Building a better cupcake: How the grocery wars may be won

Inside Loblaw’s glass-walled test kitchen, located in a sprawling four-storey building in Brampton, Ont., employees have been busy tweaking the recipes of thousands of President’s Choice (PC) products, from tiger tail ice cream to pasta sauce, for the past several years. The goal, first laid out by president and chairman Galen G. Weston back in 2012, is deceptively simple: replace artificial colours and flavours with natural ones. But according to Kathlyne Ross, head of product development and innovation at Loblaw, it was far from easy. Take, for example, the challenge of finding a natural way to give PC’s red-velvet cheesecake and ketchup chips their unnaturally crimson hues. “The ketchup chips were a tough one because people want to see red, red, ketchup,” Ross says. Most natural colouring agents, made from vegetables like beets or carrots, aren’t nearly as vibrant as their artificial counterparts. They also tend to be less shelf-stable, meaning they fade over time. “With the red-velvet cheesecake, lots of the iterations would fade to pink,” says Ross. “We asked ourselves, ‘Will customers be okay with a pink velvet?’ ”

Those questions are all part of an effort to overhaul one of Canada’s best-known store brands in an increasingly competitive retail grocery market. Where once Loblaw attempted to introduce people to new tastes and indulgences—PC “Memories of” peanut sauce, PC “Decadent” chocolate-chip cookies—it’s now more focused on having a “conversation” with consumers about PC products and their provenance. In addition to the use of more natural ingredients, expect to hear more about the Italian mill that makes pasta for PC’s black-label collection, or the potential uses of harissa, a North African spice blend. “We’re opening up and trying to engage consumers in a discussion about food and what’s happening in the food world,” says Ian Gordon, the senior vice-president of Loblaw Brands. Some of the conversations are expected to happen over social media channels, but the grocer is also engaging in more “content marketing”—articles and discussions about products (including an agreement signed with Rogers Communications Inc., owner of Maclean’s, that involves integrating PC into some Rogers-owned channels and publications).

The trend is being fuelled mostly by changing consumer tastes. The popularity of books like Michael Pollan’s In Defense of Food and the organic, local and farm-to-table movements have all helped shape perceptions about what is healthy and desirable to eat. Case in point: the local farmers’ market. No longer just a quaint throwback in towns and cities across the country, farmers’ markets are now a growing industry unto themselves. They pull in over $1 billion a year by luring people in with pricey organic produce, hormone-free meats and artisanal cheeses—often served with a generous helping of jaunty fiddle music. By some estimates, the total economic impact of farmers’ markets, many of which now operate year-round, could be in excess of $5 billion annually.

Loblaw isn’t the only big Canadian food retailer trying to adapt to this shifting landscape. Sobeys revealed last year it was partnering with British celebrity chef and cook-from-scratch proponent Jamie Oliver to demonstrate its commitment to healthier and fresher food. Both McCain Foods and Maple Leaf Foods, meanwhile, have dumped common additives and unpronounceable ingredients in favour of ones derived from more natural sources. Even Wal-Mart, the epitome of a big discount retailer, is getting into the game by selling local and organic produce in many Canadian stores, which it promises to shuttle from its distribution centres to store shelves within 24 hours.

While consumers appear to have spoken, reconfiguring supply chains and reformulating time-tested products is a huge and costly endeavour. McCain, for example, went through nearly 50 different iterations of one of its frozen potato products in an attempt to remove a single emulsifying ingredient. That might all seem a small price to pay for healthier, more nutritious and sustainable food—and there is a price to be paid. Some critics question whether that’s what we’re getting in the end. “There’s an assumption that, of course, local is safer, more sustainable and healthier,” Art Hill, the chair of the food science department at the University of Guelph, says of one of the industry’s current buzzwords. “While that might be true for specific products and under specific circumstances, it’s not true in general.” The same goes for the current taste for fresh foods over processed, he says. “It’s difficult not to cater to the market, but we shouldn’t be abandoning the science around these things, either.”

For Loblaw and its competitors, though, it’s a case of the customer always being right, even if there are times they might not be.

The changes at PC come as Loblaw stares down one of the most competitive grocery markets it has ever faced. In recent years, U.S. giants Wal-Mart and Target have rapidly expanded their grocery footprints across Canada, wooing shoppers from established players like Loblaw, Sobeys and Metro with low prices on brand-name goods. Yet another threat on the horizon is Amazon, which launched an online grocery store in Canada late last year, promising to deliver some 15,000 dry, packaged food items to doorsteps. “For its size, the retail grocery sector has to be the most competitive retail sector in the country,” says Ed Strapagiel, a retail consultant in Toronto. “Margins are very thin for mainstream groceries, and are even thinner when you get to the lower end of the scale at places like No Frills [owned by Loblaw] and Food Basics [Metro].”

To protect its market share, Loblaw has spent tens of millions to overhaul its distribution network. It has experimented with ways to speed up the shopping process with automated checkouts and is testing the idea of a “click-and-collect” system that lets shoppers buy groceries online and pick them up later at a drive-through station. Earlier this year, Loblaw finalized a $12.4-billion deal to purchase Shoppers Drug Mart, boosting the total number of stores in its empire—which includes Real Canadian Super Store, Zehrs, Valu-Mart and Wholesale Club—to about 2,300 and providing it with access to valuable real estate in dense urban neighbourhoods.

But the reboot of PC may ultimately prove to be Loblaw’s most potent weapon in the grocery-store wars. Though PC is technically a store brand, its premium positioning and long history of experimenting with international flavours and chocolate-heavy desserts, starting with the late Dave Nichol and his Insider Report, have given it a large and loyal following. In fact, Ipsos Reid recently rated PC one of the most influential brands in Canada—right alongside Tim Hortons, Google, Apple and Visa. So while competitors lure customers by slashing the prices of cases of Coke or eight-packs of Bounty paper towels, there’s only one place to buy “decadent” chocolate chip cookies. Moreover, as with all private label brands, PC products offer Loblaw much better margins. A 2012 report by analysts at Raymond James concluded that sales of private label products, both PC and No Name, accounted for $8.2 billion in sales in 2010, representing nearly a quarter of Loblaw’s overall revenue that year. Nor is it a coincidence many newer PC products have a decidedly upmarket, aspirational feel—like the Austrian roasted pumpkin seed oil. Strapagiel says sales of “premium” food products, which run the gamut from gourmet sauces to hormone-free meats, represent one of the few remaining growth categories in the food business, up about eight per cent so far this year compared to less than one per cent for regular groceries.

While the business case for overhauling PC’s 4,500 products is compelling, the same can’t always be said for consumers’ rationale for buying them. Thanks in part to the Internet, we are now bombarded with a never-ending stream of suggestions of how to make better food choices—many of which are based on less-than-robust evidence. Be a locavore. Avoid gluten. Buy organic. Observe Meatless Mondays, or, if you prefer, follow the paleo diet. Do whatever Gwyneth Paltrow says you should do. “The challenge the food industry faces is how to communicate things accurately so that consumers can make decisions based on the best information,” says Hill. “And that’s getting harder because the Internet caters mostly to what you’re interested in.”

Nor does it help that much of the science around food and health is unsettled in the first place. Even Loblaw admits there’s no clear benefit to replacing artificial colour and flavours with other ingredients, although some studies have suggested a link to hyperactivity in children. “There was no real scientific evidence around it, but we heard a lot of people talking about it—particularly moms with young kids,” Gordon says. The same goes for salt, which has long been considered unhealthy, prompting government agencies in Canada and the U.S. to set voluntarily guidelines for manufacturers. However, more recent studies have suggested that reducing salt intake to current recommended levels, between 1,500 and 2,300 milligrams per day, could actually cause more harm than good. Food-makers, meanwhile, must also weigh potential health benefits with the taste factor. In the case of sodium chloride, that has led Loblaw’s PC product development team on a time-consuming hunt for new flavour enhancers. “Anything acidic helps bring up flavour components,” Ross says. “So a little lemon juice and vinegar can help bring the flavour up and you’re not missing the salt at all.” Other times, a little extra heat from pepper or chili powder may do the trick. Deli meats, breads and cheeses present yet another problem, since salt does double-duty in those products, contributing to both flavour and behaving as a food-safety additive that keeps pathogens at bay. “We’re scrubbing every PC product,” Ross says. “But we will come across some categories where we are very challenged because salt plays a more inherent role.”

If there’s a down side to all that experimentation, it’s that it threatens to unnecessarily drive up costs and, potentially, the price charged to consumers. While Ross says Loblaw worked closely with its suppliers to keep the price point of PC products the same, some experts say a more accurate description may be Loblaw telling its suppliers what they need to do to keep its business. “With President’s Choice, Loblaw is committed to getting the products produced to their standards,” says Peter Chapman, a Halifax-based retail consultant who spent two decades as a Loblaw executive. “So when you’re asking suppliers to take out certain ingredients, it’s often difficult.” Another question: who pays for new factory equipment and packaging, if not the end consumer? Ross says both sides shared the pain, but David Ian Gray, a retail strategist and founder of DIG360 Consulting in Vancouver, says usually the suppliers are the ones who ultimately need to replace equipment and source new ingredients. As well, he says the trend in the industry is for retailers to be “hammering back up the channel” in an ongoing quest for cost-savings. “When you get into the buying side of retail, it’s harsh,” says Gray. “It’s raw commerce.”

As consumers’ attitudes change, the industry faces a growing conundrum. People want to know more about what they eat, but many are deeply suspicious of food items that have undergone any processing, which conceivably includes everything from yogourt to bread. Hill says he’s often shocked at the number of people who now refuse to eat frozen vegetables even though they are an excellent way to preserve nutrients, since they are picked ripe, blanched and flash frozen. By contrast, a lot of fresh produce is picked well before it ripens, meaning it loses some of its potential nutritional content even if it appears ripe by the time it’s shipped and stocked on shelves.

Consumers also seem to have developed a skewed sense of risks. Hill says people tend to be far more worried about the possible long-term effects of additives and other chemicals than they are of the much more immediate—and potentially deadly—prospect of contracting a nasty food-borne illness. The disconnect turned into a full-blown controversy a few years ago when Weston, speaking at a food industry conference, remarked that “farmers’ markets are great” but “one day they’re going to kill some people, though.” Outraged foodies took to Twitter to ask whether a member of one of Canada’s wealthiest families had even been to a farmers’ market. But Hill, who was at the conference, says Weston was merely pointing out some simple truths. “At the farmers’ market, you have a lot of artisans and homegrown stuff, less environmental control and more hands touching things, which is a great way to transmit bugs,” he says. “So a farmers’ market is more likely to cause an illness, but the number of people exposed will be much smaller.”

Weston is now clearly aiming to win over the very people he may have alienated that day. The question, however, is whether a massive grocery chain will ever be fully accepted by foodies with their philosophies of buying fresh and local. Gordon is optimistic. “Are we ever going to appeal to people who shop in farmers’ markets? I would like to think so, eventually.”