Column: How Sobeys Inc. plans to win with discount in Western Canada

Company is converting more than 60 of its Sobeys and Safeway stores under the FreshCo banner

IGD looks at how Sobeys Inc. plans to win in Western Canada with the expansion of its FreshCo discount format in the region.

Discount launch key to taking market share in Western Canada

The announcement to launch the format comes after months of speculation following the January 2017 appointment of Michael Medline to president and CEO of Empire, the parent company of Sobeys Inc. He is currently leading the company’s turnaround plan, Project Sunrise, which is designed to simplify the business, unlock its national scale and significantly reduce costs. One of the key elements of this is improving the performance of the business in Western Canada and growing its market share.

Lack of a discount banner impacted ability to compete

Sobeys Inc.'s business in the region has been impacted by a number of issues. These include challenges related to the integration of the Safeway business it acquired in late 2013, a downturn in the region's economic performance in 2016 and a structural reorganization in the region at the same time. The lack of a discount banner in the region is viewed as a weakness in Sobeys’ operations and ability to compete.

Around 65 stores to be converted to the FreshCo format

To launch the format, the company will convert up to 25% of its 255 Safeway and Sobeys full-service stores in Western Canada. This forms part of a broader plan to increase its presence in the discount sector. Western Canada has been chosen due to the low level of discount competition in the region and the white space that exists for the size and format of store it's planning. In addition, the company operates several unprofitable Sobeys and Safeway stores in the region, which would be better suited to a discount model. However, while discount formats are relatively under-penetrated in the region, the company will face tough competition from Loblaw’s No Frills format and Walmart.

Stores to be converted at a cost of $4 million each

The company plans to convert the stores within four years. Each conversion will cost around $4 million, which will also include some element of downsizing to create smaller-format stores. Most of the conversions will be former Safeway stores, and will be operated on a franchised basis. The stores will build on the learnings from the Ontario market and are likely to include its South Asian variant Chalo! FreshCo. Rob Adams will lead the business with support from former No Frills executive Mike Venton on the rollout.

Second quarter results reveal improving performance

Project Sunrise remains on track, with phase one targets met. During the second quarter, sales increased by 1.6% to $6 billion, with the same-store sales, excluding fuel, increasing by 0.4%. Adjusted net earnings increased from $32.9 million last year to $73.9 million in the quarter. However, Empire expects minimum wage increases in Ontario and Alberta to impact the business by up to $25 million in 2018 and $70 million in 2019. While it expects to be able to offset the impact of the increases in 2018, it continues to develop further plans to mitigate the full year impacts for 2019.

Project Sunrise on track as business moves into phase 2

In terms of business priorities, the retailer has made solid progress on reorganizing its organizational structure and people. As many as 800 office jobs have been eliminated; almost half of the people in these roles have left the company. The business is also making timely progress on taking out at least $500 million in costs from the business, with the initial cost savings coming from the restructure. The bulk of savings from cost of goods sold are expected to be delivered in the third year of Project Sunrise. Work is also underway to improve its brand and customer understanding, with a view to making a more emotional connection with its shoppers. While this is a key piece of work, it is expected to take some tie to restore consumer confidence in the Sobeys and Safeway brands.

Stewart Samuel is program director with IGD, a global grocery and food industry research firm. This column has been edited. The original version ran here.

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