Grocery giant to expand discount label

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This article was published 13/12/2017 (2324 days ago), so information in it may no longer be current.

The discount grocery segment is going to get a little more crowded as the owner of Sobeys and Safeway converts a quarter of its 255 western Canadian stores to the FreshCo flag over the next five years.

Empire Co. Ltd. CEO Michael Medline said the parent company’s decision to convert some of its 255 Sobeys and Safeway stores provides an “attractive strategic and financial opportunity” for it to grow market share in the western provinces in a profitable way.

Part of the thinking is that there are not nearly as many discount retailers in Western Canada as is the case in Eastern Canada.

News of the plan broke Wednesday morning after Empire posted a loss in its latest quarter as it was hit by restructuring costs, and said it would incur increased labour costs starting at the end of the third quarter of fiscal 2018 as a result of minimum wage increases in some parts of the country.

Shares of Empire were down close to six per cent Wednesday.

While Empire refers to FreshCo as a discount chain, some industry observers say the company has to be careful with the manner in which it rolls out the strategy.

Sylvain Charlebois, dean of the Rowe School of Business at Dalhousie University, said the move makes sense.

“Convenience does not necessarily trump price in some markets,” he said.

But he said it is important to not confuse the market, and that making the transition into the discount world can be tricky.

“Unlike Loblaws, for example, which has a very successful model with No Frills in Ontario and SuperStore out west and (in) Atlantic Canada, I have always felt that Sobeys is not as well equipped as other grocers to attract a market looking for bargains and discounts,” Charlebois said.

“The challenge for Sobeys is that it should try not to confuse the market.”

Munther Zeid, owner of five Food Fare locations in Winnipeg, agreed. While “anything that opens has an impact in the market when it first opens,” he said Sobeys will have to be careful how it markets a discount offering.

For instance, he said mainline grocery stores do not want people to get the impression they are a discount store.

He said it works better when there are different brands for the different target markets.

Company officials would not say which locations will be converted to FreshCo. The newest full-service Sobeys and Safeway locations tend to be greater than 45,000 square feet in size. The company opened its first FreshCo in 2010 and now operates 91 FreshCo locations in Ontario.

The average size is just over 30,000 square feet.

“Our comprehensive research and analysis shows that the West is fertile ground for ‘small box’ discount,” Medline said.

Jacquelin Corrado, a spokeswoman for the company, said, “The expansion of discount will take a little time to initially roll out. We need to have conversations with affected employees and will need to work with the relevant labour unions. We will also need permitting plans to renovate stores.”

Empire said it lost $23.6 million, or nine cents per share, for the 13 weeks ended Nov. 4 compared with a profit of $33.1 million, or 12 cents per share, a year ago. Sales in what was the company’s second quarter of its 2018 financial year grew to $6.03 billion, up from $5.93 million.

On an adjusted basis, Empire said it earned $73.9 million, or 27 cents per share, up from an adjusted profit of $32.9 million, or 12 cents per share, in the same quarter last year.

Last month, Empire announced plans to cut about 800 office jobs as part of its move to improve its operations amid rising challenges in the grocery industry, including new rivals, technological change and rising minimum wages.

The company warned during its quarterly results that it may not be able to fully offset the impact of minimum wage increases in Ontario and Alberta that will cost up to $25 million in its 2018 financial year and $70 million in its 2019 financial year.

“We continue to work on further plans to mitigate the full year impacts for fiscal 2019, but there is some risk that we may not be able to fully offset the effects on earnings, considering the short transition period of the cost increases,” chief financial officer Michael Vels said during a conference call Wednesday.

Shares of Empire Co. closed down $1.56 to $24.59 Wednesday on the Toronto Stock Exchange.

— with files from The Canadian Press

martin.cash@freepress.mb.ca