TORONTO — Galen Weston might have to change his mind when it comes to home delivery of groceries.
The chief executive of Loblaw has been skeptical about delivering online groceries to Canadian customers, but that could all change with Friday’s news that online giant Amazon is buying Whole Foods for US$13.7 billion.
Though Whole Foods only has 13 stores in British Columbia and Ontario, the implications are massive for the online grocery market in this country because they gives the virtual retailer clear bricks and mortar access points in this country as well as another channel for the potential distribution of fresh food. Amazon currently has six fulfillment centres across Canada, two in Vancouver and four in and around Toronto.
“All three traditional grocers (Loblaw, Sobeys and Metro) are suffering from what I call the “Apple” syndrome,” said Sylvain Charlebois, food industry expert and dean of management at Dalhousie University in Halifax.
“In 2001, Apple decided to get into music, an industry that it wasn’t in, and now they dominate sales in that industry brilliantly,” he said. “The music business resisted change for many years, and an external force came in and initiated change and that is exactly what is happening in Canada. Amazon is making a statement today. (The grocery retailers) will need to change.”
It comes as the big three grocers have spent years fending off a steady market share incursion from Costco and Walmart, whose share of grocery sales rose to an estimated 10 per cent and 7 per cent of the market in 2016, respectively, according to CIBC, up from 7 per cent and 6 per cent in 2010.
Though the market for online grocery sales in Canada is tiny, Amazon’s entry into selling packaged goods online in 2013 has deepened the erosion of profit margins among traditional players, who have lowered prices in response to the increased competition on all sides.
Packaged food bought online account for 1.9 per cent of Canada’s $140 billion grocery market, according to Nielsen, but sales online are projected to grow 20 per cent a year and will account for 5.3 per cent of the market by 2020.
Packaged food accounts for 0.6 per cent of the market currently, while health and beauty items account for 1.8 per cent of sales, according to Nielsen. Non-grocery staples such as pet foods and household paper products account for 3.2 per cent of online sales.
Amazon’s move also stands to transform the mechanics of grocery distribution, as Canadian companies who deliver online grocery orders use their own fleet of trucks or outsource delivery to others.
“Amazon is exploring product delivery with drones,” Charlebois said. “And it is 16 times more expensive to run a fleet of trucks, between labour, energy and time, than it is to use drones.”
All three grocery chains in Canada sell online to an extent. At IGA stores in Quebec, Sobeys delivers to home and offers in-store grocery pickup of online orders. Rival Metro has introduced a similar program in and around Montreal. Loblaw is doing a test market run of a “click-and collect” model, where customers order and pay online and pick up items outside selected Loblaw stores.
Walmart, meanwhile, began online delivery of fresh groceries to some areas of Toronto in March, after introducing in-store pickup at selected markets across Canada. Costco offers home delivery on some fresh and frozen food items as well as pharmacy, and health and beauty items.
Weston told analysts and investors in February that Loblaw, the country’s biggest grocery and pharmacy retailer, might experiment with grocery home delivery at some point, but added, “I don’t think anybody has reached that conclusion that it is the best path forward for grocery.”
Shares of Loblaw, Sobeys’ owner Empire Co. and Metro all fell slightly at market close Friday, by 3.6 per cent, 3.6 per cent and 2.8 per cent respectively. In the U.S., grocery stocks took a far bigger beating. Supervalu plunged 14.4 per cent, Kroger fell 9.2 per cent and Costco fell 7.2 per cent.
“I think you are seeing grocery stocks move lower because of all the uncertainty,” said Britanny Weissman, retail analyst at Edward Jones.
Regardless of whether other retailers offer click and collect or home delivery, she added, it leads to lower profit margins. “Canada has been slower to adapt to selling groceries online (than the U.S.), but as Amazon grows its presence in grocery, they will do that much more in sales, and that could lead to price competition at other grocery retailers.”