Grocer Sobeys Inc. is cutting its fresh food prices in Western Canada as it feels the pressure of low-cost rivals touting their discounts in oil-struck markets and stealing away business.
Sobeys is being hit with fewer customers coming to its stores and eroding profit margins and sales, especially in Alberta and Saskatchewan, company executives said on Thursday after posting disappointing third-quarter results. Sobeys is also struggling with a troubled integration of its newly acquired Safeway chain.
"We're not dealing with the same customer psyche that we were dealing with even a year ago," Marc Poulin, chief executive officer of parent Empire Cos. Ltd., told analysts. "The behaviour of the customer has changed in Western Canada, and we have to acknowledge that."
Despite higher purchasing costs because of a weak Canadian dollar, Sobeys and other grocers are grappling with cost-conscious consumers in Western Canada, particularly in Alberta and Saskatchewan. Now Sobeys' latest move to reduce prices of fresh fruits, vegetables and meats threatens to intensify the food fight, potentially leading to price wars.
"The other grocers may need to respond" with even lower prices, Peter Sklar, retail analyst at BMO Nesbitt Burns, said in an interview. "The competitive environment is going to tighten in the West."
He said Loblaw Cos. Ltd., the country's largest grocer, has benefited from the rocky economy in Western Canada with its discount chains Real Canadian Superstore and No Frills. Sobeys, for its part, doesn't run a discount grocer in that part of the country. It operates its low-cost FreshCo chain in Ontario.
But amid a tougher environment, Sobeys is considering launching FreshCo in the western provinces. "We are happy with the FreshCo banner's performance in Ontario and would be foolish not to explore how the franchise FreshCo model could be a solution to some of our structural challenges in Western Canada," Sobeys spokesman Andrew Walker said on Thursday.
If Sobeys fails in its latest efforts to woo back customers, the grocer "may have to take the giant step of introducing its Ontario discount banner (FreshCo) to the West," Michael Van Aelst, retail analyst at TD Securities, said in a note. "The related cost to alter labour contracts and build brand awareness would be quite punitive in the early years."
Sobeys, the country's second-biggest grocer, which acquired Safeway in late 2013, has struggled with weak results over the past few quarters after its integration of the western chain went awry. At the same time, Sobeys is operating in a difficult economy, particularly in Western Canada where it bulked up with its Safeway takeover.
Mr. Poulin, the CEO, said Sobeys' attempts in Western Canada to introduce temporary discounts didn't help it recover lost business and squeezed its margins. "We have to address the problems from a more structural point of view."
Sobeys even stumbled when it launched a major cross-country promotion in the fall. The program allowed consumers to collect stamps and redeem items such as Jamie Oliver knives, glassware and pots and pans. But it was so popular, the grocer ran out of giveaways in Eastern Canada. "Unfortunately, we made the news in Atlantic Canada about some customers chasing some knives" because of a shortage of supplies "for a few days," he said.
The promotion "ended up costing a lot more in gross margin than anticipated," Mr. Poulin said. It contributed to pinched margins of between 0.3 and 0.4 per cent, chief financial officer François Vimard said.
As a result of the challenges, Sobeys will take longer than initially expected to stabilize the business, Mr. Vimard said, adding that it will return to more normal profit margins "in the next few quarters."
To help cut prices, Sobeys is trying to simplify its purchasing process with suppliers to gain better prices from them and pass them on to consumers, Mr. Poulin said. And it is trying to run the business more efficiently to generate savings and invest in renovating stores in its most promising markets, he added.
Sobeys was also hurt by staff changes in Western Canada as its worked to merge the Safeway business into that of Sobeys, Mr. Poulin said. And it felt a crunch after consumers resisted its switch to its Sobeys private-label line of products at Safeway, although the situation is improving, he said.
In its third quarter, Empire took a $1.59-billion writedown on the value of its western business, mainly its Safeway chain, resulting in a loss of $1.36-billion or $5.03 a share, compared with a profit of $123.6-million or 45 cents a year earlier. Empire said the loss was largely a result of a recognition that the long-term value of the Safeway business is lower than previously estimated. Revenue rose to $6.03-billion from $5.94-billion.
Excluding the writedown and some other items, Empire would have had $82.5-million of adjusted third-quarter earnings, down 36.1 per cent from $118.6-million. After adjustments, Empire earned 30 cents a share compared with $118.6-million of adjusted earnings or 43 cents a year earlier.