Sobeys Q2: new platforms providing foundation for future growth

Stewart Samuel
Program Director - Canada
@RetailAnalysis

Date : 13 December 2019

We review Sobeys’ second quarter performance as it enters the final phase of its turnaround plan, Project Sunrise.

More promotional marketplace

Second quarter sales increased 3.6% to $6.4bn, with same-store sales up 2.0%. Sales growth was broad-based across its formats, with customer count and basket size up. The retailer also saw strong growth in operating income, up 65.2% to $286.4m, supported by stronger gross margins. The retailer believes there is further upside to close the margin gap versus is two closest competitors. During the quarter, volumes were relatively flat, with internal data showing that its market share held relatively steady during the quarter. Sobeys is keeping a close eye on consumer spending, with sales softening at the start of Q3. It is seeing a more promotional marketplace, which it was slow to respond to, echoing recent comments from Loblaw. Walmart is driving much of this. Against the backdrop of day-to-day trading, the retailer is also focusing on its three key growth platforms; FreshCo, Voilà and Farm Boy.

Source: Sobeys

Expanding discount format in western Canada

Sobeys continues to make progress with the expansion of its discount FreshCo format in western Canada. Currently, 10 stores are trading, with a further 12 stores in the pipeline. Over the next three years, the retailer plans to convert around 65 of its Safeway and Sobeys supermarkets in total to the discount format. The retailer has also rolled-out the evolved FreshCo 2.0 look and feel to all existing stores in Ontario.

On-track for spring launch of ecommerce service

The retailer remains on-track to launch its Voilà by Sobeys ecommerce service in the Greater Toronto Area next spring. It plans on offering same-day and next-day deliveries through the service, in addition to being able to fulfill store pickup orders. Around 39,000 products will be offered, significantly more than its competitors. Sobeys is currently developing its first Customer Fulfillment Centre (CFC) in partnership with Ocado. A second CFC is planned for Montreal in 2021. The retailer anticipates that it will be able to profitably deliver an expanded range of groceries to over 75% of the Canadian population with four CFCs.

25 Farm Boy sites under development

Earlier this month, Sobeys outlined plans for the growth of its Farm Boy format. Over the next two years, the network will grow to 37 locations, with stores ranging from 12,000-38,000 sq ft. This will enable it to target a range of catchment areas. In total, around 25 new stores are in different stages of development in Ontario. Sobeys is supporting the business with infrastructure and property capabilities.

Updating the existing network

The retailer is also pushing ahead with renovations to its existing estate. Over the next seven years, most of its stores will be revitalised either through full remodels or refresh programmes. Almost 30 conventional stores have been improved this year, with the results encouraging the business to ramp up the level of activity in the second half.

Customer focus ahead

While most of Project Sunrise was focused on rebuilding the business and creating new growth platforms, Sobeys will be placing a much stronger focus on better meeting customer needs as it moves into the next phase of development at the end of the current financial year. This will include enhancing its food ranges, being better with banner specific programmes and driving further differentiation in the market. It will also continue to focus on driving costs out of the business and improving its margins further, a process that is forecast to take another three years.

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