A steady stream of customers come and go at Tony’s No Frills supermarket in Hamilton.
For years, Bob Poirier avoided shopping at Loblaw's Save Easy supermarket in Shediac, N.B. He found the prices high, the lettuce wilted and the lighting too dim. Instead he headed to rival grocer Co-op.
That changed late last year when Loblaw Cos. Ltd. converted the Save Easy on Main Street to one of the company's No Frills discount supermarkets. The lettuce seems crisper, the pork chops more tender and the shelves better stocked.
"It's much cleaner, it's a lot brighter and the prices have gone down," says Mr. Poirier, a 63-year-old developer.
"I find it 120-per-cent better than what was there before."
Shediac isn't alone among cities and towns across Canada to get a spiffed-up No Frills. Over the past few years, Loblaw has been racing to upgrade its No Frills stores in Ontario, while converting its underperforming Extra Foods supermarkets in Western Canada to the discount banner. Now it's taking the formula to Eastern Canada with its test in Shediac.
A pillar of its key Ontario business for more than 30 years, No Frills has become a mighty weapon in Loblaw's food fight with discount titan Wal-Mart Canada Corp.
But as No Frills moves to cater to a more mainstream customer - with a wider array of products and sometimes even meat, seafood and deli counters - it risks losing its no-frills, low-cost edge if it can't keep expenses in check.
"The cost advantage is driven by the simplicity of the offering," says Tim McGuire, a director at consultancy McKinsey & Co. in Toronto.
"The No. 1 risk is that they damage the cost equation, which is key to their success. ... And there is a risk that if they make the stores too nice, they start to feel expensive."
At No Frills, operating costs make up just 15.8 per cent of revenue, compared with 22.2 per cent at a conventional store, according to estimates last spring by retail analyst Perry Caicco at CIBC World Markets. Launching a No Frills is less than half the cost of rolling out a traditional grocer, the data show.
Those lower expenses allow discounters to offer prices that are roughly 25-per-cent lower than those at conventional supermarkets, the research found.
In the economic downturn, discounters haven't had to worry about sales sliding because bargain-hungry customers have flooded into the stores. "But in a more normal time period, particularly as the recession eases, the battle for sales will probably always come back to price," Mr. Caicco says. "And that's when the added costs will matter.
"On top of that, as discount stores improve selection, ambience and service, they can cannibalize their own sister conventional store formats, which are so key to the profitability of multiformat grocery chains."
Loblaw executives declined to comment. But president Allan Leighton told analysts late last year that No Frills has been well received in Western Canada. "So we see the opportunity of No Frills in the West to be a bigger one than we initially thought."
As for the No Frills in Shediac: "It is not just a one off. ... It is to see how these things work. And if they work, then we may get behind it aggressively."
No Frills isn't alone among discounters in trying to appeal to a broader array of cost-conscious consumers. Over the past year, rival Metro Inc. has added about 1,000 items to its discount Food Basics stores, says chief operating officer Robert Sawyer.
Customers had complained they couldn't find what they wanted at Food Basics, he says. Now it's added a second or third brand in many categories. For example, it added Clover Leaf canned tuna along with Gold Seal and its private label Selection. As well, Food Basics has refurbished stores and dropped clothing and dollar aisles, he says.
No Frills has also evolved. While the original store in 1978 stocked only 500 items, today's outlet carries thousands. The original store stocked mostly No Name private labels; the grocer now carries the higher-priced President's Choice.
No Frills is piloting even more store brands. Touted as "discount brands" that are 20 per cent cheaper than national brands such as Minute Maid or Kraft, they're generally a little pricier than the No Name items. They include Luna and Terra canned vegetables, Bijou frozen juices and Cercle mayonnaise.
"It's a strategic play to offer the consumer more choice," suggests Tom Stephens, a former Loblaw executive who now heads private label specialist Brand Strategy Consultants. "They're using these discount brands to get a higher margin." Private labels can yield up to a 40-per-cent gross margin, 10 percentage points more than national brands.
Loblaw has dressed up No Frills in other areas. It has improved the quality of the fruits and vegetables, and added meat, seafood and deli counters in some locations; it caters to local ethnic needs with rows of kosher food aisles or live crabs and barbecued ducks in Asian neighbourhoods. Some stores have added sushi and other prepared foods.
In the process, No Frills is becoming a go-to neighbourhood grocer, Mr. Stephens says. "They are making it a much more acceptable offering, in terms of a retail environment."
Still, as discounters bolster their presentations to lure more customers, they have to focus even more on cost controls, Mr. McGuire says. "If done right, it can be a very effective addition to the overall offering."
No Frills contracts out some meat and fish counters to third-party experts - or cuts them out altogether - avoiding higher union wage scales. It shaves labour costs in other ways. Its employees in Ontario, where most of the 174 stores are located, earn 8-per-cent lower wages than the average at other Loblaw banners, a United Food and Commercial Workers union spokesman says.
While most No Frills stores are unionized, the ones that are being converted to No Frills in Western Canada and Shediac are non-unionized.
And Loblaw's approach to unionized Extra Foods employees in British Columbia may serve as a model to how it intends to convert stores to No Frills - and lower labour costs. In Maple Ridge, B.C., the store's employees have been on strike for more than a year over what they say are Loblaw's proposals in contract talks to slash wages by almost half in some cases.
"They would effectively be busting the union if they were to drive the contract down to those sorts of levels," says Andy Neufeld, spokesman for UFCW's Local 1518.
At Metro, the grocer has moved in the past year to rein in Food Basics' costs, partly by buying the stores back from franchisors and centralizing purchasing. It has generated savings by getting the union to agree to allow suppliers to come into stores and stock shelves, Mr. Sawyer says.
It helps ensure the items on special are now adequately stocked to try to entice more shoppers, he says. "It's not only people who have a tight wallet who walk into the discount stores," he says. "It's everybody."
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SHAVING COSTS, BOOSTING PROFIT
22.2
Traditional grocer's operating costs as a percentage of revenue
15.8
No Frills operating costs as a percentage of revenue
500
Number of items in original No Frills store in 1978
1,000
Number of items rival Metro has added to its Food Basic stores in the past year
40
Gross margin, in percentage, for private labels
30
Gross margin, in percentage, for national brands
Sources: CIBC World Markets, Metro Inc., Brand Strategy Consultants