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The new king of the West?

Buying Safeway will not only create a new platform of growth for Sobeys, it might make it the largest grocer in Western Canada

For those of you who didn’t get the memo a few weeks ago: Sobeys checked the couch, found a spare $5.8 billion and decided to blow it all on a little enterprise out of north Calgary called Canada Safeway.

Few were shocked by Safeway’s sale. Rumours swirled for months that California-based Safeway Inc. wanted to cash out of Canada. Still, many observers (myself included) figured that one of Sobeys rivals would buy Safeway.

Loblaw, Metro and even a few European grocers, such as Ahold, were considered likely suitors.

Now that the dust has settled, what’s Sobeys getting for its billions? Quite a bit. On paper, it’s buying 213 Safeway supermarkets in Western Canada, 199 in-store pharmacies, 62 gas stations, 10 Alberta liquor stores (to add to the 36 Sobeys already owns), four distribution centres and 12 manufacturing plants.

Sobeys is also picking up the Calgary wholesale company Macdonalds Consolidated, which supplies 64 independent Family Foods stores.

But there’s more: Sobeys is acquiring market share as vast as a Saskatchewan wheat field.

According to numbers I’ve seen, Safeway’s market share in the four western provinces is more than double that of Sobeys. Put them together, and Sobeys will likely become the West’s No. 1 grocery chain, just a smidgen bigger than Loblaw.

Either way, Sobeys is already touting that it’ll be the largest grocer in Alberta. That’s important. Last year, Alberta was Canada’s fastest growing grocery market. Sales at traditional grocery and convenience stores rose 5.3%, compared to just 1.1% nationally.

Assuming Alberta’s economy keeps firing on all cylinders (and that is an if), it will become much easier for Sobeys to find growth in Alberta than it would in, say, discount-saturated, sluggish Ontario.

It’s one thing to buy a competitor with decent market share. It’s another to buy a competitor that owns the right market share.

Here, Sobeys appears to be in a nice spot. Safeways are in established areas with good retail real estate. Also, 60% of Safeway’s square footage lies in four cities: Vancouver, Winnipeg, Edmonton and Calgary.

Why does that matter? Each of these cities represents the majority of food-store sales in their provinces. Edmonton and Calgary together have 65% of Alberta’s sales; Winnipeg is worth 61%; and Vancouver more than half. By comparison, the massive Toronto area captures just 44% of Ontario food-store sales.

For Safeway’s American parent, Canada was a cash cow. A remarkable statistic from the company’s annual report: The Canadian Safeways represented only about 15% of Safeway’s total North American sales last year, but they contributed 33% of operating profits. Canada Safeway was a nice bank machine for the American chain. Now it goes to Sobeys.

Of course, Sobeys will have major issues to deal with. Many believe Safeway stores are in need of a refresh.

Then there’s the question of whether to retain the Safeway name. Sobeys officials say no decision has been made. Likely, however, the name will come off. Sobeys now also faces a massive job to integrate Safeway into its business.

Another issue: Sobeys is buying market share, not taking it from competitors. It must still deal with archrival discounters, including Walmart and Costco, who are growing at a much faster rate in grocery goods than conventional stores such as Safeway.

The Competition Bureau still needs to weigh in, of course. It may require Sobeys to sell some Alberta stores. But once done, this deal will impact the industry for years to come, and could trigger more consolidation in the western provinces.

The sale of Safeway also marks the end of an era. Safeway set up shop in Canada in 1929, just before the Great Depression hit. Nevertheless, Safeway grew quickly in this country. Soon, it’ll all be over.

Rob Gerlsbeck is editor of Canadian Grocer magazine

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