Empire scales back e-commerce plans as it looks to boost bottom line

Empire Co. Ltd. has paused the opening its fourth Customer Fulfillment Centre (CFC) as it re-strategizes its e-commerce plans in a push to improve profitability.

The Vancouver facility, to be powered by Ocado technology, was due to launch in 2025.  Construction on the exterior of the building is complete. 

“The current size of the grocery e-commerce market in Canada is smaller than we, or anyone for that matter, had anticipated,” Michael Medline, president and CEO of Empire and Sobeys Inc., told analysts Thursday (June 20).

“The plan was that the rapid growth in grocery e-commerce penetration would result in increased profitability at our active CFCs, and this would compensate for the initial operating losses from the newly opened CFCs. But due to the smaller overall market and the slower rate of growth, this has not been the case. So, we're losing more money than we had initially estimated, and this is actually masking the strength of our bricks and mortar business.”

Medline said the parent company of Sobeys, Safeway and other retail banners is taking action to address higher than expected dilution from Voilà. 

“We want to focus on driving performance and volume on our three active CFCs before we open CFC four,” he said. “This pause will allow us to continue focusing our efforts on the strong momentum we are seeing with our active CFCs, rather than the time consuming activities associated with launching a new CFC. As soon as we see higher e-commerce penetration rates in Canada, we will be in a position to make a decision quickly on when we'll proceed with opening CFC four.”

Empire also announced that it is ending its mutual exclusivity with British grocery tech company Ocado. The move will result in a one-time charge of $12 million.

“Ending exclusivity is going to allow us the opportunity to pursue complementary growth opportunities in the market, including serving more types of customer trips and having access to a larger segment of the market,” Medline said. “We're in conversations with partners outside of the Voilà universe to be able to compete in other ways, not just through our CFCs. At the same time, we also believe that we'll be able to bring some of these customers into the Voilà environment because it's such a great service as well. In the next couple quarters, you're going to hear more about that.”

Medline said he hasn’t lost confidence in grocery e-commerce. 

“We're not waiting for the economy. We're not waiting for anything. We are doing all sorts of things to make e-commerce more profitable for us, and not just waiting for that, but that will come. The solution is fantastic. Customers love it, we'll do well, but we can't wait for that. We owe it to our investors to become much more profitable year after year and then make this one of our best businesses in terms of returns. So that's what we’re aiming at.”

Empire reported net earnings of $148.9 million in its fourth quarter, compared to $182.9 million last year. Adjusted net earnings were $154.0 million compared to $184.9 million last year.

The company said it saw positive sales growth across the business, particularly in FreshCo, Voilà and Farm Boy.

READ: As consumers search for value, Farm Boy delivers with its stable of private-label products

Sales for the quarter totalled $7.4 billion, largely unchanged from the prior year. Same-store sales fell 0.3%. Excluding fuel, same-store sales rose 0.2%. 

The company said it’s on track to renovate approximately 20% to 25% of its store network between fiscal 2024 and fiscal 2026, with an emphasis on renovations and continued store expansion in discount. 

For fiscal 2025, capital spend is expected to be around $700 million—with around 50% of that investment allocated to renovations and new store expansion—down from $775 million in fiscal 2024.

“Over the past three to five years, almost anything we've done in real estate has had a fantastic return. That's becoming a little bit more challenging now because of the physical cost of capital,” chief financial officer Matt Reindel said on the call with analysts. “But even within that space, the work we're doing on Farm Boy, on Longo’s, the new stores—they all generate a very healthy rate of return. So that's why we still allocate 50% of that capital to stores. 

“The reason for the reduction is it's a trimming across the board. In prior years, we had a larger investment in e-commerce that now, of course, is coming to an end. Now that our CFC four building is complete, that will translate a little bit into logistics … It's a little bit of reallocation between spend buckets and just trimming. But $700 million is a healthy number for us for fiscal '25.”

More Q4 highlights

• SCENE+: Empire’s fourth quarter marked the first full-year of Scene+ being active across all banners in Canada. The loyalty program now counts 15 million members.
• Medline on Farm Boy: “This banner continues to thrive with their same-store sales performance being the highest in our network over the last two quarters. But in addition to their standalone performance, the Farm Boy team brings so much valuable experience and learning to the rest of our merchandise and administration through several strategic initiatives. For example, this past quarter, we ran produce pilots in some of our Sobeys Ontario stores, leveraging the fresh sourcing assortment and operational excellence from Farm Boy to reinvent the customer experience in this department. There are several other exciting things in the pipeline between our merchants and operators at Farm Boy and our other banners to improve our stores. I look forward to sharing more on how this great partnership is benefiting all of Empire. Our Farm Boy banner also generates consistently strong returns and has been a great use of capital. In fiscal ‘25, we plan to continue investing in this banner by opening another three stores.” 
• Medline on consumer sentiment: “With the interest rate reduction announced by the Bank of Canada earlier this month, we believe this represents the start of a turning point for improved customer sentiment. As rates continue to gradually decline and Canadians feel less pressure on their wallets, we expect to see customers adding more items to their basket and trading up. That will translate to increased sales momentum for Empire. We are currently more optimistic about the market and our prospects than we have been in a long time. We expect that improvements will be gradual but inexorable.”