Empire's Michael Medline talks discount, reorg and tariffs
"On May 4, last year, we set out to rewrite the fundamentals of our company, and what a difference a year makes, we have found our bearings," said an upbeat Michael Medline during a recent earnings call with analysts and media.
"Our first year of Project Sunrise was a success, we have transformed our structure, sharpened our leadership team to stabilize our margins and taken cost out of the business," said Medline, president and CEO of Empire Company Ltd., which reported a better-than-expected fourth-quarter profit.
The Stellarton, N.S.-based company, parent of Sobeys grocery chain, said it earned $71.0 million or 26 cents per share for the 13 weeks ended May 5, compared with a profit of $29.5 million or 11 cents per share a year earlier. Sales in the quarter totalled $5.89 billion, up from nearly $5.80 billion in the same quarter last year.
Same-store sales were flat and looking at food sales in isolation, comps were up and tonnage was almost flat, said Medline. "That's not too bad given the environment we were facing." That environment included aggressive promotions that have "been a reality for most of us in the industry," $25 gift cards from two of Sobeys' competitors and preparing to close 10 Safeway stores in British Columbia in July.
In addition to those external distractions, the company underwent an executive shuffle to create "a truly national merchandising team, and build Empire’s e-commerce and discount leadership for the long-term.” Empire promoted internally and also made new additions to its team with senior leadership now reporting directly to Medline. Lyne Castonguay, a 2018 Star Women Award winner, was promoted from the executive vice-president, merchandising role to executive vice-president, store experience. "Lyne, our EVP of Store Experience, is a passionate leader who will deliver an exceptional retail experience to our customers," said Medline.
"Almost every single person in merchandising is in a new and/or expanded role," said Medline. "It is not reasonable to expect we would be on top of our game through this time ... We were exceedingly proud of our people, in the midst of a great deal of disruption they grew food comps, improved margins and took out cost in this disruptive period."
Medline said the company is now in a position to "take back sales." Part of that entails improving flyer promotions, investing capital to refresh older stores, closing underperforming stores, redesigning its private label brands, expanding discount into the west and preparing to enter the e-commerce fray in 2020 through a partnership with Ocado.
Empire's FreshCo expansion in Western Canada is on track with the first locations expected to open by the end of the year, said Medline. The discount banner will launch with enhanced branding, product offering and marketing to reflect what the company has learned from Ontario locations, including pilot locations in London, Ont. that carry the new branding and a more open store concept.
In addition to external forces such as an increase in minimum wage and drug reform policies, the company also has tariffs on U.S. food products to contend with, which could translate into higher prices for Canadian shoppers.
The Canadian government started to impose retaliatory tariffs on July 1, on a wide range of U.S. products (yogurt, coffee, maple sugar, cucumbers, salad dressing and other food items) in response to U.S. tariffs on some Canadian steel and aluminum products.
Though he would prefer customers not have to pay more, and suggested food companies manufacture products in Canada, Medline said price increases may be unavoidable. "Any cost increases ultimately would have to be reflected at the price and retail but our view is, we need to find alternatives and we're not going to easily pass tariff price increases onto our customers."
Medline said the company has heard from some of its supply partners who have tried to pass on those cost increases. Empire has said no, he said, adding it seemed early to be doing so.