"Health has become the No. 1 issue in the grocery business and the smaller operators are capitalizing on it by heavily going into organic products," says Michael Penalosa, senior project manager of Vancouver-based Thomas Consultants, development strategists for shopping centres and retail developments.

The big-box outlets are "making a killing, especially in the U.S., by constantly getting a bigger customer base," says Penalosa.

Today, successful small grocery chains are selling from $500-$600 per square foot worth of merchandise a year, which is the same as major grocery chains do, he says.

Vancouver-based, Canadian-owned Choices Market recently announced that it will open its sixth store in Surrey. The company, the largest retailer of natural and organic food in Western Canada, says the 20,000-sq.-ft. store will be its largest and the first one that it's building from the ground up.

Sales and profit data for the industry are difficult to get. Most participants are unwilling to disclose their sales figures. However, the Toronto office of the marketing research firm ACNielsen provided Business Edge with some national and Western Canadian figures for the large grocery chain-stores.

For the 52-week period ending Oct. 30, sales in Western Canada totalled $9.59 billion, compared with $9.33 billion for the same period last year.

Nationally, sales totalled $31.24 billion, compared with $30.18 billion in 2003.

And despite the large sales volumes, net profits are slim. "The grocery business is one of the most competitive retail channels with net after-tax profit in the range of one to two per cent," says Bryan Walton, western region vice-president of the Canadian Council of Grocery Distributors in Calgary.

Market dynamics are constantly changing and today's retailer has to react quickly, insiders say.

"You have a situation where people in their BMWs and Mercedes Benzes are shopping at Wal-Mart and Costco, but are also going to the smaller competitors where there is a wider range of specialty products," says Penalosa.

In-house delicatessens, restaurants, catering, personal shopping, grocery delivery, cooking courses, wine appreciation classes, natural vitamins - all are part of the new marketing dynamic.

"Today, the name of the game is to make everything in your store visually appealing . . . to appeal to your senses and keep you there as long as possible because the longer you stay, the more you tend to buy and be loyal to that brand," says Penalosa, whose company has a worldwide client base.

"A lot of consumers think that the Costcos, the Real Canadian Superstores and the Wal-Marts are the cheapest places to shop for everything. But that may not always be the case.

About 18 months ago, says Penalosa, a major price comparison among retail outlets was done in Vancouver, including the major chains and the smaller independents and specialty stores. "It turned out that a major chain carried the highest prices," he says. "It proves the point that it is all about perception."

One company that has capitalized on the new market dynamics is Stong's Markets Ltd., located in Vancouver's West Side. "We stock 40,000 to 50,000 items, whereas your typical chain store would stock anywhere between 20,000 to 30,000 items," says Cori Bonina, president of Stong's.

Competing with major chains such as Safeway and IGA is not cheap. Stong's recently refurbished its in-house deli and moved it to a different location in the 10,000-sq.-ft. store at a cost of more than $1 million. But Bonina says sales in the deli immediately jumped by 10 per cent.

Penalosa says the small specialty stores are competitive with the big-box outlets and other major grocery chains. "On staple items such as dish liquids and a host of other products, they do compete and this is something a lot of shoppers don't realize. They assume because they are shopping in a specialty store that everything is more expensive, but that is not the case.

"The specialty stores make their money on the premium and specialty products. There is a whole trend today to entertain and impress your guests with the kind of food you serve. And people are willing to pay for that."

Another specialty grocer is Meinhardt Fine Foods, which stocks 20,000 items in 6,500 sq. ft. of space in the trendy South Granville area of Vancouver.

"We're your neighbourhood grocery store and our approach to our customers is best described by our slogan: 'All the Basics, All the Best'," says manager Karen Hall. "We believe you need the basics and then, depending on your likes, you can buy whatever you want."

On the basics, the store tries to be competitive, she says. "But it is difficult because Costco can sell some items cheaper than what we have to pay for them at the wholesale level. Where we are really competitive is on specialty items. For example, we carry more than 200 different types of olive oil."

"Fresh, fresh, fresh continues to be one of the most important drivers in the grocery business," says the grocery council's Walton. "Witness the 'grab and go' offering of the modern supermarkets. Stores that focus on this takeout or eat-in business are configuring stores to make it as convenient as possible for customers."

Jeremy Knapman, manager of Whole Foods Market in West Vancouver, says the city's multicultural population - with the resulting diversity of eateries - contributes greatly to the local food culture. "Vancouver is a tremendous food town. People here have a passion for food," he says.

The company's 35,000-sq.-ft. store, considered one of the most upscale in Vancouver, opened on Sept. 15 and business has been tremendous, he says.

Whole Foods was founded in 1980 in Austin, Tex., and today it is the world's leading retailer of natural and organic foods. It has 166 stores in North America and the United Kingdom.

"We're actively seeking more real estate in Greater Vancouver, but it is hard to come by," says Knapman. "The company's expansion in Vancouver is based on its success in the marketplace, and we expect to make an announcement next February."

Whole Foods is in the business of selling natural foods and it has two mantras. "Sell the highest-quality food and educate the customer about the passion of food, and satisfy and delight our customers," says Knapman.

"This means we have to educate the consumer to understand the food process because some of our natural products are not as well branded as others. It is teaching consumers about the symbiotic relationship between food and them."

Penalosa says he believes the grocery stores that are local, 100-per-cent community-owned and Canadian will always be there for the local consumer.

"You just have to be nimble to changes in the marketplace and give great customer service and, above all, have a location and great access for your customers," he says. "The typical trading area for a convenience and specialty store is three to four kilometres.

"The smaller operations will see their margins being pressed as the bigger stores try to do the same thing. Safeway is probably thinking about it now."

Stong's Bonina echoes that sentiment. "The key to surviving is top-quality products, competitive pricing, exceptional selection of product and total commitment to customer service."

(George Froehlich can be reached at george@businessedge.ca)