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Grocery Business Magazine

March 10, 2016

Sobeys records $1.73 billion loss on Safeway debacle
Write-downs equal nearly all of Empire Company’s net earnings for the past five years.

Operational and personnel challenges, coupled with weak economies in Alberta and Saskatchewan have come to a head at Empire Company Limited. Sobeys’ parent today announced $1.73 billion in losses related to its $5.8 billion acquisition of 200 Canada Safeway stores, which was initially announced in 2013. To give some scale, the losses nearly equal all of Empire Company’s $1.8 billion in net earnings, during the past five years.

In a conference call with analysts this morning, Marc Poulin, Empire Company’s CEO, put a brave face on the write-downs, choosing to focus instead on the future, which he said will center on updated strategies related to pricing, network renewal and efficiency-related initiatives. These include a heightened focus on margins and shrink management.

New marketing strategies and increased promotional activity will also continue to play a role, as will store renewal efforts. In late January Empire Company launched its Better Produce at Lower Prices initiative, which included a consolidated Safeway /Sobeys flyer that is generating positive reactions. Sobeys also opened, expanded, re-bannered and/or redeveloped banners in 25 of its outlets during the quarter, and 118 for fiscal 2016 as a whole.

Losses highlight perils of acquisitions
The $1.73 billion Sobeys write-downs, which were announced in blocks of $137.7 million and $1.59 billion, amount to a recognition that Sobeys vastly overpaid for the Safeway stores. Although the company expects to generate more than $200 million in annual synergies from the acquisition, the Safeway acquisition was beset by challenges from the start.

These included difficulties in moving consumers away from the Safeway banner, which had far greater public appeal than expected.

Sobeys’ decision to consolidate numerous Western Canadian staff from its Safeway and Sobeys divisions in Calgary also generated considerable uncertainty. Many of the office workers affected either lacked clarity as to whether they would be asked to continue with the company, or whether they would be forced to move to the new regional headquarters. This uncertainty had a significant impact on operational efficiencies, particularly those related to Safeway stores and staff.

Sobeys’ challenges coincided with a downturn in Canada’s energy-rich provinces, due to the recent plunge in oil prices, which Poulin characterized as a “not insignificant,” element in Empire Company’s recent results.

Sobeys’ stumble with Safeway mirrors a widely-repeated pattern in a Canadian grocery sector. Loblaws took similar charges, reportedly totaling more than $1.5 billion, almost a decade ago, following its acquisition of Provigo stores, which were centered in Quebec. Last year Loblaws announced that it would completely eliminate its banner in La Belle Province. US-based Target also took a $5.4 billion write-off on its Canadian retail operations, part of which were grocery related.

The moves highlight persistent challenges faced by grocery sector managers who are squeezed in an increasingly competitive market, which is growing in the single digits, and shareholder expectations of double-digit profit increases.

Today’s write-downs confirm once again the perils of resorting to acquisitions to try to bridge the gap.

Peter@peterdiekmeyer.com

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peter@peterdiekmeyer.com

Peter Diekmeyer Communications Inc.