Sobeys Inc.'s plan to close about 50 stores underscores the pressures on grocers to find operating savings in a crowded field likely to face further retrenchment.
The addition of more food aisles at non-traditional retailers such as discounters and pharmacies is squeezing conventional supermarket operators, forcing them to consider following in Sobeys' footsteps and also close some stores, industry observers said on Thursday.
"Sobeys blinked – who will be the next to blink?" Kevin Grier, senior market analyst at food industry think tank George Morris in Guelph, Ont., asked rhetorically in an interview. "Is this the end of it – closures? I doubt it."
On Thursday, Sobeys confirmed it is closing about 50 underperforming stores, about 60 per cent of them in Western Canada, and cutting jobs – industry insiders estimate "thousands" of them – following its $5.8-billion takeover of Safeway Canada. The move will trigger $169.8-million in restructuring costs aimed at generating eventual savings and bolstering the bottom line.
The grocery sector is growing at an unprecedented pace as U.S. discount titans and other chains add more food to their shelves in a bid to tempt customers to shop more frequently.
But the abundance of grocery offerings is pinching each retailer and now pushing Sobeys to shut its weaker stores, a step that will turn down the heat in the sector but still leave many retailers strained.
"Over all the market remains very difficult," Marc Poulin, chief executive officer of Empire Co. Ltd., the parent of Sobeys, told analysts on Thursday. "We've got to fight for every single customer, every single day."
Perry Caicco, retail analyst at CIBC World Markets, said that Sobeys' planned pullback is "refreshing" in the tightening field. Rapid growth of grocery retail space "has crimped the Canadian market, and Sobeys has been the first to acknowledge that."
Sobeys' store closures will remove 1.5 million square feet – or 0.77 per cent of grocery retail space – from a 194 million square foot market, he said. That reduces the 2014 national industry square footage growth from 2.4 per cent to 1.6 per cent, he added. "This not only will improve Sobeys' earnings, but eases the pressure on the whole market."
Still, analysts said other retailers may now contemplate a similar move. In a $12.4-billion deal this year, Loblaw Cos. Ltd. acquired Shoppers Drug Mart Corp. and is working through its consolidation. Smaller players also are looking for ways to bulk up.
"Retailers have to take a hard look and really think about the profitability of their stores and, 'Are they worth keeping open or not,'" said Amy Koo, senior analyst at consultancy Kantar Retail in Boston.
Mr. Grier said grocers grapple with falling profit margins among their packaged foods, which make up a large part of their stores, usually in the middle section. Prices of packaged foods dropped 1 to 2 per cent in the past year, he said.
Mr. Poulin is also seeking to lower supply costs, negotiating with vendors to get better prices from them. "The cost base on a lot of our suppliers is right now being challenged and therefore will force everybody to re-look at their costing and pricing outlook for the future," Mr. Poulin told analysts. He expects "a little bit more inflation" this year than in past years.
Sobeys, which has vowed that its Safeway takeover will lower its costs by $200-million per year in three years, is on track to reduce expenses by $100-million in its first year, he said.
Late last year, Sobeys angered many of its suppliers when it told them it was retroactively cutting their prices by 1 per cent and not accepting increases in 2014, with some exceptions, to generate savings.
The Sobeys closings include 25 stores in Western Canada, among them eight Safeway stores, seven in Ontario, six in Atlantic Canada and one in Quebec. They also include IGA and Foodland stores.
The company said the closures will slice its future sales by about $400-million a year or 1.9 per cent of its total sales. The store closings represent 3.8 per cent of the company's overall store space, it said.
In its fourth quarter, Empire's profit from continuing operations tumbled to $1.5-million or 2 cents a share from $102.5-million or $1.51 a share a year earlier. Sales rose to $5.9-billion from $4.3-billion. Its adjusted profit from continuing operations, net of non-controlling interest, rose to $131.3-million or $1.42 a share from $95.7-million or $1.40 a share. Same-store sales rose 0.2 per cent.
Earlier this year, Sobeys sold about 30 stores in Western Canada as part of the conditions put on it by the federal Competition Bureau for approval of its Safeway acquisition.