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Sobeys slashes jobs, costs after Safeway acquisition

File photo of a Sobeys supermarket in Toronto.

Fred Lum/The Globe and Mail

Sobeys Inc. is focused on shaving costs to win a tough food fight, with plans to consolidate manufacturing and distribution operations, cut jobs in two regional offices and force suppliers to retroactively reduce their prices.

Marc Poulin, chief executive of Sobeys, spoke publicly for the first time on Thursday about its controversial initiative to retroactively cut vendors' prices by 1 per cent. The company also is accepting no supplier increases in 2014, with some exceptions. The moves are aimed at helping the retailer generate some of the savings it promised from its $5.8-billion acquisition of rival Safeway Canada.

"Discussions with our suppliers are ongoing – we are pleased with what we're seeing so far," Mr. Poulin told analysts after parent Empire Co. Ltd. released disappointing third-quarter results. "Suppliers are realizing that we have a lot to offer in terms of partnering with them to drive our mutual business."

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Sobeys has pledged to slash $200-million in annual costs within three years of the takeover, which closed on Nov. 4 – half of that within the first 12 months.

But in its third quarter, which is the first to include Safeway, the company reported savings of only $6-million, lower than at least one analyst's forecast of $25-million. The retailer is now searching for other ways to save money, including selling some non-core assets, as it works to improve its bottom line.

It said its third-quarter profit was hurt by the effects of a weaker Canadian dollar and inventory "shrinkage," including the disposal of unsold or expired fresh foods that no longer complied with its new higher standards. As well, it was pinched by heavy competition, profit-squeezing drug reforms and costs tied to its Safeway acquisition.

"Empire's results continue to highlight the challenges faced in an increasingly competitive retail industry, particularly given its limited discount footprint," Michael Van Aelst, retail analyst at TD Securities, said in a note before the analysts' conference call.

"There is no avoiding the consumer shift to discount – it is structural in our view – and this is very likely to keep the pressure on Sobeys organic sales and margin trends over the coming years."

Still, Mr. Poulin said the company is on its way to achieving its efficiency goals. He said the company will close an ice cream and cheese manufacturing plant in Winnipeg, consolidating production in a facility in Edmonton.

The plant will shut on Aug. 29, cutting 50 jobs, Sobeys spokesman Andrew Walker said. The Lucerne Foods plant, part of Safeway, operates "well under capacity."

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It recently told employees in regional offices in Calgary and Rouyn, Que. that it will eliminate about 50 to 60 accounting and other roles, as it centralizes functions, Mr. Walker said. It also plans to close a distribution centre in Whitby or Milton, Ont., when the expansion of its Vaughan facility is completed in 2016.

Empire reported third-quarter profit fell to $400,000 or 0 cents a share from $74.1-million or $1.09 a share a year earlier. Its adjusted profit from continuing operations – mostly the grocery business – stood at $77.3-million, or 84 cents a share, from $75.8-million or $1.11 a share. Analysts had expected $1.23 a share in the latest period, according to Thomson Reuters I/B/E/S.

Sales rose to $6.02-billion, up $1.73-billion or 40.4 per cent, including sales from Canadian Safeway. Excluding sales of $1.62-billion related to the acquisition of Safeway, the sales contribution from the food retailing segment to Empire increased by $115.4-million or 2.7 per cent.

Sobeys' same-store sales -- a key measure of sales at outlets open a year or more -- fell 0.2 per cent, reflecting low food inflation, intense competition and a severe ice storm in Ontario.

The company made its price concession demands of suppliers in a Dec. 24 letter to them. Other retailers quickly followed suit with their own vendor demands.

Last week, Overwaitea Food Group, owned by the British Columbia-based Jim Pattison Group – which acquired 15 of the stores that Sobeys was forced to divest – made its own demands. In a letter to suppliers dated March 3, it implemented a "new store startup fee" of one free case of all listed items per new store, including "all new stores going forward in each banner."

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Now, industry groups are ratcheting up pressure on Ottawa to develop a code of conduct that would guide grocers and their relationships with suppliers. The move comes as the industry braces for more consolidation: the Competition Bureau is reviewing a $12.4-billion bid by grocer Loblaw Cos. Ltd. to scoop up Shoppers Drug Mart Corp., and a decision is expected soon.

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About the Author
Retailing Reporter

Marina Strauss covers retailing for The Globe and Mail's Report on Business. She follows a wide range of topics in the sector, from the fallout of foreign retailers invading Canada to how a merchant such as the Swedish Ikea gets its mojo. She has probed the rise and fall (and revival efforts) of Loblaw Cos., Hudson's Bay and others. More


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