Sobeys’ Medline reveals ‘aggressive’ plan to cut costs at troubled grocer

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The new chief executive officer of Sobeys Inc. is launching a three-year, $500-million cost-cutting initiative to revive the troubled grocer, although the extent of the significant job cuts will not be finalized until the end of the calendar year.

Michael Medline said on Thursday the company is launching "Project Sunrise" to simplify the business and generate $500-million in annual savings by 2020, allowing it to reinvest in its business to improve its sales and the bottom line.

"We have an aggressive goal to transform our organization, better serve our customers, empower our employees and assuredly move from defence to offence in the market," Mr. Medline said.

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"The future Sobeys will operate with a simpler, leaner structure, more efficient core processes and tools and will better leverage its $24-billion national scale."

Mr. Medline, a former Canadian Tire CEO who began in the top job at Sobeys and its parent, Empire Co. Ltd., in January, said the grocer will move to restructure the organization by eliminating "cumbersome regional duplication and complexity in decision making and operations."

He said the cuts will focus on office staff only rather than "front-line" store employees or distribution-centre employees.

But the extent of the staff cuts will be determined in the coming months – before the end of calendar 2017, spokesman Andrew Walker said in an e-mail. "Having said that, there will be significant reductions in our work force across all parts of our 'backstage' operations."

Mr. Medline said management expects to record significant one-time costs in adjusted earnings for severance, relocation, retaining, minor systems development and third-party support. The initial one-time costs will begin to be expensed in the fourth quarter of fiscal 2017, which ends this week, but the majority of the costs will be expensed in the first half of fiscal 2018. Some additional costs will be expensed through the remainder of 2018.

The company will release more details of the costs in its fourth-quarter financial results in June.

Peter Sklar, retail analyst at BMO Nesbitt Burns, said the $500-million annual cuts are "a positive but challenging task."

He said it's encouraging that the company is taking steps to streamline its costs, although the magnitude of the restructuring is significantly larger than he had anticipated.

"The savings realized could improve Empire's competitiveness, as it could allow for investment in price promotion, marketing and other aspects of the consumer value proposition," Mr. Sklar said. But he also doubted the full savings would flow to Empire's bottom line.

Sobeys' revamping is tied to it collapsing the retailer's current five regional structures into a single centralized one to eliminate regional duplication.

When Empire announced in 2013 it was taking over Safeway Canada, it said the acquisition would generate $200-million in annual savings in three years.

But the Safeway takeover resulted in a lot of the company's subsequent problems as it grappled with a poor integration of the two grocers and botched private-label, procurement and loyalty strategies, angering many of Safeway's loyal customers.

Among those that are retiring from Sobeys are François Vimard, executive vice-president, who has been with Sobeys for 22 years and served last year as interim president and CEO. As well, Yves Laverdière, president of the Quebec division, will retire after 21 years helping build the retailer's IGA business in that province.

Mr. Medline said the company's structure will be largely national and "functionally led." He announced a number of new appointments, including:

Mr. Medline said the company's structure will be largely national and "functionally led." He announced a number of new appointments, including:

• Jason Potter as executive vice-president OF operations, to oversee in-store execution and efficiency across all grocery banners and regions.
• Lynne Castonguay as executive vice-president OF merchandising, to oversee products and programs to shore up gross profit margins across all grocery banners and regions.
• Pierre St. Laurent as executive vice-president of Quebec.
• Vivek Sood as executive vice-president of related businesses to develop a focus on the pharmacy, wholesale, fuel, convenience and liquor businesses.
• Rob Adams will remain general manager of the discount format (FreshCo) while the company decides on the future of its discount strategy. Sobeys has suffered by not having a discount chain outside of Ontario while its key rivals have beefed up their low-cost formats to respond to growing price sensitivity among consumers.