Breaking down the hundreds of millions Canada’s Big Three grocers are spending on innovation

VANCOUVER — Even before the COVID-19 pandemic changed Canadians’ shopping habits, the country’s Big Three grocers were racing to innovate, spending hundreds of millions on technology and store and warehouse revamps.  

Loblaw, Empire and Metro all benefited from a shopping frenzy in the pandemic’s early days, and then sustained sales growth as Canadians ate at home more often. They were able to adapt quickly to shoppers’ changing demands in a new world of physical distancing and lockdowns—a rush to e-commerce, more delivery—in part because the three already had ambitious projects underway backed by substantial capital expenditures. While each firm continues to spend on capital as planned, their most recent quarters saw capital expenditures that outpaced last year’s. Here’s how they’re spending on innovation.

The pandemic “delayed [spending] to some extent,” said Michael Vels, Empire’s CFO, in an interview with The Logic, but it accelerated the company’s buildout of its online grocery fulfillment centres.

Empire’s capital expenditures have steadily increased over the past several years. In its 2019 fiscal year, ended May 4 of that year, the company spent $434.6 million. The following financial year, it bumped spending up about 32 per cent per cent to $574.8 million. In its current fiscal year, Empire plans to spend between $650 million and $675 million, which, on the higher end, would be an increase of about 17 per cent over the prior year.

The increase comes down to five key areas on which the company started focusing about three years ago, when it rewrote its corporate strategy, said Vels. At the time, it was struggling with a rocky acquisition of Safeway, and in 2017, it launched Project Sunrise, a cost-cutting program looking to create $500 million in annualized savings by the end of fiscal 2020. It completed the plan earlier this year, and later announced Project Horizon, which focuses on growth.

Renovating stores and building new ones are part of that focus. Empire is doubling the footprint of its Farm Boy banner in Ontario—it had 26 stores in the province when Empire acquired it in December 2018—and introducing its discount FreshCo banner out west. Empire experienced some delays when several provinces suspended construction trades as part of their pandemic restrictions, Vels said. The company also didn’t feel as comfortable opening new stores in the middle of the pandemic’s first wave, he said, so “we took it easy.” Its renovation program is now back on track, and it is opening stores at an aggressive pace.

The remainder of its capital spending has focused on technology and innovation. A priority is winning the online grocery market as Canadians adapt to purchasing food online, a change spurred on by the pandemic. In its early weeks, grocers saw e-commerce grow several times over. That growth has slowed somewhat, but remains high. In their most recently completed quarters, Empire, Loblaw and Metro reported e-commerce sales increases of 241 per cent, 175 per cent and 160 per cent, respectively.

In 2018, Sobeys partnered with U.K.-based Ocado Group, which builds automated warehouses to fulfill online orders directly to customers. It planned to construct four fulfillment centres in Canada, accelerating those plans to meet the increased demand for delivery. The first, in Vaughan, Ont., started packing orders in June. The Montreal centre is under construction; though it was temporarily delayed. The next two will be expedited; one will be in Calgary and Vels hinted the fourth may be in B.C., though the company has not yet made an official announcement. To meet demand in the meantime, Empire also started to fulfill online delivery orders in some stores.

“We’ve invested a lot of money,” said Vels, adding he believes Empire’s solution will win over customers, even if Amazon eventually expands its grocery presence in Canada. “I think when they come here and try and figure out grocery in a bigger way, they’re going to find that we solved it already and we’re going to be a formidable competitor.”

Empire is also “really serious about the digital age,” he said. It’s spending about 15 per cent of its planned 2021 capital expenditures on “advanced analytics technology and other technology systems,” according to its most recent quarterly earnings report, released Thursday. Vels said that includes artificial intelligence technology, digital outreach, digital flyers, loyalty programming and back-end support through cloud solutions. “I see that continuing for many years.”

It’s also spending on in-store technology to give shoppers a reason to come to brick-and-mortar stores. In March, for example, it partnered with Infarm to start growing and harvesting some fresh produce at a number of Sobeys stores. That type of innovation doesn’t consume much capital, but does add to the company’s capital expenditures, said Vels.

Metro’s capital expenditures have also been growing. In its 2018 financial year, it spent $317.4 million. By 2019, that grew nearly 25 per cent to $396.3 million. In its recently completed 2020 financial year, it spent $510.7 million, or nearly 29 per cent more.

Metro spokesperson Geneviève Grégoire said the majority of the company’s capital expenditures last year were committed to the “modernization of our distribution network.”

The company had initially planned to spend more in its 2020 financial year, “but some projects … got delayed due to the pandemic,” said CFO François Thibault during its latest quarterly results call. He singled out an automated distribution centre in Ontario, part of a $400-million investment in its distribution network in that province, announced in 2017; it plans to build a second in Terrebonne, Que. and renovate and expand an existing centre in Laval at a cost of $420 million spread over five years, with a goal of opening the Terrebonne facility in 2023. Its partner in the automated Ontario and Quebec facilities is German company Witron. Thibault said the company would carry forward some investments into the new year, and expects its 2021 capital expenditures to total about $600 million, which, like Empire, would be a roughly 17 per cent increase year over year.

Meanwhile, Loblaw, Canada’s largest grocer, continues to outspend its rivals, though its capital expenditures have dropped in recent years. In its 2018 fiscal year, the grocery and pharmacy chain spent $1.3 billion. That fell to $1.2 billion the following year, and the company is on track to spend a similar amount this year.

The company has spent between $1 billion and $1.2 billion annually over the past five years, spokesperson Catherine Thomas wrote in an email to The Logic, on building and renovating stores, adding technology to make its stores and distribution centres more efficient, and developing and launching new products and services.

“Throughout 2020, the pandemic has delayed some of our planned projects, particularly those around renovations, etc., as we focused solely on serving our customers,” she wrote. That included scaling up its e-commerce offerings to serve more than three times its usual number of customers daily, which it was able to do “without having to meaningfully increase investments” as it already had an existing base of hundreds of pickup locations.