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Supermarket chain Sobeys Inc. says its $5.8-billion acquisition of Safeway’s Canadian assets will give it a foothold in sought-after retail markets in Western Canada.Todd Korol/The Globe and Mail

Grocers are bracing for a new round of consolidation as Sobeys Inc. prepares to swallow Safeway Inc.'s Canadian division and rivals feel the heat to bulk up to compete with bigger players.

Food retailers are pushing to broaden their geographic reach and ramp up their purchasing power in a low-margin industry which is pressed to keep prices down.

"Over all the only constant in this industry is change," Marc Poulin, president of Sobeys, said in an interview on Thursday, a day after its parent, Empire Co. Ltd. of Stellarton, N.S., unveiled its surprise $5.8-billion Safeway Canada deal.

"It's been an industry that has been very dynamic over the years as players continuously have to reinvent themselves to … offer better value to consumers."

Major grocers are jostling to bolster their business amid intensified competition as giant U.S.-based chains pump up their operations in Canada.

From U.S. discounters Wal-Mart Stores Inc. and Target Corp. to Costco Wholesale Corp., foreign titans are gradually stealing away food business from domestic players, forcing them to find new economies of scale to draw budget-conscious consumers.

The latest grocery deal will solidify Sobeys' ranking as the country's second-largest supermarket chain, greatly boost its western presence, and put more pressure on industry leader Loblaw Cos. Ltd. and Metro Inc., the No. 3 player, to operate more effectively and shave expenses.

"It's not just about building scale – it's about cost efficiencies," said Stewart Samuel, North American development manager at grocery researcher IGD. "It's very, very difficult to get organic growth in the market."

The specialty players have little appetite to add more stores so "if they want to grow, then acquisition is the route to take," he said.

Retail analyst Perry Caicco at CIBC World Markets noted in a report earlier this year: "The desperation among the buyers to enhance their buying power is growing; the synergy possibilities are immense; and the timing may never be better."

The players feel the urgency to improve their profits in an industry with close to 4-per-cent net margins, compared with about 10 per cent or more among other specialty retailers, such as those in clothing, according to Fusion Retail Analytics. Annual grocery sales are growing by 2.4 per cent, compared with 4 per cent annually pre-recession, it says.

Both Metro and Loblaw have eyed a takeover of Safeway Canada, which has for years been considered as a potential acquisition target. But Safeway didn't hold an auction and the Sobeys offer was unsolicited.

"Safeway knew our interest," said Marie-Claude Bacon, spokeswoman for Metro, whose supermarkets operate in Quebec and Ontario. "We were not invited to negotiate. We doubt that we would have been ready to pay that amount for these assets."

As for other consolidation, British Columbia-based Overwaitea Ltd. is a possible takeover target. Owner Jimmy Pattison, however, hasn't shown an interest in selling, Mr. Samuel said. "It's a solid business – it generates a lot of cash for the overall group. It would definitely be a very prized asset for any of the other retailers to acquire."

Other would-be targets are smaller, regional chains such as H.Y. Louie Co. Some Safeway stores – particularly in wealthy Alberta – could go on the block if the Competition Bureau reviews the Sobeys takeover and decides it has too many stores in that province, analysts said. The acquisition would leave Sobeys with about three times the number of stores of its closest rival, Loblaw, in Alberta. In Manitoba, it would have double the outlets of the No. 2 player.

Drugstore chains could prove enticing for major grocers as they expand their pharmacy business. Jean Coutu or even Shoppers Drug Mart could be potential targets.

For Metro, the Sobeys takeover could create an added headache. Metro and Safeway Canada are the biggest members of a grocery buying group, but Mr. Poulin suggested in the interview that Safeway would leave the group after the acquisition closes. Ms. Bacon would not comment about the buying group.

For Metro "it adds a little bit of profit pressure," noted Jeff Doucette, general manager of retail consultancy Field Agent Canada in Calgary.

Mr. Poulin also said that Sobeys' agreement to supply food to Target Canada would continue after the Safeway deal is completed, yet another way Sobeys has found to add heft to its business. A Target spokeswoman confirmed it will be business as usual with Sobeys.

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Tickers mentioned in this story

Study and track financial data on any traded entity: click to open the full quote page. Data updated as of 28/03/24 3:31pm EDT.

SymbolName% changeLast
CM-N
Canadian Imperial Bank of Commerce
+1.44%50.79
CM-T
Canadian Imperial Bank of Commerce
+1.25%68.75
COST-Q
Costco Wholesale
+0.02%732.24
L-T
Loblaw CO
-0.72%150.41
MRU-T
Metro Inc
-0.3%72.91
TGT-N
Target Corp
+1.29%176.93
WMT-N
Walmart Inc
-0.43%60.46

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