Toting a black binder, Michael Medline strode into a hotel suite filled with members of Empire Co. Ltd.’s board of directors to pitch himself as the new CEO of its Sobeys grocery chain. But Medline barely needed to look at the handwritten sheets of paper in his binder—he’d mostly memorized his blueprint for how to save the struggling retailer.
It was late 2016, and shares of Empire had plummeted in the wake of its $5.8-billion takeover of Western Canadian grocery stalwart Safeway in 2013. “I compared Sobeys to a diamond,” Medline recalls. “It was still a diamond, but it was just lying there. It had to be picked up and brushed off and uncovered. There was a lot to like, but there was a lot of work to do.”
By the time Medline was named to the top job at Sobeys in January 2017, the company had been without a permanent CEO for six months. Marc Poulin, its previous boss, was fired in July after he tried—and failed—to fix the grocer’s myriad problems. Those included a cumbersome regional structure that bogged down decision-making, and supply-chain snafus that prevented goods from getting to stores on time, if at all, leaving shelves empty. Purchasing glitches resulted in wilting produce. To top it off, Sobeys upset long-standing Safeway customers by changing its rewards program and dropping popular in-house brands. In 2016, Empire took heavy writedowns, erasing half the value of the Safeway deal.
Shoppers complained en masse. Medline read much of the feedback himself, often calling customers from his car on his way home from work. “We had sorely let them down and had to earn back their trust,” he says. “I told them we would move as fast as possible, but we asked for their patience—that we would make them proud again to be Safeway shoppers.”
Medline also held town hall sessions with employees across the country to outline his four-point plan (internally, he calls it “the mantra”), which entails untangling the regional web of fiefdoms into one centralized organization (done); slashing costs by $500 million over three years (barely started); building the brand to win back customers, both online and in bricks-and-mortar stores (work in progress); and fixing the West (also a work in progress).
Today, Medline is one-third of the way through his three-year turnaround plan, a.k.a. Project Sunrise. Empire’s stock price has rebounded, and sales at stores open a year or more (a critical metric) are finally heading in the right direction, helped by inflation. Shelves are better stocked, and fruits and vegetables are crisper and not spoiling as quickly. The company is also slimmer: It has shed 800 employees (almost 20% of its office staff) since late fall, helping to chop $25 million in costs.
Even so, not everyone sees clear signs of improvement. Michael Kehoe, a retail specialist at Fairfield Commercial Real Estate in Calgary, says he’s underwhelmed by the changes at Safeway and Sobeys in Alberta. “I don’t think there’s anything that differentiates those stores,” Kehoe says. “They’re just so bland. The customer is screaming for uniqueness, a more modern approach. It’s like turning a battleship at sea. It’s going to take months, years.”
At the same time, the estimated $100-billion-a-year Canadian grocery market is becoming increasingly crowded, with Walmart Canada, Costco Canada, Amazon and even Shoppers Drug Mart (which was swallowed by Loblaw Cos. Ltd. in 2014) all piling in. “Everyone’s got their hand in the other guy’s pocket,” Kehoe says.
Michael Graydon, CEO of Food and Consumer Products of Canada, which represents suppliers, says he abandoned his local Safeway in Vancouver more than two years ago in favour of Whole Foods, where he found the food fresher and often cheaper. But Graydon started seeing improvements in Safeway stores last summer—at least the shelves were full, and “the produce had come back to what I would classify as Safeway levels,” says Graydon. “They’re getting it back together, slowly but surely.”
Making sure shelves are fully stocked is pretty much Retail 101, which is why Medline made that his top priority after taking over. “That, at any retailer, will upset the customer more than anything,” says Medline. “It was critical to bringing back confidence across the country, but especially in the West.” So far, his team has reduced the number of missing products by more than half.
As for cutting costs, Medline expects his single largest source of savings will be shedding suppliers and negotiating better deals from the ones that remain. “We’re going to have to place our bets behind certain partners,” Medline says. “There’s only so much room in a store.”
Suppliers are gearing up for the battle, according to Graydon, but they do want Sobeys to succeed. Canada’s largest grocer, Loblaw, angered vendors in January when it cut payments to many of them by 0.79%. That has given suppliers more incentive to ensure Sobeys, the country’s second-largest grocer, stays in the game. For his part, Medline says he won’t pull a Loblaw and unilaterally change the terms of supplier contracts. That’s an approach vendors appreciate, says Graydon, adding they’re willing to sit down for “constructive discussions” that can boost business all around.
Sobeys is also racing to ramp up its e-commerce home delivery business—it has signed a deal with British online-grocery specalist Ocado to bring its robotic online systems to Canada and is building a $70-million distribution centre specifically to fulfill online orders. Mark Petrie, retail analyst at CIBC World Markets, calls this Sobeys’s most intriguing play—but it won’t launch in the Toronto region for another two years. Meanwhile, Walmart Canada is already starting to push home delivery of fresh food in a bid to keep up with Amazon, which bought Whole Foods last summer.
Today’s consumers don’t just want home delivery; they want stuff cheap. With no discount brand in the West, Sobeys missed out on consumers’ growing appetite for bargain shopping during the downturn. Now, it’s hoping to cash in by taking its discount FreshCo chain westward. One problem: Medline says the company’s own customer research found shoppers don’t recognize the FreshCo brand (which now operates only in Ontario) as a purveyor of not just fresh product, but cheap groceries as well. Part of the problem is that it looks too slick, with its signature black, white and green palette. “The perception is that it is more expensive than it actually is,” says Medline. His FreshCo 2.0 strategy toys with changing its colours to ones that trumpet its discount focus (think yellow).
As Medline prepares to convert almost 65 of roughly 250 Sobeys and Safeway stores in the West to the FreshCo banner, he’s facing another challenge: negotiating lower wages and benefits with its unions to level the playing field with rivals. In British Columbia, the United Food and Commercial Workers Union has already filed a complaint with the B.C. Labour Relations Board after Sobeys said it would shut down 10 underperforming Safeway stores but would consider reopening five if it received an “appropriate” FreshCo contract. The UFCW is calling the move an illegal lockout and has asked the province to intervene in stalled talks.
Another pain point is the new minimum wage in Ontario and Alberta. Sobeys (along with other retailers) is struggling to offset those increases, plus an anticipated reduction in its pharmacy revenues due to the latest round of cuts to generic drug prices. The latter alone could pinch Sobeys’s pretax profit by $40 million.
On the merchandise side, Medline hopes to persuade Safeway customers to embrace Sobeys’s private-label Compliments brand (its initial introduction was disastrous, since it summarily replaced beloved Safeway labels). Perhaps more importantly, Sobeys needs to carry a wider range of fresh foods to help nudge families to do their full weekly shopping at its stores, rather than just smaller “convenience” trips. To accomplish this, Sobeys must rebuild Safeway’s historical strength in fresh fare, which might help win back the four percentage points of market share it has lost in the past five years.
Empire is making money again, after a $2.2-billion loss in 2016. But while same-store sales have risen recently in the West, Sobeys isn’t out of the woods yet. Medline’s moves will take time to reach their potential, says Petrie.
Medline is aware of the risks. “We’re not exactly bragging, because when you lose that much market share, you have a long way to go,” he says. “We’re only seeing early progress. There is still a big journey ahead of us.”