03/12/2015 05:00 EDT | Updated 05/11/2015 05:59 EDT

Loblaws expansion, renovations could squeeze 'premium' Whole Foods market share

Loblaws is sprucing up, Target is bowing out, Sobeys is eyeing Ontario, and the era of the "conventional" grocer is coming back shinier than ever, according to retail analysts.

After what CIBC World Markets researcher Perry Caicco described as "a period of neglect," the big national supermarkets — Loblaws, Empire and Metro — are shifting spending away from their discount chains towards propping up existing mid-market spaces.

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Loblaw Companies Ltd. announced a $1.2-billion investment this week to upgrade at least 100 franchises in 2015 and build another 50 stores under the Loblaws banner.

With Target withdrawing from Canada and freeing up some two million square feet of dedicated food retail space, the timing is ripe for such an overhaul, said IBISWorld retail analyst Will McKitterick.

Canadian shoppers are beginning to expect a more "premium" experience when they load up on bread and milk amid higher-end competition such as Whole Foods, he said.

Grocers, in turn, are "using more than just the food they're selling," McKitterick said, to bring consumers into sparkling boutique-style markets that offer accoutrements such as free WiFi, cafes, dine-in sections and even live entertainment.

Loblaws flagship urban location in downtown Toronto, which took over storied Maple Leaf Gardens in 2013, was one example of the company's "Inspire" fleet of deluxe stores.

'On-trend' foodies

That same year, Sobeys opened its first "Extra" model of refurbished locations in Burlington, Ont., a move the company's CEO Marc Poulin said "reflects our mission to bring better food to all Canadians."

Metro, too, plans to roll out what CEO Eric la Fleche called a "premium conventional store" concept in Toronto by next year.

In his CIBC note in February, Caicco said the wave of reinvestment in so-called "conventional" grocery stores (such as Loblaws, Sobeys, Longos and Metro) rather than discount banners (such as No Frills, FreshCo and Food Basics) began last year.

"After a few years of spending on systems and logistics infrastructure, the big grocers are shifting back to spending on stores," Caicco wrote. "But instead of adding square footage to a market that is thankfully easing, the majority of the spending is heading towards renovations."

The plans come amid pressures to meet more sophisticated consumer demands for what has been called "on-trend" experiences.

"Staying fresh, staying relevant is something they need to do every couple of years to keeping consumer interest," McKitterick said, noting that demand for premium and organic foods has been on the rise in Canada for about five years.

"Part of the renovation is going to be tailored towards that consumer base," he said.

The moves also present a defensive strategy against the threat of Walmart.

"Loblaws is worried that Walmart is going to eat their lunch," said Mark Satov, a management consultant.

The big-box U.S. retailer announced 29 more Supercentres for 2015, and is expected to buy some of Target Canada's vacated real estate.

"Loblaws wants to make sure they maintain national dominance, but Walmart's food share has grown to six per cent in Canada," Satov said, noting that Loblaws, by comparison, has a 27 per cent market share nationally.

By retail analyst Kevin Grier's estimates, club stores and mass merchandisers such as Walmart and Costco have diverted $8 billion in sales from conventional grocers.

"The biggest area of growth in the last few years was in the discount area with No Frills, Food Basics and FreshCo," said Grier, a market consultant focusing on the food industry in Guelph, Ont.

With Walmart waging a battle on the discount end, and with Whole Foods commanding the higher-end market, he asked, "What's a conventional grocer to do?"

Aesthetic upgrades are one way to be a differentiator.

'Psychological effect' of sparkling spaces

"It really highlights the difference between Walmart and Loblaws and it might have a bit of a psychological effect on the consumer," McKitterick said.

"They walk into a Walmart, whose format looks standard as a retail space, and then they walk into a Loblaws where it's been renovated, everything is new, there are food items on sale they haven't seen before, there's way more diversity, everything is new. They might take that to mean the food is fresher, it's sourced better, that will draw their attention in a way that's really important."

Trends aside, Caicco laid out two other reasons for the resurgence of conventional stores — a need for grocers to justify high retail prices and a "saturation point" in the discount space.

"The rampant spending to grow the discount segment was accompanied by a long-term neglect of related conventional assets," he wrote.

Fewer cookies in the box

What filled the "conventional void," according to Caicco, were Whole Foods and other specialty players, as well as sleeker ethnic grocers such as H Mart and T & T Supermarkets.

Although the outlook for conventional grocers may be rosier in 2015, it could come at a cost.

Lower gas prices should give consumers more spending power at checkout lines, but the weaker loonie compared to the U.S. dollar will hurt grocery budgets, said pricing specialist Paul Hunt, president of Toronto consultancy Pricing Solutions.

Packaged foodstuffs manufactured in the U.S. will be more expensive due to import costs, he added.

If the number on the price tag doesn't get bigger, expect fewer cookies in the box.

"Retailers will try to hold the price point, but change the package size," Hunt said. "They'll adjust the millimetres on the package or offer less product as a more palatable way of passing the price increase.

"In tough economic times, they find a way."