Sobeys Inc., the country's second largest grocer, is poised to gain more clout in its key Atlantic Canada market thanks to a proposed supermarket deal announced over the weekend. But the move comes amid concerns of growing consolidation in the grocery sector.
Sobeys, owned by Empire Co. Ltd. of Stellarton, N.S., sealed an agreement on Saturday to buy most of the corporate food and gas retail stores and wholesale assets of Co-op Atlantic. Co-op is a network of about 170 supermarkets and convenience stores that operate under the banners Co-op, Valufoods, Village Mart and Rite Stop.
While only about 10 stores would probably change hands, the deal could bolster Sobeys' position by making it a bigger supplier to grocers in the region, giving it more influence in determining pricing and product offerings. The value of the deal has not been disclosed.
Smaller grocers have already raised concerns that the market is being reduced to fewer key players, making it tougher for independents to operate. Independent grocers have called on the federal government to introduce a code of conduct to limit the control big companies can exert in a market that consists of fewer players. They have pointed to Britain and Australia as models of countries that have adopted codes of conduct.
"Any acquisition that continues the trend of retail consolidation is worrying, especially in the Maritimes where consolidation eliminated a lot of independents from the market," said Gary Sands, vice-president of the Canadian Federation of Independent Grocers.
"In the absence of any mechanism, such as a code of conduct, to provide a framework for more fair and transparent practices in the industry, these acquisitions will reverberate across the country," Mr. Sands said.
The latest deal, which will be voted on by Co-op members on May 12, is among an array of takeovers in the grocery sector over the past couple of years that have left Sobeys and its larger rival, Loblaw Cos. Ltd., with more assets, raising questions about how viable the remaining grocers will be in the intensifying market.
Industry consolidation stepped up two years ago as U.S. discounter Target Corp. entered the Canadian market, putting pressure on all players to improve their game. But even as Target has now closed its failed chain in Canada, grocers still feel the heat from Wal-Mart Canada Corp., which continues to expand its grocery business in its super centres.
Two years ago, sales in the traditional grocery and convenience stores in the Atlantic region fell 2.5 per cent, although they recovered a little in 2014, rising 1.7 per cent, according to industry publication Canadian Grocer. Sobeys and Loblaw dominate the region, with Wal-Mart rapidly picking up more business.
Jeff Doucette, general manager of grocery researcher Field Agent Canada, said in the Atlantic region "with an effective duopoly in grocery, this is a way to grab some share for Sobeys and get some efficiencies in its wholesale/independent network, mainly Foodland.
"Co-op has been bleeding share in the region as Loblaw and Sobeys grow and Wal-Mart expands its super centre presence," Mr. Doucette said. "This is a bit of a mercy purchase in my view."
Sobeys officials declined to comment, referring questions to Co-op. In a statement, Co-op's chairman Adelard Cormier said the decision was a difficult one but "the best option for the continued viability of the member-owner stores and the co-operative movement in Atlantic Canada."
Co-op spokeswoman Monique Bourque said the 60 individually owned Co-op stores are not part of the Sobeys deal and will remain independent. "They can now begin discussions with Sobeys on a potential new wholesale agreement."
She said as part of the agreement "a small number of corporate-owned stores" would close. "Those details will not be finalized until after the member owner vote on May 12."
Other key industry takeovers include Sobeys' $5.8-billion deal in late 2013 for Canada Safeway in Western Canada. Soon after, Sobeys touched off a storm in the industry when it demanded a 1-per-cent retroactive "synergy" price cut from its suppliers and no increase in 2014 as a result of the takeover.
Two years earlier, Sobeys acquired 236 retail gas sites and convenience stores in Quebec and Atlantic Canada from Shell Canada for $214.9-million.
Early last year, Loblaw sealed a $12.4-billion agreement to buy Shoppers Drug Mart Corp. The federal Competition Bureau is investigating Loblaw's pricing strategies in a probe that has required that some of the chain's key suppliers hand over secret records about their dealings with the supermarket behemoth.
Stewart Samuel, program director at researcher IGD Services Canada, said he expects Sobeys's latest deal can improve some of Co-op's stores but others "over the medium term could be shuttered. The rationale for most deals in the sector is to not only to increase volumes and reach new customers, but to also deliver improved operating efficiencies and better margins."
He said he expects continued consolidation in the sector although "relatively few opportunities remain for large-scale deals." Attractive takeover targets exist particularly in the convenience-store, ethnic and drugstore segments, he said. "Acquiring the capabilities to help them improve their offers and meet the future needs of Canadians is likely to be more important than adding to their traditional supermarket footprints."