Empire to take on No Frills, Walmart with Freshco rollout to Western Canada
Sobeys owner Empire Co. is converting up to a quarter of its existing stores in Western Canada to its discount banner FreshCo as it struggles to build up market share and regain customer acceptance after the fumbled acquisition of Safeway four years ago.
The news, which CEO Michael Medline warned would also result in the closure of some weaker stores in the Western market, comes after the layoff of 800 employees last month amid an ongoing restructuring of Empire’s business.
“The absence of a large discount banner has put us at a structural disadvantage,” Medline told analysts on a conference call Wednesday to discuss second-quarter financial results, where ongoing costs of the transformation pushed the retailer to a loss, in line with industry expectations.
Sobeys only operates its discount banner FreshCo in Ontario, while Loblaw operates Real Canadian Superstore and No Frills in Western Canada, where Walmart and Costco are also strong players.
“Discount grocery is the fastest growing segment of the bricks and mortar market,” Medline said, with low-cost grocers accounting for close to half of Canadian food retail sales, about 44 per cent. “This is a very attractive strategic and financial opportunity for us,” Medline said. “It will grow our market share in a profitable way.”
Currently, 87 per cent of Empire’s business is in the full-line grocery segment. The conversions will be accretive to earnings after two years.
Medline, the former Canadian Tire CEO whose turnaround plan and presence at the helm of the Nova Scotia-based company since January has helped to boost Empire’s stock by close to 60 per cent, told analysts that the grocery company is six months ahead of where management thought it would be from a financial results perspective.
Regardless, Empire’s shares fell five per cent in afternoon trading to $24.83 after the company warned it is heading into a tough period of its restructuring and might show inconsistent performance as it adjusts to the collapse of several operating units into one centralized structure.
Empire also said it may not be able to fully offset the impact of minimum wage increases in Ontario and Alberta that will cost the retailer up to $25 million in fiscal 2018 and $70 million in fiscal 2019.
The company’s three-year turnaround plan, dubbed “Project Sunrise,” was announced in May and is expected to result in approximately $500 million in annualized cost savings by fiscal 2020. It also included leveraging its scale for purchasing, simplifying its vendor processes and multiple productivity initiatives.
Beyond fixing operations, store formats and processes, Medline said the company still has to do work to win back customers alienated in the years following the messy Safeway takeover, which resulted in empty store shelves, disgruntled store-level employees and $2.9 billion in writedowns.
Medline said that the business is making improvements in the West and its strategic initiatives are starting to get traction, but that the unit’s results are still below where they need to be and that executives on store tours of the operation are still seeing “too much inconsistency store to store,” he said. “It’s a lot easier to turn customers away than to win them back.”
Empire lost $23.6 million in the 13-week period ended Nov. 4, or nine cents per share, compared with earnings of $33.1 million (12 cents) in the same period a year ago.
Sales rose to $6.03 billion from $5.93 billion, while same-store sales were virtually flat, edging up 0.4 per cent excluding fuel. Adjusted earnings were $73.9 million or 27 cents per share, up from $32.9 million (12 cents) a year ago.
Restructuring expenses in the second quarter amounted to $129.2 million.
Sylvain Charlebois, agriculture expert and dean of management at Dalhousie University in Halifax, said Project Sunrise appears to be making good progress.
“I think the company is doing what it needs to do to get a culture going to support all of their stores,” he said. The company’s expansion of its discount banner makes sense given that the majority of consumers value price over convenience, and that the country’s third-biggest grocery banner is the discount chain Walmart.
“When (Empire) looks at its own architecture it is not well designed to capitalize on discounting, unlike Loblaw, who is doing very well in that segment.”
This is a very attractive strategic and financial opportunity for us. It will grow our market share in a profitable way.” MICHAEL MEDLINE, CEO, Empire Co.