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New Sobeys CEO Michael Medline to face earnings scrutiny

Sobeys Inc. has faced operational challenges integrating Safeway Inc.’s Canadian stores. The company has also been losing market share on price competition.

Fred Lum/The Globe and Mail

Michael Medline will face his first public scrutiny as chief executive officer of troubled grocer Sobeys Inc. this week– and the results won't be pretty.

The former CEO of Canadian Tire Corp. Ltd., who started as the head of Sobeys and its parent Empire Co. Ltd. on Jan. 12, will inevitably have to address more bad news from the food chain on Wednesday when Empire releases its third-quarter results and Mr. Medline speaks with analysts on a conference call.

Its profit has been tumbling along with its sales at existing stores, stemming from the company's 2013 $5.8-billion takeover of Safeway Canada in Western Canada. Since then, almost anything that could go wrong in an acquisition turned sour.

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To add to its self-inflicted wounds, Sobeys suffered from the downturn in Alberta and Saskatchewan amid the decline in oil prices. Now it grapples with falling food prices, which will bruise its bottom line even further, as U.S.-owned discount rivals Wal-Mart Stores Inc. and Costco Wholesale Corp. sharpen their food game while other major conventional grocers focus more on discounting to respond to cautious consumers.

As Galen G. Weston, CEO of Loblaw Cos. Ltd., the country's largest grocer, said last month: "We're lowering prices; customers are responding to those lower prices."

Mr. Medline enters the grocery arena at a time of deflation and steep competition, threatening to make his new job even tougher.

"He's got a big job in front of him," said Hugh Latif of Hugh Latif & Associates Management Consultants and a former general manager of grocery researcher Nielsen.

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The sector is increasingly shifting to discount formats while Sobeys is at a disadvantage with a low-cost chain – FreshCo – only operating in Ontario and not in Western Canada, where it is feeling intense pain.

The shift to discounting is evident: In the year ended Jan. 7, the percentage of overall Canadian grocery sales whose prices were discounted rose 3 per cent to 37 per cent of the total $76-billion market from a year earlier, according to Nielsen data. In the overall fresh-fruits and vegetables category alone, for instance, price-reduced sales jumped 12 per cent to 35 per cent of the $886.2-million of sales from the previous year, it found.

"The food retail market remains extremely competitive and migration to discount banners continues unabated," RBC Capital Markets analyst Irene Nattel said.

The pressure on Sobeys to lower prices – which it began to do before Mr. Medline arrived – will force it to cut costs further, she said. But launching its own discount format in Western Canada is probably more of a medium- rather than short-term ambition for Sobeys because of the capital and management resources needed for such a move, she said.

Still, Mr. Medline is not expected to do a deep dive into his turnaround strategy when he speaks on the conference call on Wednesday.

"Mr. Medline is likely to outline early views but defer a detailed plan to stabilizing the business and reconstituting margins until the [fourth-quarter] release," Ms. Nattel said. At that time, Mr. Medline's blueprint for change will probably incorporate recommendations from consultancy Boston Consulting Group, which Sobeys hired under its previous CEO to study the grocer's struggles.

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This week, Mr. Medline is expected to talk about the state of the business and the time he thinks it will take to revive it. And he will likely reflect on Sobeys's push to lower prices.

Analysts expect Empire's third-quarter earnings per share to drop to 5 cents from 30 cents a year earlier, and sales to slip to $5.88-billion from $6.03-billion, according to a Thomson Reuters poll.

Despite the challenges and his lack of specific food retail experience, Mr. Medline is considered by many industry watchers to be a strong retail executive.

And at Canadian Tire, he oversaw the acquisition of two retailers and their relatively smooth integration into the parent's operations: apparel chain Mark's Work Wearhouse (now called Marks) and sporting-goods specialist Forzani Group, which included the Sport Chek chain.

"He has a lot of solid experience," said Mr. Latif, author of Maverick Leadership. "Empire and Sobeys have on their hands a good executive who knows the Canadian retail market … But he has to be given some time."

He will need 18 to 24 months to woo back customers who were angered not only by high prices but also a switch to a new private-label and rewards program at Safeway while shelves were often empty. "They neglected the customer," Mr. Latif said.

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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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