Canada's No. 1 grocer faces major challenges as it tries to stem sliding profits, but some analysts and consumers say the key for Loblaws may be to cater to a growing demand for locally grown food.

In the parking lot outside Loblaws Real Canadian Superstore in downtown Ottawa, Heather Epton carries just two small bags. Inside are cleaning products and toilet paper.

"I don't usually buy vegetables in this store," Epton says. "If they concentrate more on local, I'd definitely buy here. But right now, I go to two stores."

The buy-local movement comes just as Loblaws goes head to head with U.S. retailer Wal-Mart, which is moving deeper into the grocery business.

Elizabeth Margles, a spokeswoman for Loblaws Companies Ltd., prefers to see the bright side to Wal-Mart's diversification strategy.

"It's great to operate in a competitive environment. It continually drives us to make sure that we're ahead of the curve, offering customers what they want," she says.

But distribution and warehousing problems along with a management overhaul have led to a dip in Loblaws' share price.

Last year, it posted its first loss in 19 years and in the first quarter of this year, profit dropped more than 60 per cent. The company is also dealing with millions in restructuring costs after laying off 20 per cent of its administrative staff.

"I'd say Loblaws has a lot of challenges and difficulties ahead," says Ian Lee, an assistant professor at Carleton University's school of business in Ottawa. "In the U.S., some of the major grocery chains did fail. [They were] beaten up by Wal-Mart."

If Loblaws is at a crossroads, it's been here before. In the 1970s, the company was in debt and Galen Weston Sr. was called in to rescue the family business.

He hired his former college roommate, Dave Nichol, who introduced the now-famous and popular President's Choice products.

While the brand remains a lure for customers today, Nichol is long gone and Wal-Mart's low-cost, one-stop-shopping experience has influenced new management at Loblaws.

Don't emulate Wal-Mart, says analyst

Lee says that's a mistake.

"I think they should focus on the quality side, the differentiation, and say, 'We're not Wal-Mart. We have fresher food and far greater choices,'" he said.

"The buy local [strategy] is part of that and I think it would be a potent source of competitive advantage."

Loblaws CEO Galen Weston Jr. has acknowledged that consumers want local food. But at the corporation's recent annual general meeting, Weston also told shareholders it plans to lower prices.

While doing both will be a challenge, Margles insists Loblaws is going local.

"As long as it makes sense for everybody, we are always happy to work with local vendors, local suppliers, local manufacturers across the board," she said.

But a survey of Ottawa's Loblaws Superstores finds there's no local meat. The garlic, a common eastern Ontario crop, comes from China, and all the apples are from outside the country.

Ottawa-area farmers say it's hard to get their products into Loblaws. Analysts say the reality for huge operations like Loblaws is that it's easier to buy, transport and track from big suppliers, few of which are in eastern Ontario.

Lee says it won't be easy to find a niche in local, high-quality food, but he maintains that's the way Loblaws will compete successfully against Wal-Mart.

"The most important strategic question facing Loblaws today [is] what do you want to be when you grow up?" he asks. "Does Loblaws want to be in the mid-market selling reasonably good-quality groceries? Or do they want to get into the lower end of the market and sell schlocky merchandise?"