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Sobeys making progress, but still has ‘significant work to do’ on turnaround efforts, Empire CEO says

Empire owns the Sobeys grocery-store chain.

Brent Lewin/Bloomberg

Sobeys Inc. is making progress in its turnaround efforts after a troubled few years but still has work to do to fully revive its grocery operations.

"You won't be hearing any champagne corks popping over here," Michael Medline, chief executive officer of parent Empire Co. Ltd., told an analyst conference call on Thursday after posting better-than-expected quarterly results. "We still have significant work to do in all facets of our business."

The work will be bogged down by upcoming minimum-wage increases in Ontario and Alberta, which he estimates will add at least $95-million of costs to Sobeys over the next two years if the company doesn't take steps to ease the pain, such as more automation, which it plans to do but still has to find more offsetting measures for fiscal 2019.

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As Sobeys sales and profit appear to have bottomed out, Mr. Medline, who took the top job at struggling Empire in January, is mapping out a future with more e-commerce and a more appealing marketing message to win back customers who lost trust in the retailer following the company's botched 2013 takeover of Safeway in Western Canada.

Investors responded enthusiastically Thursday morning to the company's results, pushing up Empire's class A shares 14 per cent to $22.53 by midafternoon on the Toronto Stock Exchange.

"Over all, these were solid results that showed better early wins than we had modelled, so we would expect the shares to outperform" on Thursday, said Michael Van Aelst, retail analyst at TD Securities.

Irene Nattel, retail analyst at RBC Dominion Securities, raised her rating of Empire to "sector perform" (which is like a recommendation to hold on to the stock) from "underperform," which is equivalent to a recommendation to sell the shares.

But she also noted that Sobeys' overall sales performance, while improved, still suggests it is continuing to lose market share to leader Loblaw Cos. Ltd. and Metro Inc., which ranks third in the sector. Sobeys is the country's second-largest grocer.

Still, Mr. Medline said Sobeys is gaining back a little lost business in Alberta and British Columbia and moving in the right direction across the country, although he cautioned that every quarter won't be as strong as the latest one.

Mr. Medline also hinted that Sobeys may soon decide to expand its discount FreshCo chain outside of Ontario to try to catch up to rivals in the low-cost grocery segment and woo increasingly price-conscious shoppers.

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Sobeys has been at a disadvantage to Loblaw and Metro in not operating a discount chain outside of Ontario to take on low-cost giant Wal-Mart Canada Corp. But Mr. Medline said his latest analysis of FreshCo's performance and other data "have moved me a little closer" to expanding FreshCo beyond Ontario.

But he said the company would shift to discount stores in a "small, organized fashion" by converting existing traditional stores outside of Ontario to the FreshCo banner rather than launching new "greenfield" outlets. In that way, the capital spending to set up the discount stores would not be as significant as some analysts have predicted, he said. "Financially I'm confident this would work," he added, noting he has to ensure the move wouldn't distract from Sobeys broader transformation effort, which he calls Project Sunrise.

He also gave a vote of confidence to Sobeys e-commerce future, emphasizing that the grocer will not be left out in the cold as online titan Amazon.com Inc. branches out in the grocery field with its $13.7-billion (U.S.) acquisition of Whole Foods Market Inc.

E-commerce is still a very small part of the grocery market, Mr. Medline said, noting Sobeys has a strong, fast-growing online shopping operation in Quebec.

He said he has watched Amazon steal away business from incumbents in a wide range of retail sectors in the United States, calling it inevitable that it would turn its attention more to Canada.

"Although we take every competitor very seriously and we are getting ready for Amazon and their ilk, for the next number of years our biggest competitors start with the letters W, M and L," Mr. Medline said, referring to Wal-Mart, Metro and Loblaw.

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He said innovation will be a "huge" part of Sobeys initiatives to leapfrog the competition and expand in e-commerce. And as an "additional weapon in our arsenal" it has hired Deirdre Horgan as senior vice-president of marketing. She's a seasoned digital merchant and former executive at Indigo Books & Music Inc., which was an early adopter of online retailing.

Empire's first-quarter profit fell to $54-million or 20 cents a share from $65.4-million or 24 cents a year earlier. Sales rose to $6.27-billion from almost $6.19-billion.

On an adjusted basis, the company's profit was 32 cents per share in the quarter ended Aug. 5, up from 27 cents.

Same-store sales, an important retail measure, rose 0.5 per cent, excluding fuel sales.

Sobeys said the unmitigated financial effect of proposed minimum-wage increases in Ontario and Alberta could be up to $25-million in its fiscal 2018 year and $70-million in 2019. Its estimates represent only the wage increase for employees earning less than the anticipated new rates and does not assume any changes to other wage categories. It says it has developed plans to offset the impact in 2018 and is working on plans for 2019.

Loblaw and Metro are among other companies that have disclosed the extent of the effects of the rise in minimum-wage rates. Loblaw anticipates they could add $190-million of labour expenses to the retailer in 2018 alone.

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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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