Despite a few bumps in the road, Empire Company Limited saw improvements in its third quarter thanks to a strong holiday period, creative merchandising, more disciplined pricing strategies and an increase in basket size, its CEO said during a call with analysts and media Wednesday morning.
The Stellarton, N.S.-based company, and parent of Sobeys grocery chain, said it earned $58.1 million for the quarter ended Feb. 3, compared to $30.5 million a year ago, despite 10 store closures in B.C. and a major organizational restructuring, which combined incurred costs of $37.8 million.
“We are committed to doing everything it takes to make our company successful,” said Michael Medline, who joined the company from Canadian Tire a little more than a year ago. “We will make the tough decisions.”
The organizational changes, as part of the company’s Project Sunrise to streamline processes and drive down costs, include collapsing multiple independent regions into a national, functionally led structure and should be completed by the end of fiscal 2018, the company noted. Cost benefits related to Project Sunrise are expected to total around $500 million by the end of fiscal 2020.
Medline reminded analysts that it’s still early days — only nine months into the three-year transformation — and that the quarterly results only reflected slightly less than 5% of the grocer’s overall target, with benefits expected to ramp up over the next two years. “Again, we will make every tough decision we need to in order to win. We are changing the culture at Sobeys,” he said. “Our leaders are expected to deliver Sunrise results and strengthen our company to win in the future, no excuses.”
Meanwhile, sales rose to $6.03 billion from $5.89 billion and same-store sales for the quarter, excluding fuel, increased 1.1% year over year. This, the company said, was “driven by increases in basket size and more disciplined pricing strategies compared to significant deflationary pricing strategies in the prior year.” Medline said Q3 was a particularly competitive promotional environment, especially in Ontario discount, and he expected this to continue into the next quarter.
“We’re expecting to see increased pressure on sales in Q4 as those curious gift cards from our competitor began and continue to hit the market,” said Medline in reference to the $25 gift card Loblaw distributed to customers as a gesture of goodwill following its admitted participation in an alleged industry-wide bread price-fixing scheme.
Though Medline only made veiled references to the price-fixing scandal during the call with analysts, a report published on its website said the company continued to cooperate in the Competition Bureau’s ongoing investigation. It went on to say that the company does not believe it or any of its employees violated the Competition Act.
Class action lawsuits have been filed against Sobeys, but the company doesn’t believe they, or the investigation, “will have a material adverse effect on the company’s business or financial condition.”
As competitors continue to invest and expand their click-and-collect and grocery delivery services, Empire chooses to focus on the long game rather than rush to market with “mediocre systems,” he said. The company is doing this through its recently announced partnership with British online supermarket Ocado that will see Sobeys roll out home delivery across the Greater Toronto Area in the spring of 2020.
Medline said he’s not concerned about losing ground to competitors in the GTA over the next two years while the company gets its online grocery service up and running. “I see this as a marathon and we’re in the first 100 meters,” he said.
When asked for this thoughts around online market penetration, Medline said he believed e-commerce in Canada would grow significantly in the next five years. “The issue for e-commerce in this country, in Canada, is that no one has given the customers a fantastic option, and you can see in the U.K. where they were given a great option that the growth in e-commerce took off faster than it otherwise would have.”
Initially, the e-commerce effort will focus on the GTA — “a market we need to and will win,” said Medline — while keeping an eye on three or four other markets. He wouldn’t say how fast the company plans to grow and expand the service, but announced it had secured its first customer fulfillment centre in Vaughan, Ont., not far from its existing automated distribution centre.
“It makes sense for us by offering customers something that they just never have seen before,” he added. “We will have highest market share in [online] grocery, and we will be competing with you know who. So that’s where we are looking at.”