There is green beyond grocery

Grocery stores are selling more than food-furniture, small appliances and kitchen utensils are also a hot item.

Cruising the aisles of the Real Canadian Superstore at Don Mills and Eglinton avenues in northeast Toronto, you realize that while food might be the main attraction, it's the general merchandise on sale that's the real showstopper. Sure, there are the fruits and veggies you'd see at a typical grocery store, along with the No Name and President's Choice products the superstore's owner, Loblaw Cos. Ltd., has been famous for for more than 20 years. What's new, however, is the extent to which the shelves are brimming with hundreds of items for the home–furniture, small appliances, kitchen utensils. And that's just what John Lederer (right), president of Canada's biggest grocer, wants to see as Loblaw branches out in an attempt to capture a big slice of the general merchandise market.

Since Loblaw introduced the Real Canadian Superstore to Eastern Canada from the West, “the concept has really picked up steam,” Lederer told analysts during the company's last conference call in July. While other Canadian food retailers–including Metro Inc., Sobeys Inc. and Canada Safeway Ltd.–have focused on food and produce with their “fresh” and “garden” concepts, Loblaw is expanding big-time into the non-food arena. It's even planning to launch a line of stylish apparel in 2006, says senior vice-president of investor relations and public affairs Geoff Wilson. Some supermarket chains, like U.K.-based Tesco, with its Cherokee and Florence + Fred brands, have found success selling clothing.

It's a bold move, business-wise–and is both defensive and offensive. For starters, general merchandise is meant to be a platform for future growth; there's only so much you can increase food sales, unless you grab someone else's market share. But moving into general merchandise is also a way of making it harder for Loblaw's biggest rival, Bentonville, Ark.-based Wal-Mart Stores Inc., to bring its highly successful Supercenter format, also combining grocery and general merchandise, north of the border.

The Real Canadian Superstore is a concept that Toronto-based Loblaw created in Western Canada in 1979, with the first outlet opening in Winnipeg. The huge stores, at about 150,000 square feet, offer a full line of groceries, along with everything from towels to electronics. In 2003, Loblaw brought the format to Eastern Canada, where there are now 18 outlets; by the end of 2008, there could be as many 45 to 50. Lederer has told analysts that sales trends at these stores are “at or exceeding expectation,” and same-store sales at those Eastern Canadian outlets that have been open for more than a year have grown in the “strong double-digit range.”

Still, the move to selling more general merchandise has led to challenges, at least in the short term. BMO Nesbitt Burns analyst Karim Salamatian notes the development of the Real Canadian Superstores is cannibalizing sales at existing Loblaw outlets in the area. That's not necessarily a bad thing in the long run, he says. “If these stores can achieve the level of sales and profitability of the RCSS [outlets] in Western Canada, then the short-term sales setback and capital deployment will be well justified.”

But getting the general-merchandise business right has been part of a major restructuring at Loblaw, making 2005 a year of major transformation for the country's biggest food retailer. When its second quarter ended June 31, Loblaw had recognized $63 million in restructuring costs aimed at various initiatives designed to streamline its supply chain, reorganize and relocate general merchandise operations and consolidate the company's divisional offices. And more restructuring costs are anticipated. However, analysts bullish on Loblaw, like Merrill-Lynch's Patricia Baker, who said in a recent report that the time is right for it to press forward with its general merchandise and Real Canadian Superstore strategy. Says Baker: “Not only is the competitive landscape intense, but the traditional lines have more than just blurred, they've virtually begun to disappear.” So if, or when, the Wal-Mart Supercenters come to Canada, Loblaw plans to be ready.