4. Consumers shopping more in discount banners
During the first 10 weeks of 2025 we will cover one of our trends each week. We want to explore them in more detail and give you some options, understand the impact, provide ideas and strategies you can implement in your business. At SKUFood, our perspective is you need to understand consumers, customers and the marketplace if you want to be successful in the food and beverage industry. Our annual trends are created based on exposure to both key stakeholders and the market. When we are doing our job, we support you to get your products on the shelf and into the shopping cart.
Retailers are investing in more square footage devoted to discount formats. There are a few reasons for this change.
1. Consumers want lower prices and this is the best vehicle traditional retailers have
2. A stronger presence might keep a foreign retailer like Aldi or Lidl out
3. These are the cheapest stores to build and operate.
Just this week Metro announced their results and indicated they will be opening more discount stores in 2025. Loblaw have also said they are focused on discount, which is where people want to shop. Sobeys continue to open FreshCo stores, but they are more positive about people returning to conventional formats like Sobeys, Safeway, Thrifty Foods, Farm Boy and Longo’s. Perhaps they have to say that because they have a lot invested there.
This will have a significant impact on suppliers. Great discount stores are a unique retail environment. Discount retailers have different priorities and the best suppliers figure out how to support their positioning. Successful discount stores are not a grocery stores with different colours and less service. They are driven by a commitment to reduce costs and offer the lowest price. Do not assume your products will make it to the shelf in discount. If your items are there, you need to have a different mindset too.
What is a discount store?
Discount stores are focused on reducing costs in every part of the operation. This translates into lower margins, which results in better prices for consumers. Often, people assume the retail price has a direct correlation to the price the retailer pays for a product. Obviously, it has a huge impact but the required margin to operate the store and the rest of the business can be the difference between 4.99 and 5.29.
A real discount format has a commitment to remove costs from the moment they interact with a product to when the consumer puts it in their own shopping bag to leave the store.
Discount banners want to buy in full pallet quantities and make the most efficient use of freight. They are looking for the best configuration for products to arrive at the store and how they can merchandise the product with the least amount of labour. This can be display ready pallets or case pack merchandising.
Check out the case pack merchandising and display ready pallets in this Lidl store in Italy
If you plan to sell into these formats make sure you understand the merchandising and how you deliver what they need.
Great discount stores have very good quality fresh. A common misconception is the quality can be lower. This is not true. If they have substandard fresh, they are a poor retailer and not a true discounter. A discounter offers better value in fresh. This is achieved through lower prices on the items their shoppers are looking for. They accomplish this by having fewer items in the department. They carry the high-volume items and avoid the slow selling, high waste products. The margin they need to deliver is lower because they do not have to cover the cost of throwing out star fruit or cherries when they are expensive. Discount stores also look for different sizes they can offer at a better price. Slightly smaller apples than the conventional stores are a great example. Departments have much lower labour costs which also impact margin required. They just do not have the people on the schedule to work on products. They really just want to touch it once when they put it on the shelf or perhaps not at all if it is case pack merchandised.
The philosophy of fewer items is present throughout the store. Costs are lower to manage, distribute and merchandise 7,000 SKUS than 20,000 SKUS. Fewer price changes, less inventory to pay for, inventory that turns faster, less labour to fil the shelves all translate into a lower margin required. A discount format strives to remove enough costs to have a margin 5% less than conventional formats.
If we go back to our $4.99 vs $5.29 retail example the difference in the retailer’s margin is +/- 5%.
If the cost of goods is $3.50 the $4.99 retail price delivers a 30% margin for the discount store.
4.99-3.50/4.99=30%
Most conventional stores need to deliver at least 34% which is why they would have to be $5.29 with a $3.50 cost.
5.29-3.50/5.29=34%
They are both paying the same price for the product. It is the cost of operating the store that makes the difference in the retail. If the discount store can buy a bit cheaper because they only take full pallet quantities in full loads from supplier once per week, they have an even better advantage. The logistics saving is worth .10 per unit. Now they can deliver the same margin and sell for $4.89.
4.89-3.40/4.89=30%
That is a win in the discount world.
What does this mean for suppliers
If you want to sell into the discount formats you need a different mindset. How do you support this positioning and what will you do to fit the discount model?
Most retailers have separate team for merchandising and operations in discount. You will need to be prepared to sell into them with your discount mindset.
The listing base (items carried in the store) is significantly smaller. If you are the #3 or #4 brand in a category you will probably not get to the shelf. You will have to work even harder to offer a size or case pack format that appeals to their merchandising team.
The stores are smaller with less space for refrigerated and frozen items. Visit these stores to understand what they do and do not carry. If you do not see an opportunity for your products, put yourself in the position of the category manager. Why do they need you? How do you deliver value to the discount consumer?
Value will be the priority over innovation, sustainability and line extensions. This can be a challenge for small to medium sized producers and processors. These attributes are usually part of your value proposition. Sometimes a unique size will be attractive in discount. They are looking for a retail price, with their margin to resonate with consumers.
Explore your products from the retailer’s perspective. How hard is it to get your product through their system, onto the shelf and out the front door. If you can figure out how to do this with very little labour, very little waste and good volume tell your story. Remember to tell the story from the perspective about how much it helps them, not your business.
We will continue to see more retail square footage and more volume in the discount segment. With the looming trade war, the Canadian dollar will likely drop and prices will go up again. More people will be looking for the prices in discount stores. If you do have an offering that is compelling in discount, go for it! If you do not, focus on growing your share and sales per store in conventional formats. They are still out there but a 5-10% sales growth would be a big win.
Peter
SKUFood Recipes for Success Podcast
In this episode, we’re excited to feature Carzan Local Meats, a family-owned business from Southey, Saskatchewan, dedicated to producing premium grass-fed beef and jerky products. Founded on the principles of sustainability and regenerative ranching, Carzan has become known for its locally raised meats and innovative flavour offerings in their growing jerky business.
Join us as we delve into their journey with Carter and Carmen, from their family roots to their commitment to providing top-tier products that reflect their passion for sustainability and community.
Get ready to hear the inspiring story behind Carzan Local Meats.
Buy Canadian will be a focus
As we write the newsletter this week, it appears the regime in Washington are prepared to use their ‘economic force’ on Canada. In other words, the 25% tariff will come into effect tomorrow. There is no doubt this will have a long-term impact on our economy.
One tactic in the response will be to encourage people to have a more focused buy Canadian approach. This is easier said than done. As the Prime Minster found out this week when he encouraged people to buy French’s ketchup. Kraft Heinz were quick to respond that their ketchup is made in Canada again. To further complicate the issue consumers started to post about Heinz ketchup made in the U.S. People have no idea how complex the food industry is.
One positive in all of this is people will focus on food again. It is unfortunate it takes pandemics and trade wars to get people to understand the value of the food and beverage industry.
FCC Distributor event in B.C.
Join Coby Palidwar National Sales Manager, Left Coast Naturals, and me as we discuss the ins and outs of working with a distributor.
From knowing when your business is ready to make a move and what to look for when choosing a distributor to communicate and work with in a way that generates the most value, you’ll learn actionable insights you can bring back to your business.
N.S. Ministers conference
Interested in the new technologies and innovations shaping agriculture? Ready to boost your business’ presence online and build trust in your product?
Join us for Digital Harvest and the 2025 Minister’s Conference: Innovations in Agriculture, two back-to-back events in February hosted in collaboration with the Nova Scotia Department of Agriculture and Perennia.
Network with peers, hear from experts, and learn about the latest trends in agriculture in the field and on social media.
Sell Successfully to Food Service
Gain the knowledge & tools you need to become a supplier of choice to the Food Service sector. This highly rated business learning program includes:
- Interactive virtual workshops by sector experts
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I do have travel coming up to Toronto, Calgary, Lethbridge and Niagara Falls so if you want to connect or have an event in any of these locations give me a call or send me an email.