Empire CEO warns of ‘distressing’ cost increases from suppliers

Empire Co. Ltd. CEO Michael Medline said the company is pushing back against some multinational suppliers that are sending through “unfair” cost increase requests.

“We're now seeing more than a few of our large supplier partners sending through cost increase requests for February, and some of them are distressing,” Medline told analysts on Empire’s second quarter earnings call Thursday (Dec. 14). “They just can't be justified. Inflationary times are not an excuse to pass every single rising cost onto grocers, and more importantly to Canadians. This was not the way business was conducted before these inflationary times.”

Medline said the grocery giant’s national sourcing team is taking a “tougher” approach to this latest round of negotiations.

“If that results in a few holes on our shells, we believe that Canadians will more than understand,” he said. “This is not an indictment of all our supplier partners. I am referring to several big, multinational CPGs…  As a company we will be pursuing new solutions to help mitigate inflation. One way that we can keep costs down is through our Own Brands portfolio, where we have greater visibility and control over prices… As we and others have said for several quarters, private label products are in high demand, and we will give even more space to our Own Brand products if it will help us maintain lower prices on shelves.”

Medline’s comments follow similar sentiments from executives at Loblaw Cos. Ltd. 

Loblaw chief financial officer Richard Dufresne raised concerns around supplier cost increases on the company’s most recent earnings call in November,  

“Without the support of suppliers, it will be difficult for the industry to sustain the current momentum of falling food inflation,” Dufresne told analysts.

It’s also in part why Loblaw has yet to sign the grocery code of conduct. Chairman Galen Weston recently told MPs the code could hand over too much negotiating power to suppliers.

“It's very, very bad business in the long run for supplier partners to think they have that kind of elasticity in their pricing,” Medline said. “We'll get blamed as grocers and Canadians suffer… Every time we have a cost increase, we don't pass it on to the customer. We have to find ways to save money, and we have to eat some of it. That's the way you do business.”

Chief operating officer Pierre St-Laurent did note, however, that the rate of cost increases is slowing. In the second quarter of fiscal 2024, Empire saw one fifth of the cost increases it received for the same quarter last year.

Empire – which owns food retail banners including Sobeys, Farm Boy, Longo’s, FreshCo, Safeway and other chains – reported net earnings of $181.1 million compared to $189.9 million last year. 

Same-store sales, excluding fuel, increased by 2%.

Sales for the quarter totalled $7.75 billion, up 1.4% from $7.64 billion in the same quarter last year. Empire attributed this to growth across the business, particularly in discount. 

The company said it plans to enhance its Own Brands through increased distribution, shelf placement and product innovation.

READ: With abundant data and insights, Empire Company’s big loyalty play is paying off

Empire said it’s planning to renovate approximately 20% to 25% of its store network over the next three years. 

Despite the dip in earnings, Medline says Empire remained resilient as consumers “retrenched” amid higher interest rates and economic uncertainty.

“This retrenchment wasn't major but it did appear to occur quite suddenly,” Medline said. 

“All in all, when I look at Q2, I felt that our execution was just as sharp as Q1, but consumer confidence affected our results a little bit. We continue to attract more customers to our stores with higher transaction counts. Our promotions are constantly improving and are attractive to our customers while still protecting our margins. And we continue to see very strong on-shelf availability.”

MORE Q2 HIGHLIGHTS

• Medline on organizational changes: “As we announced last quarter, we have begun making organizational changes to optimize our structure and reduce costs. A refresher of what we did in Sunrise, but on a smaller scale. Almost seven years have passed and we are a very different company. We have advanced data and analytics capabilities, new strategic assets in our portfolio and a much stronger team. Before, the focus was on fixing what was broken. Now, the focus is on supporting our go-forward strategy to drive growth… This isn't just about cutting. The team has been very strategic and is also looking at what we can bring in-house to do better and more efficiently. You will see severances in our financial adjustments this quarter and through to the end of fiscal ‘24.”

   

• Matt Reindel, executive vice president and CFO, on the shift to discount: “When we talk about this trade down to discount, it's not necessarily trade down to discount shops. Our customers are still in our store. We still have very strong customer numbers. In fact, they're increasing. What that tells you is that our customers are trading down in our store. So they're looking for value in our store, as opposed to a trade down to discount. In terms of continued discount expansion, that's something that we will continue to look at strategically… But, to be honest with you, we're not going to massively expand discount. That's not the structure of our business, but we do have some scope to continue to expand.”