Sobey’s parent company Empire made a bold move to shake up the grocery market Monday, with the acquisition of the popular Ontario-based retailer Farm Boy. The deal values Farm Boy at $800 million.
The chain only has 26 stores, 14 of which are in the Ottawa region, but it has enjoyed strong growth in recent years thanks to a reputation for fresh product, prepared meals and private label offerings. Aggressive expansion across Ontario is planned.
“Farm Boy is a superb strategic and financial acquisition,” said Empire CEO Michael Medline in a call with analysts shortly after the deal was announced Monday morning. “It strengthens our reach in the key Ontario and markets. It will be a growth vehicle in urban and suburban markets and its very strong private label program will bolster our Ocado driven e-commerce business.”
Farm Boy has been enjoying same store growth of 5.3% for the last three years, Medline said the average for Canadian grocery in the same period is about 1.3%. “Big difference,” he said.
While Sobeys faced criticism and customer complaints about how it handled the 2013 acquisition of Safeway, Medline made it clear Empire intended to let Farm Boy operate as a totally independent business with both founder Jean-Louis Bellemare and his co-CEO Jeff York left alone to operate the business. Both men have also agreed to reinvest in the company, along with two long-standing Farm Boy senior management team members, Donny Milito, senior VP of retail operations and product development and Shawn Linton, vice-president, supply chain and IT. Together, the four partners hold a 12% interest in Farm Boy.
“We do not want to ruin the magic of Farm Boy by trying to integrate them,” said Medline. While national expansion is a longer-term goal, the executives made it clear they intended to expand aggressively in Ontario, especially the GTA. York said Farm Boy could have 60 stores in the Toronto area in the next five years.
Bellemare, who started the business in 1981, said they had other buyer options but chose Empire after meeting with the Sobey family and concluding they would not have to change the Farm Boy experience at all, and would be able to more aggressively pursue their expansion plans. “The Empire partnership will give us the tools we need to grow,” he said.
The deal would enable Farm Boy to get better locations, a significant advantage to realizing full growth in the GTA, said York. With the big three--Loblaw, Sobeys and Metro--getting first chance at premium sites, Farm Boy was left with “the crumbs,” he told Canadian Grocer in an interview.
The first store in the city of Toronto, which opened earlier this year, is busy all the time, he said. “And it’s not even in a good location.”
With the buying power of Sobeys behind it, Farm Boy will have better access to premium sites all around the GTA including in the downtown core where Farm Boy sees potential for smaller formats, such as the 8,000-sq.-ft. store it recently opened in Ottawa’s Rideau Centre. “That format we think we can take to urban centres right across the nation,” York said during the call with analysts.
Farm Boy also no longer has to worry about developing an online strategy since it will be on the leading edge Ocado system Sobeys is building out now, with plans to launch in the GTA in 2020. “That is a huge win,” said York.
The executives emphasized the deal would not cause any customer facing changes. “We want Farm Boy to be Farm Boy,” said Medline. “We are not going to mess around with anything that touches the customers.”
But being part of a much larger business will bring significant benefits of scale; it’ll be up to Bellemare and York to pick and choose what works best for them and where to take advantage. “If they think they can get a better deal on bags, or cash register tape, or logistics or anything like that, they are going to tap in," said Medline.
"But we have been really clear with these guys, do not disturb what you are doing now. There are a lot of synergies here, but the real play is because they are so good at thrilling their customers.”
Farm Boy records $500 million a year in sales and Sobeys reports $25 billion, said York. That means Sobeys has 50 times the leverage when buying from suppliers. “I assume they buy a few things cheaper than we do,” he told Canadian Grocer.
Similarly, a bigger supply chain and logistical efficiencies will make it easier to open stores across the province. “We didn’t even include in the pipeline anything past London, anything north of Barrie,” said York. “We didn’t even look at those markets because of the trucking, now all these sites open up.”
In a note to investors, BMO Capital Markets retail and consumer analyst Peter Sklar said that while $800 million seems like a “significant valuation,” approximately 14 times the 2020 EBITDA of $57 million, “we believe this is a coveted jewel asset that offers a high growth rate and the format should allow Sobeys to roll out a compelling banner in the GTA.”