Grocery Business Magazine

March 12, 2015

Sobeys clients balk at price increases

Volumes down amidst record Canadian consumer debt

Sobeys Canada’s parent Empire Company reported disappointing sales numbers today. Revenues at the national grocer fell by 1.1 percent to $5.9 billion in nominal terms during the third quarter ended January 31, 2015. Worse, company officials indicated that food inflation ran at 3.9 percent during the quarter. If that number is correct (Empire did not immediately reconfirm it) volumes could be down significantly.

Marc Poulin, the company’s president and chief executive officer acknowledged that the higher cost of import products is causing sticker shock among cash strapped Canadians. “We are finding it hard to get consumers to understand that the price reality is changing,” said Poulin, in a call with investment analysts this morning.

Empire Co. officials point out that sales data look somewhat better on a same store basis and that store divestitures and closures caused part of the drop. However they did not disclose to what extend the volume drop was due to consumers increasing purchases at non-grocer discounters such as Wal-Mart and pharmacies.

Weak loonie hits food shoppers hard

While politicians and financial institution economists laud the falling Canadian dollar, which has dropped from $1.04 to $0.79 relative to the US dollar during the past few years, the plunge has hit ordinary food buyers hard. That’s particularly true with respect to goods brought in from the United States or countries whose currencies are pegged to the greenback.

The higher food prices could not have come at a worse time for cash strapped Canadians, who are now awash in record debt. According to Statistics Canada data released this morning average mortgage, credit card and other consumer debt in Canada, shot up to 163.3% of disposable income, a trend clearly weighing on consumer spending decisions.

Sobeys has thus been increasingly forced to rely on generating efficiencies, to boost profits. They have clearly been doing a good job. Adjusted net earnings per share from continuing operations rose by an impressive 38.3 percent during the quarter to $1.30, compared to $0.94 during the same quarter last year.

Tightening operations

Much of the current synergies stem from the $200 million in efficiencies Sobeys executives hope to squeeze out of operations, when integration of the 213 Safeway stores acquired in 2013 is complete. For example the company has already combined many Safeway and Sobeys SKUs under one private label brand. That trend is expected to continue.

Poulin also announced that just after the end of the previous quarter, Sobeys was able to roll out integration of its SAP enterprise resource planning IT system in Safeway stores. This, plus the company’s recent move to accept Air Miles reward points across the country, will better help managers track consumer spending patterns and to tailor merchandizing efforts accordingly.

Distribution center closures on the way

Last month, Sobeys also confirmed the shuttering of Canada Safeway’s Winnipeg warehouse/distribution center, a move that will trim company payrolls by 172 employees. Sobeys, which has 18 (Sobeys and Safeway) retail support centers in Western Canada also indicated that more shutterings were on the way.

One group that got great news was Empire Group’s shareholders. They, and senior executives such as Poulin, whose $4.8 million 2014 salary was heavily tied to stock options, will be benefitting from a huge share buyback program announced this morning. The company is expected to repurchase $160 million worth of shares during the coming 12 months, about 3% of the outstanding float.

peter@peterdiekmeyer.com

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