Days of discount outperforming full-service grocery stores could soon end: Empire CEO

Empire Co. Ltd. said the same-store sales gap between its discount and traditional grocery banners is tightening.

“We see the same-store sales gap between full-service and discount channels at Empire and in the industry at large gradually disappearing, and expect this trend to continue,” CEO Michael Medline told analysts Thursday (March 14). “We've been expecting, as you know, the gap between full-service and discount to shrink as inflation falls. But even we were surprised by the magnitude of the gap closing this much this quarter.”

The parent company of food retail chains Sobeys, FreshCo, Farm Boy and others reported sales of $7.49 billion for its most recent quarter, up from $7.48 billion last year. Same-store sales increased by 1.9%. 

Empire said the increase in sales was driven by growth across the business, particularly in discount and full-service.

“I think the days of discount greatly outperforming full-service are coming to an end,” Medline said.

The company said it plans to renovate 20% to 25% of its store network over the next three years, and is continuing to grow the footprint of its discount banners.

But on Empire’s fourth quarter earnings call, Medline pointed to higher construction costs as a major hurdle.

“We are not pleased with the increase in construction costs at all,” he said. “The whole real estate team has got to be even more efficient in terms of putting these stores up because we will not take a lower return… We're going to put up stores where they make economic sense, where we get the returns. We're going to have more stores. Which banners? We're not gonna let you know exactly what we're doing there, but we have very distinct plants in every jurisdiction.”

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Net earnings came to $134.2 million in the third quarter of Empire’s fiscal 2024, compared to $125.7 million in 2023.

“We are cautiously optimistic in terms of where we're headed, because two things are going to be catalysts for us... We do think that, at some point, interest rates are going to start to fall – we don't think the first fall of interest rates is going to spur everyone on – but as consumers see interest rates starting to fall and they get some sort of confidence, that's gonna be great for us,” Medline said. “The second is that we were not waiting for that. We're not standing still. We got a lot of improvement coming in our business. Tough times are an opportunity to make yourself a lot tougher. And we've gotten tougher – we're tougher on the business, we're more demanding, more accountable, greater velocity and we're taking costs out where they need to be taken out for the Canadian consumer and for our company.”

“People don't want to shop at four or five grocery stores… They've had to make decisions they don't actually like,” Medline said. “If we just see some, some better times and less inflation and some construction costs settling down – things like that – we will be in very good shape. But we have to run like it's going to be tough. And then if it's better, we make out like bandits, and so do our customers.”

MORE Q3 HIGHLIGHTS

Read on for additional third quarter commentary from Empire CEO Michael Medline.

• On acquiring land in Montreal: “The quarter we also entered into an agreement to purchase a sizable plot of land in Montreal, which remains subject to due diligence. Securing this land was highly strategic and for the time being we will land bank it until we decide whether and when to proceed with site development. The opportunity for such a valuable and well situated piece of land does not come around often.” 

   

• On organizational changes: “As we announced in Q1, we have been making organizational changes to optimize our structure and reduce costs. This backstage initiative is largely complete with the full run race cost savings to be realized in fiscal 2025. Beyond the cost benefits of this program, I am very pleased with the structure of our teams and the critical talent changes we've made to ensure we are better positioned to execute on our strategy and deliver strong results.”

• On Scene+: As the program tops 15 million members, Empire is “now rapidly turning [its] efforts toward personalization to develop a more robust and customized loyalty program.”

• On Empire's new central kitchen in Calgary: “We'll be opening in Calgary in the first half of F25. In partnership with Crombie REIT, we have built a state of the art facility that will service Alberta and surrounding provinces, bringing an elevated curation of ready-to-cook, ready-to-eat meals into our stores. This concept has been developed within our merchandising team leveraging expertise from Farmboy, Thrifty Foods and our internal team to create an offer that will be fresh, delicious and market leading. We will gradually introduce products from a central kitchen to our store network to provide greater consistency, expanded variety, fresher products, better forecasting, better flexibility, less food waste, and reduced costs... This opening in Calgary is just the beginning and I look forward to sharing more soon.”