Focus turns to margins over steep price cuts

Medline said Sobeys prefers to focus on margin improvement than “empty calorie” same-store sales, which are most easily achieved in the cutthroat industry through steep price cuts.

Last year, Sobeys launched a three-year restructuring regime dubbed “Project Sunrise” aimed at achieving $500 million in annual cost savings by 2020.

The retailer has completely overhauled its merchandising, collapsing regional offices into a centralized structure in a bid to harmonize supplier prices, reduce cost of goods sold and improve merchandise margins.

During the quarter Sobeys closed 10 underperforming stores in B.C. and also announced it would extend its FreshCo discount banner into Western Canada, a region where it has been hindered by its lack of a low-cost store.

The restructuring continues four years after Sobeys’ botched integration of the western Canadian Safeway chain that led to departing customers, spiralling sales and $2.9 billion in writedowns before the former Canadian Tire CEO was brought in to turn around the business.

Medline told analysts Wednesday that Sobeys will regain its lost market share when its business overhaul takes hold: the rollout of its discount banner out West, improvements in merchandising and the extension of its e-commerce business announced in January in partnership with U.K.-based online grocer Ocado.

Grocery e-commerce has been a focus of industry retailers across North America since internet giant Amazon. com Inc.’s purchase of Whole Foods last fall, and Sobeys executives fielded multiple queries about the Ocado plan on the call.

Rival retailers including Loblaw and Walmart have started select delivery of online fresh grocery orders to consumers directly from their closest stores, rather than a having a warehouse for e-commerce shipments. And Costco Canada confirmed this week that it is exploring ship-from-store fresh grocery e-commerce.

Sobeys, on the other hand, will use Ocado’s e-commerce platform and build a Toronto-area warehouse over the next two years to fulfil fresh food orders in the area. Socalled store picking of fresh items for online orders — a method Sobeys currently uses at its Thrifty Foods unit in the West and at IGA stores in Quebec — may be the best system that is available in Canada right now, Medline told analysts.

But it “is not in the end, in the next 5-7 years, a sustainable, profitable, or the best way to serve your customers,” he said. “We made a decision to go for the win rather than a short-term answer.”

Net earnings were $58.1 million, or 21 cents per share, compared with $30.5 million (11 cents) in the same period a year ago. Adjusted net earnings were 33 cents per share, compared with 13 cents a year ago. That beat average analyst estimates of 25 cents, according to Thomson Reuters.