Safeway integration impacts Sobeys

Date : 10 September 2015

As Sobeys reports its first quarter results we look at some of the issues which impacted its performance.

Moved too quickly to change processes following success with systems integration

Sobeys’ first quarter sales increased by 0.4% to $6.2bn, with same-store sales (ex-fuel) up 1.2%. Adjusted net earnings fell by 5.7% $121.7m, with the retailer noting the integration of Safeway having a negative impact on its gross margins. Specifically it had underestimated the time needed for Safeway teams to adapt to the process changes which had been made given the success it had achieved in completing systems integration by the end of Q4.

Forecasting issues impacted gross margins

These included the ability to accurately forecast demand for fresh products and the management of promotional programs. This resulted in markdowns not in line with expectations.  The introduction of new buying processes for fresh produce, following the end of its transition agreement with Safeway US, also had an impact.

Addressing with training and operations integration

Improvements are now being made through store training and integration of operational teams from Sobeys’ Edmonton office and Safeway’s Calgary office into one unit in Calgary. Sobeys expects the effort to take a few quarters to drive an improvement in results, although its remains confident in its ability to achieve its three-year synergy run-rate target of $200m.

Customers adjusting to new private label brand

The completion of systems integration at Safeway has also enabled the integration of grocery private label products, with the Sobeys ‘Compliments’ brand appearing in the Safeway stores. This also had a dampening effect on sales as customers adjusted to seeing this new brand in-store. The next phase will see the common use of fresh private label brands and product messaging, and alignment on product costings.

New concept stores being rolled-out

On a positive note, the retailer continues to make good progress with the roll-out of its ‘Better Food For All’ strategy. This includes the roll-out of its new concept store format, with 11 stores now trading in Ontario and its first store opened in Atlantic Canada. The retailer has recently opened its first Urban Fresh format store outside of Toronto in Ottawa, and launched a new South-Asian focused discount concept, Chalo! FreshCo in Toronto.