The new leader of grocer Sobeys Inc. vows not to "miss out" on the emerging e-commerce battle as U.S. powerhouse Amazon.com Inc. prepares to shake up the supermarket sector with its upcoming $13.7-billion (U.S.) acquisition of Whole Foods Market Inc.
Michael Medline, who took over as chief executive officer at Sobeys in January, said the retailer must become "a strong participant" in e-commerce, both in home delivery as well as the less-costly "click and collect" model that is being tapped into by major rivals. It entails customers ordering online and picking up their purchases in stores.
But the grocery landscape is expected to change dramatically in the coming years following Amazon's announcement this month it will swallow U.S. organic supermarket chain Whole Foods, giving Amazon a stronger foothold in higher-margin fresh food and threatening to pinch incumbent grocers' bottom line.
"There's no way we're going to miss out on e-commerce," Mr. Medline told an analyst conference call on Wednesday after the company posted weak but overall better-than-expected fourth-quarter results. "It's going to be so essential, not in the short term, maybe not in the medium term, but long term for our customers, and it's all about customers and what they want."
Even so, the new CEO has a lot on his plate as he gears up for what he dubs "Project Sunrise" and a transformation of the troubled business after it got bogged down in its late-2013 acquisition of Safeway in Western Canada and botched merger efforts.
Now Mr. Medline will have to navigate new digital waters while slimming down Sobeys's staff and operations and taking on competitors that are rushing to beef up their e-commerce.
"Successful and timely implementation of the strategic plan to reduce complexity and lower costs by $500-million boils down to execution and the process is unlikely to move forward in a straight line," said Irene Nattel, managing director at RBC Dominion Securities, adding that Mr. Medline warned there would likely be "hiccups" along the way.
Amid "financial, operational and structural headwinds," Sobeys grapples with the "structural disadvantage" of not having enough discount grocery stores, she said.
And while Sobeys's results in the fourth quarter ended May 6 – the first full quarter since Mr. Medline's arrival – showed signs of improvement, they also suggest Sobeys continues to lose market share to archrivals Loblaw Cos. Ltd. and Metro Inc., Ms. Nattel said.
Rivals are benefiting from discount divisions at a time when consumers are turning increasingly to low-cost chains, such as No Frills, owned by industry leader Loblaw, and Food Basics, run by third-ranked Metro.
Sobeys, which is the country's second-largest grocer, operates discounter FreshCo in Ontario, but has yet to expand it beyond that province. Mr. Medline hinted he will eventually launch FreshCo in Western Canada, but "we don't want to be rushed to make a decision," he said on Wednesday. He said he won't reveal publicly if and when Sobeys does roll out FreshCo in the West because "we don't want to give a heads-up to our competitors."
Investors seemed pleased with Mr. Medline's progress. Class A shares of parent Empire Co. Ltd. (whose business is mostly Sobeys) jumped almost 10 per cent to $21 on Wednesday on the Toronto Stock Exchange.
Mr. Medline, a former Canadian Tire Corp. CEO who took that title at Empire and Sobeys, said initial efforts to transform the business and chop $500-million of annual costs by the end of 2020 are starting to take root but "we're not out of the woods yet."
He acknowledged he is taking "a little bit of risk in terms of keeping the wheels on while we're transforming" but added he prefers that to the "status quo."
Jim Durran, managing director in research at Barclays Capital, said that, in light of Amazon's planned takeover of Whole Foods, "the market is probably going to have to step it up just to be in a very good position" to take on new e-commerce competition.
Mr. Medline said Sobeys has a good e-commerce base but also "some work to do there."
Sobeys has been selling online in Quebec at its IGA division for years, "probably longer than anyone else," he said. "But we didn't put our foot on the pedal … We didn't expand it." Now, however, Sobeys has to restructure first before it can afford new initiatives, he said.
Empire expects one-time costs of about $200-million tied to severance, staff relocations, consulting and minor system developments, mostly in the first half of fiscal 2018.
Stellarton, N.S.-based Empire had a fourth-quarter profit of $29.5-million or 11 cents a share compared with a loss of $942.6-million or $3.47 a year earlier, the latter a result of asset writedowns that were mostly related to its Safeway acquisition. After excluding last year's writedowns, Empire's adjusted profit slid to $50.2-million or 18 cents a share from $95.3-million or 35 cents.
Sales dropped to almost $5.8-billion from about $6.3-billion, with most of the decline attributed to last year's extra week, while sales at stores open a year or more fell 1.1 per cent, or 1.6 per cent when excluding fuel sales. Those sales, which exclude the effects of annual store openings and closings, are considered an important retail measure.
Mr. Medline launched in the spring Project Sunrise, a three-year transformation intended to simplify the organizational structure and cut costs.
As well, Empire board of directors increased the annual dividend to 42 cents a share, or 10.5 cents a quarter, starting with the July 31 payment.