblaw has various store formats to represent their regions and different demographics. (i.e. No Frills low price/limited selection, Zehrs- full service, more rural type stores, very customer centric, Fortinos full service items more skewed to a European based shopper. Store Formats Conventional: Full service store that cater to the middle and upper middle class. They typically have full service departments including but not limited to deli, prepared foods, seafood, meat, pharmacy and natural value. They will have a broader base of product lines and offer a wide selection of products and services. These stores typically use marketing-driven programs and extensive use of advertising flyers to attract and reach customers. Discount Banner: Focused on keeping their costs low to keep retail prices low. They are less focused on marketing programs and advertised flyers to drive their business and more focused on an everyday low pricing (EDLP) mantra to attract their clientele. Their stores tend to be a smaller footprint and often have been recycled from other conventional stores. However, their sales per square foot is very competitive and they carry a limited assortment of products and offer less services to the customer (i.e. bag your own groceries). Ontario Retail Intelligence Report Page 3

Ethnic Retailers: Generally focused on a particular subset of population or demographic group. They know their customers quite well and will cater to their target market. They will carry a wide assortment of imported items and brand names. They will have strong fresh presence and a wide variety of fresh items that appeal to their market. They can be located in urban market areas and their volume/sales can be substantial. With a few exceptions they tend to be independently owned. They can also be part of a larger chain (i.e. T&T Supermarkets and Fortinos, both owned by Loblaw). Independent Chains and Large Independents: Basically similar to the conventional stores and found more in regional markets. They are independently owned and tend to be more flexible in their decision making process. Affiliated Independents: Maintain a buying agreement with typically a larger chain account. They agree to buy the majority of their products from the chain in exchange for the rights to have an advertised flyer produced, using a banner name (i.e. Foodland) and enjoying some of the benefits that come from a larger company. They are free to make purchase decisions at store level; however they do tend to follow the chain program. They are independently owned stores who, in most cases, own their own real estate/building. Wholesale Stores: Typically larger store format stores that will cater to small business owners (foodservice, convenience stores, caterers, etc.) as well as consumers. They will carry very limited lines and tend to be aggressively priced and work on lower margins than typical retail outlets. The wholesale stores also come in various formats from Costco which is very consumer oriented and membership driven to the Wholesale Club stores owned by Loblaw which are more focused on small/medium sized business owners. Global Food Safety Initiative (GFSI) A business driven initiative dedicated to the continuous improvement of food safety management. The system is designed to ensure confidence in the delivery of safe food to consumers worldwide. GFSI provides a guidance document to which all food-safety related schemes can be benchmarked. Safe Quality Food (SQF) A food process and product certification program recognized by the GFSI. Considered a rigorous standard, SQF is known as a highly credible program by retailers and foodservice providers around the world. British Retail Consortium (BRC) Ontario Retail Intelligence Report Page 4

The first food safety, quality and operational criteria standard to be approved by the GFSI. BRC is regarded as the benchmark for best practices in the food industry. Consumer Confidence Index (CCI) An indicator designed to measure the degree of optimism citizens have about the state of the economy. The index takes into account consumer s activities of saving and spending. The CCI is benchmarked to The United States in 1985 (1985=100) as that year was neither a peak nor a trough. Ontario Retail Intelligence Report Page 5

1.0 Introduction The Canadian food retail sector represents approximately $87 billion total sales with Ontario s dense population maintaining the largest percentage (32%) at $27.7 billion 1. Food manufacturing is the country s third largest industry, employing more than 265,600 people 2. Canada s food retail has maintained a majority of Canadian-based ownership compared to other retail sectors (i.e. general merchandise, electronic, appliances) with leading companies including Weston Group (Loblaws), Empire Company (Sobeys) and Metro all being Canadian owned companies 3. This is a significant sector as recognized by the Business and Investment Development Unit (BID) of Ontario Ministry of Agriculture and Food and the Ministry of Rural Affairs (OMAF and MRA), that focuses on investment retention and expansion of activities that support the creation of jobs and investment in food manufacturing. Keeping current and informed regarding the key market access point that retail represents will assist the BID unit to provide knowledge, connections and resources that will influence investment decisions. The authors (refer to Appendix 1) have been hired to support the retail intelligence knowledge base with this report by providing a unique perspective in the food sector which includes experience within the manufacturing of food and a vast industry network developed by supporting new technology, developing new products and introducing brands into the food retail marketplace. In particular, this scan of the food retail sector focuses on specific opportunities and conclusions for Ontario industry development based on current market indicators. The food retail sector has undergone a radical shift in the last decade. Consistent with the sector s competitive history, the recent expansion of supercenters in Ontario has given way to an unprecedented amount of business consolidation which has resulted in what some are calling Grocery Wars. Walmart s store concept has expanded to include a wide range of food offerings while in the past they have relied on shelf stable household items. With their proven distribution network and logistics capabilities, they, and emerging chains like Target Canada, pose an obvious threat to the likes of food retailers such as Loblaw, Sobeys, and Metro. In response to the threat, all three of these grocery giants have made significant business mergers in the past three years. Along with economic pressures, unique channel and merchandizing options, and the retail industry s never ending desire to claim more of the food dollar from foodservice, there have been strategic shifts in the retail sector. National retail chains cannot afford to miss opportunity. In what was once a very niche retail segment, the ethnic food market has provided both challenges and opportunities for food retailers and food manufacturers. 1 Condon, Canadian Grocer 2014 Who s Who, 110-171 2 Food Processing Human Resources Council, About the Food Industry 3 Industry Canada, Canada s Changing Retail Market, Consumer Trends Update 2013 Ontario Retail Intelligence Report Page 6

Growing interest in ethnic food is a reality largely driven by the province s increasing culturally diverse population. Now more than ever, retailers are stocking their shelves with Asian, South Asian and Halal products to expand their market share. This report provides an overview of the Canadian retail market which is relevant given that national retailers, representing almost 95% of retail sales, often demand broad distribution contracts from market players. It explores the major retailers and their various store concepts, also known as banners, which may be corporately or independently operated. Within the stores, consumers will find popular national brands as well as brands unique to a store concept or banner. These are referred to as store brands, or Private Label brands, which are produced by manufacturers for the stores. Private Label brands are very common across Canada and many nationally based retailers focus efforts on managing their Private Label strategies as a way to maintain and increase market share. In addition, it would be remiss to ignore the independent retailers who have carved out a 5% share of retail sales and the impact they have on the retail environment and related opportunities they represent especially for new start up businesses. Ontario is home to many of the head offices of Canada s largest national chains. This location takes advantage of an established logistics infrastructure which is close to the countries largest population base. In this regard, there are some unique opportunities for those interested in business development and investment. That is, consumer trends have influenced product offerings that are more convenient to fit into busy lifestyles; are focused on health and more recently, are responding to the interest in buying locally grown and produced foods. Also, this concentration of head office presence in Ontario means that many of the decision makers are within greater reach. It will be suppliers that are able to develop a synergistic partnership by understanding the retail environment and setting realistic expectations for growth that will help support their success. The realities of the retail market need to be well understood to reduce the risk of failure in this dynamic marketplace. A new market entrant needs to understand the intricacies of the retailer strategies to position their product for the best chances of success. They must also understand logistical considerations such as supply quantities, distribution and warehousing. The related costs of bringing a product to market include carrying or listing fees and marketing support programs which each retailer will require in one form or another. Without awareness of these aspects, misconceptions of bringing a product to market can lead to costly mistakes that can be made as early as the concept stage of product development. Ontario Retail Intelligence Report Page 7

2.0 Canadian Retail Landscape An understanding of the Canadian retail landscape includes an overview of the major retail chains, independently owned retailers and new emerging channels that serve the unique market segment and the related opportunties in Canada. The overview includes: Regional breakdown of retail chains and box stores within Canada and identification of affiliations. Location of each retail chain and box store central offices and regional presence. The number of stores and sales volumes and market share for each retail chain and box store. Identification of the various retail chain banners and Private Label brand positioning. Independent retail market overview. 2.1 Canadian Market Overview Canadian retail grocery sales represented approximately $87 billion in 2012, of which, 90% of these sales were through retail chain outlets which include affiliates that are independently operated and 10% of sales through independent retailers. Food retailing is highly competitive in Canada. Expansion of traditional grocery formats has led to include mass merchandisers, pharmaceutical chains and box stores (warehouse/club stores). Within this competitive environment, opportunities exist for both regional players as well as those interested in bringing products to the Canadian marketplace. A five year historical breakdown of Canadian retail food sales shows that there is a positive and direct correlation between the retail sales and agriculture and food imports that have been maintained (refer to Table 1). Table 1 Canadian Retail Food Sales and Food Imports 4 Year Agriculture and Food Imports (000 C$) Total Retail Food Sales (000 C$) 2012 $23,001 $87,112 2011 $22,590 $85,489 2010 $20,848 $84,450 2009 $20,936 $82,341 2008 $19,950 $79,277 4 Arbula, Global Agriculture Information Network Report, 9 Ontario Retail Intelligence Report Page 8

Over the last seven years more than 70% of the food bought in Canadian was produced domestically 5. The United States represents the source for the majority (57%) of food imports to Canada and nearly the same amount (55%) of domestic food exports go to the United States 6. Regional Markets in Canada Across Canada, there are four distinct food retail markets that are defined as follows: Western Canada: Central Canada: Quebec: Atlantic Canada: British Columbia, Alberta, Saskatchewan and Manitoba Ontario Quebec New Brunswick, Prince Edward Island, Nova Scotia, Newfoundland and Labrador Table 2 identifies the size of each market using the 2013 population data for each food retail market: Table 2 - Canadian Market Population 7 Markets Western Canada Ontario Quebec Atlantic Total Canada Population 10,980,400 13,538,000 8,155,300 2,368,800 35,042,500* *Excluding Yukon and North West Territories Figure 1, Canadian Retail Central Office Map, shows the regional locations of the head offices for each of the major Canadian retail chains and box stores. It is evident that the majority of head offices are clustored within Central Canada and located in Southwestern Ontario. This is strategic in that this region is densely populated and has infrastructure to support manufacturing and transport to reach the various markets. The head offices typically dictate buying decisions however, regional chains, particularly those in the coastal regions, manage their own buying relationships. 5 Ghanem, Z. and P. Cross, 2008, "Food Prices: A boon for producers, a buffer for consumers, "Canadian Economic Observer, Statistics Canada Catalogue no. 11-010-X, Vol. 21, no. 6. 6 Statistics Canada, International Trade Division, 2008, special tabulation. 7 Statistics Canada, Population by Year, by Province and Territory Ontario Retail Intelligence Report Page 9

2.2 Canadian Retail Chain and Box Store Market Overview About a decade ago, the Canadian retail landscape consisted of few traditional national food retailers and has now experienced dramatic shifts in marketshare being captured by other distribution channels. In the past, focus was solely on food distribution for national chains such as Loblaws and Sobeys Inc., with both maintaining store representation throughout each province across the country. Other retail food chains with a significant regional presence include Metro Inc., Coleman s (Eastern Canada), Canada Safeway (owned by Sobeys), Overwaitea, and Federated Co-operatives Ltd. (Western Canada). Diverse format distributors such as Costco and Walmart saw the opportunity to use their logistical capabilities and warehousing capacity to expand their food offerings. The addition of Target Canada to the Canadian market place has put added pressure on an already overstored market. While Target Canada s initial entrance to Canada has not been as impactful as thought; it provides an additional opportunity for Canadian and new food manufactures. It was the entrance of Walmart that has made a major impact on the food retail environment in Canada and they continue to put pressure on other national players as they focus to become the number one food retailer in Canada. They are continuing to invest in their distribution networks and stores to expand their fresh food capabililities 8. Currently they operate 380 stores (227 supercentres with grocery). In response, traditional Canadian retailers such as Loblaw have expanded their discount format No Frills banner into Western and Atlantic Canada and Supercenters into Ontario and Sobeys has introduced the Freshco discount banner to Ontario. Another format, more in line with a wholesale setting is Costco Canada, referred to as a national box store that sells, among many household items, bulk-sized food products. They exist throughout Canada with the exception of the province of Prince Edward Island. Adding to the food retail competition in Canada are unique and untraditional food retail formats. Some of them are national players including established Canadian owned M&M Meat Shops, which has a unique store format that maintains over 400 stores and concentrates on frozen boxed products. Others are established businesses that have distribution logistics and retail outlets and are recognizing the opportunity that grocery retail represents. For example, Shoppers Drug Mart (now owned by Loblaws), was traditionally a pharmacy with a health and beauty focus that now actively promotes their food products. 8 Shaw, Walmart Stores to Invest $500-million in Canada, Create 7,500 Jobs Ontario Retail Intelligence Report Page 10

As the population has become more ethnically and culturally diverse, there is demand to fulfill a consumer need for foods from around the world. Stores which started out as community and regionally specific independently owned grocery stores have grown and caught the attention of retailers that have mainly focused on traditional food offerings. The emergence and sophistication of larger ethnic grocers has also brought a new dynamic to the market as new Canadians seek out foods unique to them and existing Canadians expand their shopping horizons. That is, these stores are not only frequented by specific ethnic groups. Many Canadians are interested in exploring shopping and eating in these stores, further expanding the market opportunity. Ontario Retail Intelligence Report Page 11

Figure 1 - Canadian Retail Central Office Map Ontario Retail Intelligence Report 12.

Table 3 identifies the number of retail stores by region, total Canadian sales and the related market share for each of the major retail chains and big box stores in Canada. Table 3 Canadian Retail and Big Box Store Landscape 9 Retailer Ontario Stores Quebec Stores Western Stores Atlantic Stores Total Stores Canadian Sales Market Share Loblaw Companies Ltd. 459 232 235 121 1047 $33,190,000,000 31.02% Sobeys Inc.* 327 605 414 426 1772 $19,140,000,000 17.89% Metro Inc. 264 632 0 0 896 $12,020,000,000 11.23% Costco Canada** 26 19 34 6 85 $8,069,000,000 7.54% Walmart Canada Corp** 147 64 123 45 379 $6,790,000,000 6.35% Canada Safeway*** 6 0 217 0 223 $5,433,000,000 5.08% Co-ops 0 0 294 108 402 $3,350,000,000 3.13% Overwaitea Food Group Alimentation Couche- Tard 0 0 129 0 129 $2,740,000,000 2.56% 305 665 36 0 1006 $1,249,000,000 1.17% 0 0 121 0 121 $775,000,000 0.72% Shoppers Drug Mart** 632 174 381 112 1299 $651,000,000 0.61% H.Y. Louie Co. Ltd 0 0 37 0 37 $607,000,000 0.57% Total Canadian Retail Outlets 2166 2391 2021 818 7396 $94,014,000,000 87.86% Including Independent anners Food sales only Now part of Sobeys Inc. Including northern territories Note: The sum of the Canadian Sales column above exceeds the industry s total sales referred to in the introduction. This is because the widely accepted $87 billion figure only considers traditional food stores. If sales through non-traditional food stores are considered, total sales increase by $20 billion (with contributions from Walmart, Costco, drugstores, and ethnic stores). The above market shares are based on this all encompassing sales figure of approximately $107 billion. 9 Condon, Canadian Grocer 2014 Who s Who, 99 Ontario Retail Intelligence Report 13

2.2.1 Retail Chain Banners The largest food retailers in Ontario are also predominantly national distributors, which gives them additional negotiating power when dealing with food suppliers 10. Proximity and consistency (of store layout and product), are what keep shoppers coming back. However, because large retailers spread themselves across a variety of segments, consumers have access to multiple chains in their communities that offer a range of pricing options which makes it easy to switch from one chain to another. As a result, grocers find themselves in a highly competitive environment. This desire to diversify to appeal to multiple markets has led to the representation of various stores brands or banners under one umbrella of owner. This is often accomplished through the purchase of existing stores that consumers identify with as having a value or discount positioning or conversely, a premium shopping experience, which has given way to a considerable amount of industry consolidation. Metro Inc. s acquisition of Marche Adonis is the most recent in a string of business mergers that have taken place in the past three years; Loblaws purchase of Shoppers Drug Mart and Empire Co s (Sobeys) purchase of Safeway being the other major two. Such consolidation has resulted in an astonishing growth of square footage in Ontario s grocery retail sector. According to CI C World Markets, this growth in square footage will eat up most of the sales growth for 2014 11. Retailers urgency to expand is evident through such sacrifice of sales growth and is indicative of their cutthroat competitiveness. Despite major changes from a corporate perspective, it doesn t seem as though consumers will notice many differences at store level. All aforementioned retailers have maintained that mergers came about organically and will require very minor, if any, changes in management or image. This is in keeping with their attempt to distinguish their banners to productively drive sales and avoid cannibalization of sales. That is, most have a mainline store format as well as a discount banner and some maintain a premium banner that is tailored to upscale shoppers. New banners that target growing market segments (i.e. ethnic) are becoming more popular as shown with Loblaws acquisition of T&T Supermarkets which has an Asian food focus. The following provides an overview of the larger Canadian food retail chains and the market positioning of their subsidiary banners and tiers of their Private Label brands. 10 Roukhkian, The Canadian Food Retail Sector: Opportunities for Swiss usinesses, 17 11 Mayer, Loblaw s Shoppers Drug Mart id Escalates Grocery Wars Ontario Retail Intelligence Report 14

Loblaws Table 4 identifies the different retail banners operated by Loblaws and their corporate positioning: Table 4 Loblaws Banners and Market Positioning 12 *Not including Shoppers Drug Mart Loblaw is the largest food distributor in Canada, operating 22 different banners across the country. These banners include Loblaws, No Frills, Zehrs, Fortinos, and Wholesale Club, among others. Spanning all market segments, Loblaw s banners have been established in a variety of store formats. In this report, stores have been categorized as conventional, discount, wholesale and ethnic (see Table 4). To defend against the aggressive expansion of American superstores, Loblaw has focused on increasing the number of its discount stores as well as diversifying its store offerings 13. Diversification for Loblaws has included expanding into home, fashion and health items most prominently seen in their Real Canadian Super Stores. In an attempt to take advantage of what they consider to be a growing consumer segment, Loblaws acquired Shoppers Drug Mart in September 2013. While Shoppers Drug Marts annual $1 billion in food sales is an obvious benefit of the acquisition, Loblaw s is set to gain most from Shoppers Drug Mart s established reputation in their health products and services business. The purchase will allow the company to grow its stake in health, wellness and nutrition 14. In similar efforts of diversification, Loblaws has also taken steps to expand its Joe Fresh clothing and women s cosmetic line into 12 Loblaw Companies Limited, anners and rands 13 Roukhkian, The Canadian Food Retail Sector: Opportunities for Swiss usinesses, 18 14 Loblaw Companies Limited, Loblaw Welcomes Shoppers Drug Mart Shareholders Approval of Acquisition Ontario Retail Intelligence Report 15

the United States, announcing a relationship with J.C. Penney Company Inc. in 2012. The line was introduced in 700 J.C. Penney stores in March 2013. In 2012, Loblaw s multicultural merchandising team expanded their distribution of Asian, South Asian and Caribbean products in stores nationally. This is beyond their investment of their purchase of T&T Supermarket stores. The approach was to work closely with select Loblaw s stores in the Greater Toronto Area to enhance their ethnic produce offerings, adding items such as Asian greens, okra, spice mangos, yellow yams, breadfruit, June plums, and cut Jamaican pumpkin 15. As early as 2013, the retailer began to offer 33 products in select Loblaw banner stores nationally that were offered mainly in their T&T Supermarket stores. Over the past five years Loblaws has experienced steady growth. Their better-than-expected results in the second quarter of 2013 left them with a good foundation for the purchase of Shoppers Drug Mart. That being said, the coming years may prove difficult, as US giants Walmart and Target Canada continue to expand 16. Metro Inc. Over the past five years, Metro has worked to develop a comprehensive marketing segmentation strategy, targeting both traditional supermarket and discount segments. With banners such as Metro, Super C, and Food Basics, Metro has established a powerful presence in Quebec and Ontario (Table 5). Table 5 Metro Banners and Positioning 15 Loblaw Companies Limited, 2012 Annual Report, 31 16 Strauss, Loblaw s Timely Acquisition Amid Rivalries Ontario Retail Intelligence Report 16

In 2013, plans were released to reorganize Metro s Ontario store network in an effort to reduce operating costs. This decision will result in the closure of numerous Metro stores or conversion to Food Basics. These adjustments are an indicator of the ever-increasing level of competition in grocery retail, the success of discount banners and the lingering effects of the economic recession. A notable change in recent years has been Metro s acquisition of Marche Adonis, a well established ethnic food retailer in Montreal region specializing in fresh Mediterranean products and prepared meals. In purchasing 55% of the Adonis operation, Metro gained six stores: five in Quebec and one in Ontario, as well as distributor Phoenicia Products. Metro s Chief Executive Officer, Mr. Eric La Fleche, has stressed his intentions of keeping the stores autonomous in structure. The purchase was treated as a partnership: management and employees of Adonis having not experienced any change thus far. Sobeys Table 6 identifies some of the different store banners operated by Sobeys Inc. and their corporate positioning: Table 6 Sobeys Inc. Banners and Positioning 17 Sobeys owns over 1500 stores and operates under 8 banners (see above). Store formats are categorized similar to that of major competitors (conventional, superstore, discount, etc.) and are successful in covering close to all market segments. Sobeys professes a focus on providing fresh food (regardless of price point) and a commitment of customizing store size and format to each location. 17 Sobeys Corporate, Sobeys: At a Glance Ontario Retail Intelligence Report 17

November of 2013 saw the completion of Sobeys $5.8 billion purchase of Canada Safeway. The acquisition was funded through a combination of an equity issue, debt and asset sales. Empire Ltd. (owner of Sobeys) has said the deal to buy the Western Canadian chain will provide a 25% earnings boost once the synergies from melding the businesses are realized 18. In an effort to increase their appeal to health conscious consumers, Sobeys has announced a partnership with world-renowned chef and campaigner Jamie Oliver. The company is beginning to place greater emphasis on the importance of healthy food solutions a growing market in Canada. Research confirms that 73% of Canadians say they would like to eat better than they currently do. With the help of Oliver, Sobeys plans to evolve its store experience and product assortment over the next few years 19. Along the same lines, a focus on health and socially-conscious consumers was made clear through the opening of their first Sobeys Extra store in Burlington, Ontario. The store is part of Sobeys Food for All initiative which works to offer a wide range of fresh, healthy and wholesome, sustainable and time-saving products. Sobeys Extra offers consumers an enhanced Sobeys shopping experience with expanded departments, products, experts and services (i.e. in-store chef, wellbeing counsellor, cheese ambassador) and extra savings 20. Walmart Compared to the existing chains, Walmart is relatively new to the grocery retail environment in Canada but has experienced rapid growth in the market since 2008. Much of their success has been achieved through considerable expansion of fresh foods in conjunction with the values of Walmart s core strategy 21 : Save Money. Live Better. Walmart has had a significant impact on food retail in Canada, causing market leader Loblaw to expand out of their comfortable food position to encompass home, fashion and beauty products as shown in their Real Canadian Super Stores. Throughout, Loblaws has maintained a strong Private Label presence, yet Walmart continues to utilize their considerable buying power to bring everyday low prices to consumers through national brands as well as their Private Label offerings. According to 2013 statistics, Walmart Canada s food department may be one of its few successes. As general store profit has decreased since 2012, grocery profits have shown growth 22. Walmart s hedge against Target Canada also seems to be working as they have gained notable market share in food and consumables since Target Canada s arrival in 2013. 18 Shaw, Sobeys Completes $5.8-billion Purchase of Safeway 19 Empire Company Limited, etter Food for All 20 Empire Company Limited, 2013 Annual Report, 29 21 Canadian Council of Grocery Distributors, Ontario Conference Presentation 22 Shaw, Walmart Canada Stung as Retail Competition Heat Up Ontario Retail Intelligence Report 18

The most significant thing Walmart s expansion in Canada brings is competition. In one of Canada s most ambitious industries, Walmart s involvement in food applies sales pressure to national retailers (such as the aforementioned Loblaw). Walmart and Target Canada have put longstanding grocery giants in a situation where they have to convince their customers not to switch. 2.2.2 Private Label - Store Brand Private Label chains request manufacturers to produce products to their specifications (and pricing strategy) to compete with national brand sales. This allows the retailer to capture larger sales margins. In some cases, it is the national brand manufacturer that produces Private Label products. This grants chains negotiating power and allows them to have their products retailed along with the leading National brands and build consumer loyalty through their use of proprietary brands and programs. All major retail banners and large independents rely on the use of Private Label products to support their market strategy. Typically each retailer will dedicate a separate team responsible for the procurement and development of Private Label products. Most retailer Private Label programs will support a premium as well as a discount product entry; however it is not uncommon to see retailers use distinct or unique Private Label brands for ethnic and various departments within the store, Loblaws being the most aggressive. Examples of this include ethnic brand Suraj, health and beauty brand Exact, deli brand Ziggy s, and bakery and produce brand Farmers Market. Private Label programs and brands allow the retailer to protect their margin, create price image, provide unique products and brands and provide a marketing vehicle in which to actively promote their stores and services. The retail Private Label landscape is extremely well developed in the Canadian marketplace and there is every indication that the reliance and focus on Private Label growth strategies will continue. As a supplier pursuing a Private Label strategy, the tactic provides opportunities such as warehouse listings, net pricing for the most part (i.e. no over and above programs such as volume rebates, ad fees and marketing funds) and a dedicated focus to the brand. However, the process at times can be quite rigorous, time consuming and costly from a development perspective depending on the item. Retailer requirements can also be quite demanding from a production, food safety and cost perspective. There is a significant interest in Private Label brands that retailers can benefit from. A 2010 consumer report offers the following statistics on Private Label (PL) consumer trends 23 : More than 80% of Canadian grocery shoppers say they purchase PL brands. 49% of Canadian shoppers purchase PL brands frequently and 34% say they sometimes purchase them. 23 Grier, The Rise and Fall and Rise Again of Private Label in Canada Ontario Retail Intelligence Report 19

58% of Canadians who purchase PL products frequently say they are less expensive and offer their families greater value. 48% of frequent PL buyers said they feel the products are comparable, or better, in quality than national brand names. PL brands are most popular in Quebec and Ontario, with 54% and 51% respectively saying they purchase them frequently. Loblaw Brands Table 7 identifies some of the store brands offered by Loblaws and the related marketing focus: Table 7 Loblaws Inc. Private Label Brands Brand President s Choice no name Joe Fresh PC Blue Menu Rooster Suraj Sufra Marketing Position Over 1,800 Private Label products offering innovative tastes, great quality at a great value. Discount Private Label brand offering cost savings. Affordable apparel and accessories, included in this line are Joe Fresh Style, Joe Fresh Bath and Joe Fresh Beauty. Private Label brand with a healthy and lifestyle focus. Proprietary Asian-focused brand. Full range of South Asian and ethnic grocery products. Control brand line of Halal and South Asian entrée products. Loblaws remains innovative with their Private Label offerings. Products have unique packaging and formulation to distinguish PC (President s Choice), a higher end brand, from no name, a less costly generic option, and related products at retail. Packages feature distinct backgrounds to separate the two segments of Private Label: PC products carry product shots while no name has a plain yellow box without graphics. Loblaws also continues to progress its T&T Supermarket Inc. Private Label pilot in a selection of the company s mainstream stores. Ontario Retail Intelligence Report 20

Metro Brands Table 8 identifies the store brands offered by Metro Inc. and their marketing focus: Table 8 Metro Inc. Private Label Brands Brand Irresistibles Irresistibles Life Smart Irresistibles BIO Organic Irresistibles Gluten Free Irresistibles Market Fresh Selection Selection Eco Marketing Position Offer consumers high-quality products, as well as exclusive items that are in line with market trends and consumer preferences. Products designed for a balanced lifestyle that meet many of the criteria for a healthy diet. Industry certified organic products that are produced using green agricultural practices. Products with an increased awareness of common dietary issues and food allergies. Fresh chicken products. Consists of over 2,000 products that are comparable to, but cost less than national brands. Affordable green products. Metro s Private Label brands work to meet a variety of consumer needs, price points, and trends. Their two main tiers: Selection, which is considered their discount position, and Irresistibles, which is considered their premium position. These are typical examples of how large Canadian retailers approach Private Label. While still cheaper, Irresistibles shows a smaller differential from national brands. Ontario Retail Intelligence Report 21

Sobeys Brands Table 9 provides a summary of the store brands offered by Sobeys and the related marketing focus: Table 9 Sobeys Inc. Brands Brand Compliments Gourmet Minute S!gnal Marketing Position Signature Private Label offering everything from healthier choices to premium quality food experiences. Ready-to-eat meal ideas that are inspired by home-cooking and freshly prepared daily in store. Product line of everyday low price basics. The most expansive of Sobeys Private Label is their Compliments brand. The brand currently exists through five different facets: Compliments (original), Sensations, Compliments Green Care, Compliments Organic, and Compliments Balance which has nutritional focus. The latter three are obvious indicators of Sobeys efforts to capitalize on recent environmental and health concern trends. Sobeys has focused efforts to increase their home meal replacement items with ready-to-eat items within their hot and cold deli department, offering international flavours including Asian, Indian and Italian foods as well as a host of prepared salads. This line is knows as Gourmet Minute. Sobeys has continued to offer Private Label programs that focus on upscale products with their Compliments line as well as their discount line S!gnal. Ontario Retail Intelligence Report 22

Walmart Walmart Canada offers a variety of Private Label brands, three of which are relevant to their food and health sales. Consistent with other store items, products under these brands largely consist of low priced alternatives (see Table 10). Table 10 Walmart Brands Brand Sams Choice Great Value Equate Marketing Position Premium retail brand, positioned to compete with national brands. Private Label offering national brand quality at a lower price. Private brand used for consumable pharmacy and health and beauty items. Walmart was accused of having an uninspired Private Label effort upon their entry into the Canadian grocery market 24. However, as Walmart grows their food business (which is inevitable given their expansion of stores into Canada) their presence in Private Label will increase. 2.2.3 National Brands vs. Private Label All of the national retail chains and some regional based players continue to invest in their Private Label formats. National retailers consider their ability to offer Private Label products as a competitive advantage to other retailers. This strategy allows them to differentiate and expand into unique trends very efficiently while maintaining product control. Private Label sales represented 18.5% of 2009 retail grocery sales in Ontario and have seen significant growth in recent years. However, brands are a significant motivator for consumers and for many retailers considered essential in the product mix to maintain market share. 24 Grier, The Rise and Fall and Rise Again of Private Label in Canada Ontario Retail Intelligence Report 23

The following Graph 1 identifies the breakdown of overall Private Label Sales in Ontario vs. National Brands in 2009 25 : Graph 1 Private Label vs. National Brand Sales, Ontario 2009 Traditionally, Private Label has offered manufacturers with an ability to increase volumes and still protect their brand strategy relatively speaking. However, the pressure to bring value at even lower margins is forcing some manufacturers to reevaluate their ability to profitably do both. 2.3 Ontario Independent Retail Overview Ontario s independent retailers have greater flexibility with regards to buying decisions, allowing them to react to new opportunities as they tend to have less head office levels that may delay approvals. They are often a good testing ground for new market entrants to learn the logistics of the retail sales environment. However, since they do not represent large volume commitments, it may be challenging for some manufacturers to offer competitive pricing without economies of scale. Striving for a market niche, independents and smaller grocers focus on knowing their neighbourhood and serving immigrant population bases, core urban and rural shoppers as the case may be. This often translates into enhanced product and service selection, increased choice and competitive pricing benefiting the consumer. In order to remain competitive, the independents are often linked to larger logistics companies that may allow for increased volumes. In some cases, they offer variety among a product category by supporting national and unique regional brands rather than Private Label positioning. 25 The Neilson Company, Market Track, Ontario Ontario Retail Intelligence Report 24

Differentiation has always been a strong competitive advantage for independents however the competition among the larger chains has required them to rethink past policies. For example, larger chains are realigning their procurement requirements to take advantage of local and regional trends and want to be the first in the market to carry innovative products. Many of the national chains now carry niche sections such as organic, ethnic and locally grown products to appeal to consumer demand. It is not certain as to the profitability of these sections but justification seems to stem from social marketing aspects of supporting regional products, something that independents have always done. The rapid expansion and growth of ethnic independents with demographic specific variety offerings, full service, competitive pricing, wide product assortment and larger, brighter and updated stores has had a significant impact on traditional retail chain stores sales as well as merchandising strategies. Most are found in larger urban areas and generate significant sales dollars and appeal to new Canadians. They will have their own buying teams and many are represented with multi unit locations. Major retail chains have reacted with Loblaw purchasing T&T Supermarkets and Metro purchasing Adonis. 2.4 Canadian Retail Landscape Conclusion The Ontario food retail market offers the most diverse format of any province providing opportunities for an array of relationships with retail partners with congruent strategies. Of course, within any opportunity careful consideration must be given in the initial stages of product development including supply requirements, product formulation, pricing and packaging and participation in Private Label opportunities. For example, supplying Loblaws will require a high level of sophistication and forethought with regards to a Private Label. This retailer option may not be the correct one for a strong brand marketer that may not have the volumes and program monies to establish a strong launch at Loblaws. Loblaws and Sobeys are two of the most established nationally based grocery retailers in Canada with Loblaw most recently purchasing the Shoppers Drug Mart chain and continuing to expand beyond food retail with their successful Joe Fresh line to compete with Walmart. Sobeys recent acquisition of Safeway in Western Canada, its prime asset base, plus a continued focus on the Fresh Market concept provide a strong market position. Metro Ontario is focused on continuing to develop their Food Basics chain converting older Metro assets and those in ethnic areas to Food Basics during the later part of 2013 and into 2014. Indications are that additional Adonis locations are planned for 2014. Metro stores have put a concerted effort into enhancing their perishable food lines and running a strong operational program to remain competitive. Ontario Retail Intelligence Report 25

Walmart and Costco, considered as big box stores, have national presence with Walmart experiencing the largest growth in the retail grocery sector in the recent years largely a result of new square footage. Walmart plans to continue their aggressive growth strategies with a target to become the retail grocery market leader. Other major chains include: o M&M Meat Shops with over 450 stores across Canada. o Western based Canada Safeway with 213 full grocery stores (now acquired by Sobeys). o Overwaitea Food Group with more than 120 stores under the Save-On-Foods, Overwaitea Foods, Urban Fare, Cooper's Foods, PriceSmart Foods and Bulkley Valley Wholesale banners. Regional chains include: o Eastern Canada s regional chain Colemans (Colemans Group of Companies) has 12 food stores. o Ontario has Longo's with 27 stores in the Greater Toronto Area and Highland Farms flanking Toronto with a location in Mississauga (west) and Scarborough (east) have four locations in the greater Toronto area. Some non-traditional retail grocery chains such as Shoppers Drug Mart, recently acquired by Loblaw, continues to expand their presence in this market in an attempt to regain sales lost to grocery chains that have expanded into the health and beauty market. Target Canada s recent entry into the Canadian marketplace puts added pressure on existing food retailers from both a sales and pricing perspective. Target Canada has shown a willingness to work with Canadian manufactures and places an emphasis on its Private Label products. Ethnic independents such as Oceans, Oriental Foods and others continue to grow not only within the demographic bases they serve, but with all Canadians. Many have expanded their store sizes and added clean bright multi-unit, full service stores carrying a wide assortment of products. Their volumes are significant and they represent a threat to the existing traditional retailers particularly in densely populated ethnically skewed urban markets. The following section explores in detail the impact of market and consumer trends, strategic focus and requirements for launching a product successfully in the retail environment. Ontario Retail Intelligence Report 26

3.0 Relevant Consumer Trends The environment in which consumers make purchasing decisions is changing faster than ever before. In the wake of significant technological advances, demographic shifts, and weak economic conditions, the food retail sector has readjusted its focus. An increasing number of label conscious consumers have created a marketplace steeped in health-centric products. eyond that, Ontario s desire for locally produced and inspired food has sky rocketed, presenting itself as one of the most compelling trends of late. 3.1 Internet and Technology Following booms in wireless technology, the internet has become even more influential affecting nearly every sector of retail. Not only are consumers flocking to their computers and smart devices to purchase, but also to review, learn about and share products. In the past, retailers looked to loyalty programs to track purchases and reward customers. The use of smart phones is allowing them to make much more personalized recommendations to consumers shopping their stores. This includes tracking their purchases and sending them coupons for products that are in line with their buying behaviour. Most recently Loblaw has introduced this to consumers and is dedicating much effort towards marketing this ability. This is a new opportunity that new market entrants and long term market players can tap into to reach their target audience. Although these programs have resulted in significant changes to the landscape, more major changes are anticipated to come by way of mobile devices. Shopping with mobile devices in store is projected to change the way consumers purchase food. As more stores adapt to Wi-Fi and the use of smart sensors around the store, shoppers will be able to use location based services which allow them to check product availability, locate products, and identify alternatives. Tomorrow s technologically savvy consumers will require all retailers to address the new ways they shop and how they expect to be served 26. There is particular excitement about some of the innovative technologies retailers, technologists and researchers are developing that seem truly ahead of our time. Three of the more interesting projects include 27 : Peapod vi u l i ic g i i. Lining the walls with product images and QR codes, Peapod allowed customers to, theoretically, order items while they were waiting for their train. Lapka l vi i. The device and app allows shoppers to test the organicity of food while still in store. 26 Fernando, Changing Food Retail Landscape in Canada 27 Gould, 2013 Food Trends Favor the Tech Savvy Consumer Ontario Retail Intelligence Report 27

G i c iv c, & fish counter. Designed by interaction design students, the counter provides customers with detailed product, origin and recipe information. 3.2 Lasting Effects of the Recession Concern regarding consumer spending remains at the forefront of retailers minds. This came to light in Neilson s 2013 Canadian Consumer Confidence Report, where an overview of consumer spending found Canada s confidence level at a score of 97. Though higher than the US and Europe, Canada has gone down five index points since last year. Food prices made Canadian s top five list of concerns regarding spending. Consumer debt is high and they are looking to reduce household spending overall 28. This is reflective in the strength and success of the discount food retailers segment which has realized a 9% growth and owns almost 40% of the market share compared to conventional retail, at just over 60% 29. Discount chains like Target Canada see an opportunity to expand their presence in Canada. Pressure from these chains has increased competition and kept retailers focused on prices. Through both Neilson s and DC 2013 consumer reports, the following lingering recessionary statistics were identified: Seven out of ten Canadian consumers have reduced their spending in some fashion since the 2008 recession. Two in five consumers now shop around more than they did before the recession. Only one in ten Canadians believe that next year will bring positive changes to the economy such a low consumer confidence has a profound impact on purchasing habits 30. The 35 to 54 generation has changed its habits the most which coincides with the fact that this age groups average annual income has been stagnant since 2008. 42% of Canadians are unable to save due to debt. Looking on the bright side: Canada is leading the consumer confidence recovery within North America. Despite a drop in confidence from last year, Canadians remain among the most optimistic: o 46% - believe job prospects are good. o 53% - believe the country is no longer in an economic recession. o 41% - agree it is a good time to buy 31. Grocery categories are leading industry growth. Declining retail prices may result in an initial volume increase, but not enough to offset price decline. In the US, price increases have dropped sharply now deflationary. 28 Nielsen Market Track and Homescan Q1 2012 CPG Review 29 Homescan Grocery Watch, Canada National All Channels 52 Weeks to March 31, 2012 Grocery Composite 30 Consumer Trends BDC Report, 2013 31 Neilson Report, 2013 Ontario Retail Intelligence Report 28

In 2010, the average Canadian spent 11.9% of personal disposable income on food. In 2012, this translated to $7,739 of household spending on food, $5,572 on food from stores, and the remainder on food from restaurants 32. Ontario In Ontario, consumers are reacting to current economic and market conditions in a variety of ways: 56% Value Seekers o Sale seekers - 36% o Brand disloyal - 11% o Promotion sensitive - 8% 34% Business as Usual o Recession indifferent - 22% o Recession insensitive - 12% 9% Panic Stricken o Beyond price sensitive, these consumers will do whatever it takes to save money and cut expenses. Over the past two years in Ontario, the percent of retail sales sold with a price cut has increased. The economic climate has driven fundamental shifts in consumer shopping with 44% of Ontario consumers saying they will Only buy when on sale to save money. Feature pricing is driving the retail dollar and unit sales but at higher promoted prices. Coupon usage has been in the low single digits but there is market increases in the number of coupons Ontarians are using (38% change since 2007 2009). National brands and Private Label brands are gaining at the expense of secondary brands. Discount retailers are seeing increases and consumers are making them a part of their shopping behaviour in order to help them spend less. No doubt retailers will continue to be influenced by the impact of the recession and the slower moving US market will keep value pricing and product features at the forefront of retailers strategies over the next year. As a result, a new market entrant will need to be forward thinking and understand fundamental consumer needs. They will have to bring a strong brand image that is truly unique (i.e. not a me too brand) as consumers are relying on brands that consistently deliver. As well, being value conscious and bringing a pricing structure that is strategically positioned with strong initial promotion for long term growth will be something that consumers and retailers alike will demand. 32 Statistics Canada, Survey of Household Spending Ontario Retail Intelligence Report 29

Despite the overwhelming number of price conscious shoppers, Ontario has a percentage of its population keeping the premium sector alive. Young, high income consumers have sustained retailers like Whole Foods and Longo s in many cases, even expanding them. Consumers like these are focused on quality, service and selection, and are willing to pay for it. The retailers that are truly suffering from the latent effects of the recession are those stuck in the middle. Conventional stores are being faced with decisions to either discount their product or differentiate themselves through better quality and services 33. Effect of the Economy (Searching for Value) During poor economic periods consumers tend to scrutinize their purchases leading to a decrease in sales for luxury items and an increase in valued priced purchasing. According to the Nielsen Company 31% of retail sales in Ontario for the year ending October 2009 were sold on promotion, an increase from 21% in 2007 34. 52% of Canadians identified they spent less on consumer packaged goods (CPG) in 2009 35. Ontario CPG sales for 2009 were valued at $23.4 billion, an increase of 5% from the previous year however, this was a direct result of inflation as unit sales dropped 1% over this same period 36. Ontario consumers increased their use of coupons by 38% in 2009 37. Discount retailers represent 48.5% market share of retail stores in Ontario for 2009, an increase of 10% over the previous year. The effect of the demand for value pricing has been seen throughout the store as shown in Graph 2 38 which identifies the increase in temporary price reductions by category: 33 Stefanac, Canadian Consumers Still Fell Like It s a Recession 34 Allison, Carman, The New R Word 35 The Neilson Company, Nielsen Global Online Consumer Confidence and Opinion Survey 36 The Neilson Company, Nielsen Market Track 37 The Neilson Company, Homescan Market Summary, Ontario 38 The Neilson Company, Nielsen Market Track, Ontario Grocery Ontario Retail Intelligence Report 30

Graph 2: Ontario Retail Sales by Category, 2009 3.3 Relevant Consumer Retail Chain and Box Store Purchasing Trends Further research of consumer buying trends has identified the following drivers are the most relevant to the Ontario retail market: Convenience Due to the increased time demands for people in today s society, Canadian retailers are seeing an increase in the number of ready-made meals available to consumers. Those showcased at Canadian trade shows included premium dishes with high quality ingredients, ethnic meals (Chinese, Indian and Thai dishes) and a number of functional and better-for-you alternatives. Also, growth in quick one-dish meal kits such as stir-fries and stew is expected to continue as there are more single person households. Similarly, easy work lunches gain popularity. The majority of these dishes are sold in oven or microwave packages ready for consumption after 60 seconds to 10 minutes of heating 39. Working mothers were likely the most time-starved people and often relied on higher priced, convenience products to enable their busy lifestyles, allowing them to keep up with the day-today demands of an active household and family 40. 39 Arbula, Global Agriculture Information Network Report, 11 40 Reid, Emerging Consumer Demand for Premium Foods & Beverages in Canada Ontario Retail Intelligence Report 31