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Report On Business After Safeway deal, Sobeys’ results are in the spotlight

A Sobeys store in Calgary.

Todd Korol/The Globe and Mail

It has quietly made headway in an increasingly cutthroat grocery market, but now Sobeys Inc. has been thrust in the spotlight with its $5.8-billion deal to swallow a key western rival.

Sobeys' parent, Empire Co. Ltd. of Stellarton, N.S., unveiled this month its surprise agreement to take over Safeway Inc.'s profitable Canadian division. The acquisition is designed to bolster Sobeys' presence in the critical western provinces and solidify its position as the country's No. 2 grocery player.

Even before the deal was announced, Sobeys was "in fighting form" to navigate the choppy waters of today's supermarket wars, said Perry Caicco, retail analyst at CIBC World Markets.

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Sobeys' business model of slashing costs and prices, while improving its store offerings and displays, "should allow it to survive the next couple of years in pretty good shape," he said in a report earlier this year.

Industry leader Loblaw Cos. Ltd. gets most of the attention for its seven years of reinvention under celebrity leader Galen G. Weston, but second-ranked Sobeys has been slogging away in the trenches to boost its operations and then taking a big stride by snagging the coveted Safeway Canada.

Still, business remains a struggle, with consumer confidence relatively weak and customers counting their pennies.

"You really have to work very hard at putting your best foot forward to convince the consumer to take dollars out of their pocketbook," Marc Poulin, chief executive officer of Sobeys, said in March. "We have to work harder at getting the consumer to make a full shop ... You have to earn your sales on a daily basis in this environment."

To make gains, Sobeys followed a similar path that leading U.S. grocer Kroger Co. took to battle the rise of Wal-Mart Stores Inc. as a food powerhouse, stealing sales from specialty players. In Canada, Sobeys also takes on Wal-Mart, the emerging Target Corp. and other forces in its move toward becoming "a leaner, meaner machine," Mr. Caicco said.

On Thursday, when Empire reports its fourth-quarter results, it will probably get more scrutiny than usual. Food inflation rose 1.7 per cent between February and April, according to Statistics Canada, but Sobeys will probably report a quarterly inflation rate closer to 0.25 per cent, Mr. Caicco said.

Sobeys and other grocers have been forced by fierce competition to offer more discounts to draw customers, providing little leeway for price hikes. The landscape is expected to become even tougher. As a result, "the Safeway Canada platform is an attractive one," said retail analyst Keith Howlett at Desjardins Securities Inc. About 70 per cent of its stores have been renovated over the past six or seven years. "The Safeway Canada assets fit well with the Empire's Sobeys business."

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