Now it’s aiming to be your favourite restaurant.
Time-pressed customers of quick-serve and casual dining establishments are just who Canada’s biggest grocer wants to woo with its new selection of freshly made take-home meals, such as truffle mushroom lasagna and turkey spinach meatballs.
In the industry, the trend is known as HMR (for “home meal replacement”), a $2.4-billion market in Canada that is the fastest-growing segment in foodservice as grocery retailers encourage empty-fridged shoppers to hit the prepared food counter instead of taking the family to Boston Pizza.
On a recent weekday morning, Michael Clement, a customer at Loblaw’s flagship store at Maple Leaf Gardens in Toronto, had just finished tucking into a breakfast of scrambled eggs and hash browns.
He’s a regular to the store’s 90-seat café area and appreciates the free Wifi and the fact that counter staffers will customize certain dishes for him.
“They toss in some sautéed red onion [to the eggs] for me, it gives them a nice flavour,” he said.
With a 2,500 square-foot glass-walled kitchen as a focal point suspended one floor up and overlooking the produce section, the store within the former hockey shrine opened in 2011 to showcase a broader selection of fresh produce, meats and cheeses to customers in the urban core with higher disposable incomes and more adventurous palates.
But it’s what’s going on in the store’s kitchen, which functions as test lab for creating the fresh-prepped comfort foods and fusion salads Mr. Clement comes in for three to four times a week, that has the retailer’s executives really excited.
“We wanted to stand out from the rest of the crowd,” says Sal Baio, senior vice-president of Loblaw’s fresh food division.
“Everyone’s HMR department sells fried and rotisserie chicken and French fries, and that’s not what we are about. We wanted to introduce healthy alternatives. If you don’t change things up, your business eventually becomes very stale.”
Make no mistake, the company still does a strong business in hot rotisserie chickens. Mr. Baio said HMR as a whole has been growing sales at a high-single digit percentage for the past three years at Loblaw.
But the retailer is getting a major lift from newer dishes it started working on in late 2012, such as chicken curry pot pies and lamb tagine with apricot and couscous.
“If you look at specific categories, like the salad case, that has been a big engine for us,” generating year-to-date sales growth of “mid to high-20s” per cent.
Improving its selection of fresh food and burnishing an image of producing high-quality fresh meals has been a key pillar of Loblaw’s growth strategy over the past two years, an unprecedented era of competition in grocery retail in which new square footage, largely coming from Walmart’s grocery expansion, is growing at more than twice the country’s demographic growth rate.
There is also potentially more money to be made in HMR, those in the industry say, because prepared dishes such as red quinoa and kale salad sell at a much higher margin than packaged goods like cereal, for which ruthless competition in the sector has forced industry players to keep a lid on prices.
“We believe that fresh is a major source of competitive advantage for us,” Loblaw president Galen Weston said on the retailer’s most recent second-quarter conference call last month, saying customers’ approval of the retailer’s improved fresh goods selection is driving positive margins to offset deflationary pressures in the dry grocery part of the store.
“We think it is part of the reason that our outlook around margin, as we go forward, is stable.”
Loblaw began testing new HMR recipes at Maple Leaf Gardens in 2012 under the direction of the company’s executive chef Mark Russell, who served as former personal chef to the Loblaw-owning Weston family.
At the beginning of this year, it rolled out 140 new dishes, a percentage of which rotate seasonally, to 202 locations across the country.
By the end of 2014, 300 to 400 stores will have a revitalized HMR department, and the company has added more café seating at urban stores that attract a high volume of walk-by traffic.
“We have people coming here for breakfast, lunch and dinner,” said Mr. Russell, gesturing towards a seating area adjacent to the fresh salad case and another by the store’s espresso and gelato bar. “We can fill 90 seats very easily.”
Indeed, it looked as though Mr. Clement was going to stick around until lunch. He gave nodding approval to a wrapped hummus and carrot sandwich on grainy whole wheat bread and glanced to the extensive salad counter, an array of superfood combinations such as apple beet quinoa, priced at $2.19 for 100 grams. “It’s pricey,” he said, but noted he often ends up buying more than he comes in for because the colourful dishes look so tempting.
“My partner and I were in here just yesterday and we spent 50 bucks,” he chuckled.
Mr. Clement and customers like him illustrate why — notwithstanding any competitive threat Loblaw may pose to other grocers, many of which, from Sobeys to Whole Foods, have enhanced their HMR departments to varying degrees in recent years — it is restaurants that should really be worried about HMR.
“I think that is where we are getting our growth from,” said Mr. Baio.
“Instead of going into a fast-food place or to [a casual dining chain], you have a choice now to come to your local Loblaw, and buy that type of quality food.”
HMR, which accounts for 7% of grocery sales in Canada, has been the fastest-growing part of grocery retail in the past five years, according to market research firm NPD Group.
Traffic in that period has grown 10% in the HMR departments of grocers, compared with 1% at Canadian restaurants, according to Robert Carter, executive director at NPD. NPD expects HMR traffic to grow 10% over the next five years, with restaurant foodservice traffic to stay flat.
“We see that the HMR customers are not coming from other grocery stores, they are coming from the [quick-serve restaurant] segment,” Mr. Carter said.
Geoff Wilson, president of restaurant consulting firm FsStrategy said grocery chains have a clear convenience advantage over restaurants because people already go there regularly for consumables and household goods.
“If people are tightening their purse strings they might not go to a restaurant because of the economic conditions we continue to experience, but will they still want to treat themselves to restaurant quality food,” he said.
Still, HMR can be a risky and expensive area for grocers to navigate, he added.
“Where a restaurant makes what is ordered right away, grocery, retailers guess what and how much to put in the HMR section daily. “If they guess wrong, they are going to have a lot of waste. Those high margins can be eroded very quickly due to waste.”
Another industry source said Loblaw’s efforts to enhance its HMR business are more about aspirational marketing for their fresh food business than about potential profit.
“You have to factor in the labour cost — expensive unionized grocery store labour versus non-unionized restaurant labour — as well as [food waste], because nothing deteriorates faster than prepared meals,” the source said. “There may be high gross margin [in HMR], but that does not translate into high operating margin.”
Regardless, it appears Loblaw sees value in it.
“We have got huge plans for what we are going to do for HMR in the future,” Mr. Baio said.
“All the other elements that you look at from quick-service restaurants, full-service restaurants — those are the things you’ll start to see us incorporate into our stores.”
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