Andre Hardy:
Welcome to the Industries in Motion Podcast from RBC Capital Markets, where we'll be exploring what's new and what's next in today's fast moving markets and industries to help you stay ahead of the curve. Please listen to the end of this podcast for important disclaimers. My name is Andre Hardy, and I am head of Canadian and Asia Pacific Research. Let's get into today's episode.
Andre Hardy:
I'm very pleased to introduce our guest, Irene Nattel. Irene is a Managing Director at RBC Capital Markets, and is responsible for our equity research coverage of the Canadian Consumer sector, including food retail. Irene has over three decades of experience in equity research and has consistently been among the top ranked analysts in investor surveys in both consumer staples and discretionary areas.
Andre Hardy:
Today, we'll be discussing the results of our recent consumer survey on Canadian food shopping behavior, which support Irene's views of the significant structural changes occurring in the Canadian food retail space, notably around e-commerce, the key factors that influence consumer choice of food retailer and how consumers are dealing with the rising pace of food price inflation.
Andre Hardy:
Many of the topics were first explored in an in-depth thought leadership report titled RBC Imagine™ Preparing for Hyperdrive, which was published by our Global Research team in November 2021. That piece outlined key cross sector global themes we think are important to understand as we prepare for the years ahead.
Andre Hardy:
We built upon these themes in a more recent report published early in April titled RBC Imagine™: Reimagining the weekly shop. That report took those themes and really expanded on them using our broad based survey of Canadian food retail shoppers as a basis. So Irene, why don't we start with where we are in food retail today and how that might have changed as a result of COVID?
Irene Nattel:
Thanks, Andre. Let me start by painting a picture for you. Food is central to our daily lives. In the before times, as the way I think of it, many of us had the luxury of not really having to think or plan for all of our daily food occasions. There were a wide range of options for food away from home. We could make last minute decisions around what and how we could and would consume our meals and our snacks, and generally speaking, it was easy enough to stop at the grocery store and pick up whatever we needed.
Irene Nattel:
Then, seemingly overnight, we found ourselves at home having to think about those three meals a day and snacks, let's not forget the snacks, the vast majority of which was going to be prepared by us in our own kitchens on top of everything else that we needed to worry about at the time. And, we needed to plan for the dreaded daily question of, "What are we going to have for dinner?" We had to first ask ourselves, "How and where are we going to get groceries to make dinner?" And, increasingly the way consumers are shopping for food is about getting what we want, when and how we want, and seeking value through loyalty and promotions.
Irene Nattel:
Let's start with the how. We still overwhelmingly buy our groceries from stores. Over 90% of food retail dollars are spent in store, which may come as a surprise given all the attention to online food shopping. But before COVID, only about 1 to 2% of food retail dollars here in Canada were spent online. At the peak of the shutdowns, it was pushing 10%, but averaged around 6% over the past couple of years, and it's in and around there today. That is a big shift. Andre, has your household been shopping for groceries online?
Andre Hardy:
I thought I was supposed to be asking the questions. No, Irene we have not yet been shopping for groceries online.
Irene Nattel:
Can I ask why not?
Andre Hardy:
I think part of it is we're hesitant on perishables and meat and poultry. Since we're going to make the trip anyways, we might as well pick up the other items that one might think would be a little more logical to order online.
Irene Nattel:
Well, Andre, although that makes your household a bit different from what we're seeing more broadly based, i.e., pre-COVID less than a quarter of food shoppers bought food online; today, that number is two thirds. But I will say that your reason for not shopping online is, in fact, the number one reason that people choose not to shop online for food. But for the two thirds of us who do, we actually like buying food online. 90% of us plan to keep on doing it.
Irene Nattel:
That's largely because we're also pretty happy with our online food shopping experience. Almost 90% of us say that we're satisfied with the service. We're also getting much more comfortable with ordering online for the full basket and not just the pantry basics and household cleaning products that you so rightly said would be logical to buy online.
Irene Nattel:
Over the COVID period, we've seen marked increases in the penetration of fresh categories like dairy, frozen, bakery, produce, and similar in online baskets. The one category where shoppers remain reluctant to order online, and I do include myself in that group, is fish.
Andre Hardy:
That's interesting. One thing we hear a lot about is click and collect versus store pick-up and delivery from home. Which of these alternatives are most popular?
Irene Nattel:
That's a great question, Andre, in part because a lot of what we hear, and this is the way you frame the question, is an either/or. But again, coming back to this whole idea of it's about, shopping today is really about, you and me getting what we want, when we want, and how we want it.
Irene Nattel:
Home delivery is the most popular option. About 35 to 40% of us always get home delivery. Pick up is pretty popular too. It's pretty close, 30 to 35% always pick up, but 25 to 35% of us sometimes do one and sometimes do the other. Since I've been working from home, I've been part of the delivery group, but as we head back into the office, I'm becoming more of a both kind of girl.
Andre Hardy:
Interesting. One thing we're reading tons about, I mean, you can't pick up a newspaper and not read about food inflation these days. I suspect your survey could confirmed there's a fair amount of food inflation, but importantly, what are consumers doing to try to deal with higher food prices?
Irene Nattel:
Yeah, food price inflation is a very big issue for the consumer. To put where we are right now in context, normally food inflation runs about two, two and a half percent on an annual basis. In the most recent month, consumer space food price inflation of close to eight and half percent, and that's a 40 year high, and consumers are acutely aware of the fact that food prices are rising way faster than their incomes, and so consumers are looking for ways to stretch their food dollar.
Irene Nattel:
Almost half are shopping around for the best deals. Just over 40% are paying more attention to weekly flyers, and a similar number, around 40%, are looking to substitute for lower priced items. On that subject, we are really lucky here in Canada where are all of the major food retailers have great quality, well priced, private label options as alternatives to the national brands. I'm sure many of our listeners are quite familiar with brands like President's Choice, No Name, Irresistibles, Selections, and Compliments, just to name a few.
Irene Nattel:
Finally, just under 40% of us say that we won't eat out as much as before, or order as much as before from restaurants, and almost 30% of us say we're just going to avoid eating out as much as possible altogether, and we've also been ordering from restaurants less often.
Andre Hardy:
When you said that consumers are shopping around for best deals and paying more attention to flyers, are you talking about consumers actually switching brands and grocers more frequently?
Irene Nattel:
Absolutely. 33%, a third, of people are willing to switch grocers to get better deals, and 38% are willing to switch brands, hence the trade down to private label. But one of the really interesting things that's going on here, and this has really come to the fore since the start of COVID, is the related shift in the way we think about and we access and become aware of promotions.
Irene Nattel:
It used to be that those paper flyers were the way that we compared prices, and we saw what was on sale where. Now, only about one quarter of food shoppers do it that way. The other 75% access promotions digitally either through some kind of direct communication from the loyalty program, or from the food retailer app or site, or through one of those aggregator sites.
Irene Nattel:
Now the role of loyalty is something we really dug into in that recent RBC Imagine report. One of the numbers that really stood out to us is that 85%, let me repeat that, 85% of food shoppers highlighted loyalty programs as an important factor in their choice of grocer, both in store and online, and over half cited loyalty as very or extremely important. Andre, what grocer focused loyalty program does your family have?
Andre Hardy:
We would be PC Optimum members.
Irene Nattel:
Excellent. That makes your household one of the 86% of Ontario households that are PC Optimum members, which is a pretty impressive statistic. PC Optimum is also number one in Quebec, but it's 61%. AIR MILES and Metro & Me, or Metro & Moi, are met are both in the mid 40s. But the loyalty programs are really important in terms of offering each of us individualized and personalized promotions that are consistent with our shopping behaviors and that, therefore, resonate and have meaning to us, unlike the flyer, which really is a one size fits all.
Irene Nattel:
I'm pretty sure we've all had the experience of looking for an item, let's say orange juice, and we're facing a choice of buying the brand that's on sale or buying our preferred brand. The nice thing about those individualized promotions is that each one of us get a promotion on our preferred brand instead. So, maybe I get Tropicana and you get Oasis, but either way it's meaningful and relevant and valuable to us. That becomes a key factor in this virtuous circle of relevancy and use of promotions. An impressive 90% of both PC Optimum and Metro & Moi members find the personalized promotions relevant.
Irene Nattel:
The other advantage of loyalty programs, depending on the way they're structured, but PC Optimum and Metro & Moi are structured this way, is that beyond the more personalized relevant promotions that we can receive, we also work toward money saving rewards, tangible dollars off our spend. And particularly in today's environment of rapidly rising food prices where everything costs more, free definitely feels good.
Andre Hardy:
We've been talking for about 10 minutes and the name Amazon hasn't come up. Typically, when I think of e-commerce and online shopping, Amazon is the first name I think of. How does Amazon fit into the Canadian food retail landscape?
Irene Nattel:
That is another great question, Andre. Amazon is absolutely a player and an important one, but not the player in Canadian e-grocery. Keep in mind that here in Canada, Amazon doesn't offer any fresh, refrigerated, frozen or prepared foods. So although 40% of online grocery shoppers report purchasing grocery type items from Amazon, the type of items they purchase are typically those commodity items like paper products, cleaning, supply, and pantry basics.
Irene Nattel:
Interestingly, the full basket retailer that scores very well on our survey is Walmart, which is the only retailer, other than Loblaws, to have coast to coast home delivery and click and collect options. With today's increasingly value-oriented consumer, the Walmart value pricing and positioning is certainly an asset
Andre Hardy:
That makes sense. Switching gears a little bit, if we go back to your survey, any other changes in behavior that you found interesting in the results?
Irene Nattel:
Yeah. One thing that really emerged over COVID was the surge in everything related to video meetings and interactions, and that includes physician appointments. Just over one quarter of us have connected with our physicians using telemedicine, and another 25 to 30 of us haven't yet, but would feel comfortable doing so. Which has the potential to significantly increase the level of physician access, and also diminish waiting times. This is definitely something to watch over the coming years.
Andre Hardy:
So, you started the podcast with a visual painting of how we approached meals before COVID started. When you look at it today, what does it look like?
Irene Nattel:
Well, Andre, some things haven't changed. Freshness and value remain table stakes in our choice of how we buy food and where we buy it. But interestingly and increasingly, we're broadening our behaviors based on need states. Maybe one day, it's home delivery because we're working from home. Another day, it's store pickup because we're on our way home from the office, and on weekends, maybe it's an in-store shop because we want to take the time to shop for and prepare a special meal.
Irene Nattel:
We're also more and more comfortable with shopping online and increasingly, loyalty programs are becoming critical, in part because of those personalized promotions, and we're looking to combine both physical spaces and digital tools in a seamless way. Having embraced online food shopping, we're likely to continue to increase how, and the various ways in which we use it, and integrate it as part of our daily patterns.
Andre Hardy:
Irene, that was a really interesting and exciting vision of how things are changing around how we approach shopping for food. Thank you very much for your insight into how these major structural changes are impacting us.
Andre Hardy:
What else lies ahead in today's ever evolving markets and industries? We'll be keeping track right here on Industries in Motion. We also ask that you listen to Lori Calvasina's podcast, Markets in Motion, provided by RBC Capital Markets. Until then, thank you for joining us on this episode recorded on April 21st, 2022, and please make sure you subscribe to Industries in Motion wherever you listen to your podcasts.
Andre Hardy:
If you'd like to continue this conversation, or you are interested in more information, please contact your RBC representative directly or visit our website at www.rbccm.com/industriesinmotion. Thank you.
Speaker 3:
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