Sobeys Inc. to tackle discount in the West, e-commerce and price perception

Sobeys Inc. is finally joining the discount grocery fight in Western Canada and will come out swinging with plans to convert more than 60 underperforming Safeway and Sobeys to FreshCo stores in the next five years.

The announcement came Wednesday morning as Empire Company Limited, the parent of wholly owned Sobeys Inc., released its 2018 second quarter financial results.

The company posted a loss in its latest quarter as it was hit by restructuring costs. Empire said it lost $23.6 million or nine cents per share for the 13 weeks ended Nov. 4 compared with a profit of $33.1 million or 12 cents per share a year ago. Sales in what was the company's second quarter of its 2018 financial year grew to $6.03 billion, up from $5.93 million.

In a conference call with analysts and media, CEO Michael Medline said while he was skeptical at first about expanding the FreshCo banner, he now planned to move aggressively into the space.

“The absence of a large discount banner put us at a structural disadvantage,” he said. “Discount grocery is the fastest growing segment of the bricks and mortar market. Low cost formats today compromise about 44% of Canadian food retail.” But Sobeys Inc. is underrepresented in discount with 87% of its business in conventional, and FreshCo is the sixth ranked discount banner in terms of sales. “We need to participate to a greater degree in this higher growth segment.”

Western Canada will be the focus in part because some of its Safeway and Sobeys stores have been underperforming and also because the competitive intensity of discount grocery in the west is not as great as it is in Central Canada.

“The market is fertile ground for discount,” said Medline. “There is a lot of white space, especially for the size and format of store we have in mind.” Converting the larger Sobeys and Safeway stores to smaller FreshCo formats will cost $4 million on average and the stores will be franchised, he said.

Sobeys only launched the FreshCo banner in 2010 and has 88 stores across Ontario. Medline said the company had learned a great deal from launching the FreshCo brand—overseen by Rob Adams, general manager, discount—and those lessons will be applied to the expansion into Western Canada.

“The biggest learning is, from my perspective, when you are in retail you have to go for it,” said Medline. “You have to play to win. And I think we have not allowed Rob to be as aggressive and fight the discount fight as aggressively as we can. As we get out there, Rob’s gloves are off.”

During his call, Medline touched on a number of the key issues facing Sobeys Inc. Here are a few of the key takeaways.

Fresh face at FreshCo

While Adams will oversee the FreshCo expansion in the west, he’ll be assisted with a new vice-president of strategic initiatives for discount, Mike Venton, who joins the company Jan. 3. “Mike brings strong, very strong, operational and merchandising skills and most recently ran the No Frills banner. Obviously a great addition to a strong team,” said Medline. According to Loblaw, Venton led operations for No Frills for about two years until the end of 2016. Since his departure, Michael Rinaldi has led the No Frills team.

Conventional improvements

Despite the new plans to aggressively expand FreshCo, Medline stressed that bottom line growth for Sobeys Inc. would be driven by better same-store sales at its conventional banners. “This company has not been as strong at the basics of retail as we would like to be,” he said. That could be anything from service levels, to consistent in-store experiences and having the right products that customers want on the shelves when they need them, he said. “Getting the basics right, that is so important and that will be the main driver of our improvements over the next year or two.”

It will take dedication and hard work to lure back customers who were disappointed in recent years, he said. “I don’t believe in hail marys in retail,” he said. “We will increase our sales, we will gain back market share, but it takes a while to get those customers back and for them to trust us.”

Price: perception versus reality

Over the last 18 months, Empire has “realigned” prices to be more competitive, though many consumers still don’t realize it, he said. “I think there is some perception out there that we are more expensive than we are,” he said. “It is a much better deal to shop at Sobeys, Safeway and IGA than people know and it takes a while to change that perception.” Marketing will be focused on communicating the value proposition of shopping at those brand beyond that to get them excited about buying groceries there.

E-commerce

While the company has been focused on Project Sunrise, a comprehensive transformation plan to improve operational and structural efficiencies and drive out costs, Medline said expanding e-commerce beyond Quebec to the rest of Canada is atop his to-do list. “We have been relatively busy working on Sunrise and getting our brand going, and turning around our conventional banners and FreshCo expansion,” he said. “However one of the most important things that we will now be working on is an e-commerce strategy.”

Medline said he believed in home delivery and the company had learned a great deal from IGA’s online platform in Quebec, which has been growing aggressively. “But we have a long way to go to have an innovative great solution so that we can win the day and battle Amazon.”