Sobeys starts to shape its future as it approaches end of turnaround plan

Date : 16 September 2019

We review Sobeys’ first quarter performance as it enters the final year of its three-year turnaround plan and consider what’s next for Canada’s second largest food retailer.

Additional cost savings expected beyond initial $500m target

Sobeys delivered a solid Q1. Sales increased 4.4% to $6.7bn, with same-store sales, excluding fuel, up 2.4%. Adjusted net earnings increased 33.6% to $133.9m. Internal food inflation was reported at 3%, indicating that volumes were down. However, the retailer pointed to its strategy to be less promotionally driven, choosing to protect its margins rather than run with loss-making offers. Its turnaround plan, Project Sunrise, remains on-track. However, it now expects cost savings of $550m over the three-year period, ahead of the projected $500m. This year, savings will be driven by the completion of its category reset programme, cost reductions and operational improvements.

FreshCo outperforming former Safeway stores

The retailer’s format development strategy contributed to its sales performance. This year, Sobeys will continue with the roll-out of its discount format, FreshCo, in western Canada. Seven stores are currently trading, with a further 11 expected to launch this year. The retailer is pleased with the performance to date, with the stores delivering stronger sales compared to the pre-conversion period. Four additional locations have also been identified to open next year, to take the announced sites to 22 stores. This is around a third of the projected openings for the format in the region. 

Source: IGD Research, Sobeys 

Testing larger format Farm Boy stores

The retailer is also making progress with its ambition to double the size of the acquired Farm boy business over a five-year period. Three additional stores will be opened this year, along with two in the next financial year. Sobeys is focused on using its property expertise to accelerate the chain’s growth, supporting its goal to develop its urban-centred business in the Ontario market. It has identified several sites where existing Sobeys stores will be converted to the Farm Boy format. Some of these will see it push the size of the box beyond its current upper limit of around 3,000 SQ M.

Ecommerce soft launch expected next spring

The final piece of its format-driven growth plan is Voila, the ecommerce business it’s developing through its strategic partnership with Ocado. The business plans a soft launch next spring in the Greater Toronto Area. Its second Customer Fulfillment Centre (CFC) is expected to become operational in 2021, enabling Sobeys to grow its ecommerce business in Quebec and the Ottawa area.

What comes next?

Although the business is focused on closing out the final year of its turnaround plan, it is inevitably looking to what comes next. It is currently finalising the next phase of development, and while this won’t be shared until next spring, the retailer has given some clues to how it plans to progress. It continues to see opportunities on the buying side, to reduce the cost of goods sold, enhance the customer offer through optimising its data capabilities and improve store sales productivity. Data and analytics will play a key role, with Sobeys set to enhance its loyalty and personalisation efforts and further fine-tune its ranging, pricing and promotional programmes. Supporting its innovation agenda, the retailer has appointed a new SVP innovation and strategy. He will initially focus on elevating the importance of data analytics and AI within the organisation.

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