Sales and profitability remain under pressure
Sobeys’ fourth quarter sales fell by 7.7%, reflecting a shorter trading quarter this year, with same-store sales down 1.6% (fuel sales excluded). Adjusted net earnings fell by $45.1 million to $50.2 million. The retailer’s performance has been impacted by several factors over the last three years including integrating the Safeway business that it acquired, responding to the economic climate in Western Canada and moving to a new buying model and pricing strategy.
Project Sunrise to deliver $500 million cost savings
Earlier this year, Michael Medline was appointed the retailer’s new president and CEO. Following an initial review of the business he launched Project Sunrise, a comprehensive three-year transformation plan designed to simplify the organizational structure and reduce costs. This is expected to deliver approximately $500 million in annualized cost savings by fiscal 2020 that will allow it to improve profitability and reinvest in the business. Though it’s very early days in the transformation process, during the quarter, Sobeys delivered volume growth for the first time in 17 quarters.
Simplified structure and processes to reduce cost and complexity
A key element of simplifying the business is to collapse multiple, independent regions into a largely national, functionally-led structure. The retailer’s management has taken the first step in transitioning to the new structure with the appointment of a new senior leadership team. A key piece of the work being undertaken is focused on re-organizing the merchandising teams, with the retailer starting to identify how it will break down national and local buying.
This team has also undertaken a detailed assessment of cost reduction opportunities available. It is currently executing against a phased plan to permanently reduce its cost base.
Cost reductions will be driven by a reduced headcount, enterprise-wide efficiencies and productivity initiatives, and simplifying how it collaborates with suppliers to optimize its purchasing scale. The initial focus is on goods not for resale where Sobeys has identified significant opportunities due to past poor negotiation, a fractured supply base, and in adopting professional procurement disciplines.
Performance in Western Canada coming into line with the wider business
The other major focus for the retailer is to improve the performance of the business in Western Canada. In the short term, it has focused on improving store execution and promotional mix, enabling it to deliver more positive results in the fourth quarter, with comparable store sales more consistent with the wider business. However, a significant amount of further improvements will be required to return the business to acceptable levels of profitability.
The retailer is particularly focused on the Safeway business and is formulating a strategy that will enable it to exploit white space in the market. No decision has been made on whether to introduce its FreshCo discount banner into the market, though the new CEO views the potential to do so.
Fresh marketing approach to drive better engagement with shoppers
Sobeys is also reviewing the relative positioning of its categories and store banners to develop and implement a strategy that will improve its proposition to customers. Significant consumer research has been undertaken, with the results currently being analyzed. It expects to complete this work over the next four months, but highlights the themes of community connections and its Canadian roots as areas that could be brought to life through its stores. It also plans to announce the appointment of a senior vice-president of marketing to lead brand building, customer targeting, data, and advancing digital initiatives.
Transformation is a significant undertaking; results will take time
Medline is bullish on the opportunities to drive improvements in the business. Opportunities are emerging across the business, including with discounting in Western Canada and grocery e-commerce, but Medline stresses that it has a plan and it is important to execute the key initiatives in order.
Introducing new processes and systems will be a major undertaking, along with its plans to break down regional silos. However, these initial improved results will give the company confidence that it is on the right-track under the new leadership.
Stewart Samuel is program director with IGD, a global grocery and food industry research firm