Sobeys’ parent Empire posts massive loss
Canada’s second largest grocer loses $942.6M amid Safeway struggles
TORONTO The parent company of grocery retailer Sobeys Inc., has a lingering, severe case of indigestion in the wake of its acquisition of the western Canadian Safeway chain three years ago, posting a huge quarterly loss Wednesday, taking a $1.3-billion impairment charge and sending its stock into a tailspin.
At the end of the day, Empire Co. Ltd., shares plunged nearly 10 per cent as executives admitted there is much work to be done to remedy problems in its supply chain, tweak its house-branded private label products and find the right pricing mix at its stores.
“It’s not simple promotional fixes that will get the job done,” said Empire’s CEO Marc Poulin. “It’s more fundamental changes that will adapt the business for our customers.”
Canada’s second largest grocer has suffered amid stiff competition from lower-priced discount chains, such as No Frills and Walmart, particularly in areas of the country where consumers are feeling the oil industry downturn.
To help the situation Sobeys has been running aggressive price promotions at its full-line stores, but it only operates its discount banner FreshCo in Ontario, where discount retailers have been driving the bulk of the growth in Canada’s grocery sector for the last year.
“We know the overall market continues to experience significant shifts in consumer mindset,” Poulin said.
“People are looking at pricing even more than usually,” he added, citing “an overall customer that is changing the way they are shopping.”
Weakness in the western Canadian business has weighed on Sobeys’ results for the past three quarters and that got even worse in the fourth quarter, and sales appear to be softening in other regions of the country, Poulin said.
The company will be revamping its distribution and supply chain in Western Canada over the next year, and has lowered prices on produce, meat and in broader groceries. It has renegotiated the allowances it receives from its suppliers, allowing Sobeys to lower its shelf prices and overall costs and improve the chain’s so-called “price perception” among consumers.
But on the pricing front, “a significant amount of heavy lifting remains to achieve traction with our customers over the long term,” Poulin said.
Meanwhile, industry observers say the initiatives do not appear to have helped Sobeys much thus far.
“They announced an aggressive discount program in Quebec and elsewhere, transferring rebates (on packaged goods sold) in the centre of the store over to the consumer, and I am just not convinced it is benefiting the company,” said Sylvain Charlebois, agriculture expert and dean of management at Dalhousie University in Halifax.
Charlebois added that the acquisition of Safeway seems to have been more challenging for Sobeys than it had initially imagined.
Charlebois said the problems might have been exacerbated by how the companies operated before the takeover.
“You are looking at two very distinctive cultures and they managed their businesses quite differently. Safeway’s private label strategy was a little stronger and more committed, whereas at Sobeys it seemed like a bit of an enigma, and it felt like they didn’t know what to do with it. That is really different from Loblaw, where you really feel a strong commitment towards the brands.”
In the period ended May 7, Empire reported a loss of $942.6 million, amounting to a loss of $3.47 per diluted share, net of non-controlling interest. That compares with net profit of $55.4 million (20 cents per share) in the fourth quarter of last year.
The woes led to the company taking a $1.3-billion impairment charge in the fourth quarter, coming just months after having to take a third-quarter writedown of $1.59 billion related to the value of Canada Safeway, which it acquired in November 2013.
Empire’s annual fiscal loss amounted to $2.13 billion, or $7.78 per diluted share, compared with net income of $419 million ($1.51) in fiscal 2015.
Sales were $6.28 billion, up 8.9 per cent from $5.77 billion a year ago, helped by an extra week in the quarter compared with 2015.