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In the wake of Safeway purchase, Sobeys moves to cut costs and jobs

Profits at grocery chain drop in third quarter; Sobeys same-store basically flat

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Sobeys is looking to cut costs by eliminating jobs, a distribution centre and a factory as it starts to digest the massive acquisition of Canada Safeway.

The news came Thursday after Sobeys parent company, Empire, released third-quarter results that saw a sharp decline in profits and amid controversy over a pre-Christmas letter sent to vendors demanding a retroactive one per cent rollback in the prices that Sobeys pays to them.

READ: Industry groups call for a code of conduct

Among the cost-cutting casualties is a Lucerne ice cream and cheese making plant in Winnipeg.

That facility was “under capacity” and therefore will be closed with production moved to a similar plant in Edmonton, Marc Poulin, president and CEO of Sobey and Empire, said in a conference call with analysts yesterday.

It will “significantly improve our efficiency,” he added.

About 50 people will lose their jobs when the Lucerne plant (which was part of Safeway) closes this summer.

The United Food and Commercial Workers union said the closure does not include a separate milk production operation at the same location.

Some 50 jobs will also be eliminated across two Sobeys offices, in Calgary and near Ottawa, as part of ongoing efforts to centralize back-end services such as accounting and data management.

Meanwhile, Sobeys will close either its Milton or Whitby, Ont. distribution centre once expansion of the company’s massive automated warehouse in Vaughan, Ont. has wrapped up.

Poulin told analysts that he is confident of finding $200 million in cost savings over the next three years through the acquisition of Canada Safeway.

“We are working diligently to successfully integrate the Canada Safeway business and continuing to secure our operational efficiencies and reducing cost across the network,” Poulin said.

READ: Marc Poulin on building up Sobeys’ empire

Sobeys took ownership of Safeway last fall. It has since started to integrate parts of the two organizations. Sobeys’ SAP functionality, for instance, is being adopted in Safeway’s IT systems.

“This integration when complete, will allow us to fully leverage Sobeys national SAP platform,” Poulin said.

On Wednesday Empire released third-quarter results that showed a steep fall in net profits compared with a year ago, even as revenue soared as a result of its acquisition of Safeway.

Net earnings in its fiscal third-quarter ended Feb. 1 slumped to $400,000 or nil per diluted share compared with $74.1 million or $1.09 per share in the year-earlier period.

The company said the decrease of $73.7 million was due to a $65-million decline in net earnings from continuing operations, net of non-controlling interest, accompanied by an $8.7-million decline in net earnings from discontinued operations.

In November, Empire Theatres announced it had completed the sale of 46 theatres with 397 screens in separate transactions with Cineplex Inc. and Landmark Cinemas.

Sales revenue was $6.02 billion, up $1.73 billion or 40.4 per cent, including sales from Canadian Safeway stores, which it acquired for $5.8 billion in a deal announced last summer.

Excluding sales of $1.62 billion related to the acquisition of Canada Safeway, the sales contribution from the food retailing segment to Empire increased by $115.4 million or 2.7 per cent.

Sobeys’ same-store sales decreased 0.2 per cent from the prior year, reflecting the impact of low food inflation, increased competitive square footage in the market, ongoing competitive intensity and a severe ice storm in Ontario in its fiscal third quarter.

Gross margin at Sobeys grew 158 basis points to 24.51 per cent compared to 22.93 per cent in the year-ago quarter. The increase was largely due to the Safeway takeover.

Excluding Safeway, gross margin would have fallen 40 basis points to 22.53.

The decline was attributed to an increase in shrink associated mainly with Sobeys’ fresh retail inventory, plus new commercial programs that are part of the retailer’s “Eat Better, Feel Better, Do Better” strategy, a weaker Canadian dollar, and the highly promotional environment of the Canadian grocery industry at the moment.

Sobeys new food strategy, under the tag line “Better food for all,” launched last fall with Brit celebrity chef Jamie Oliver acting as pitchman in flyers and in TV ads.

READ: Sobeys unveils its latest store with food discovery and more

The strategy calls for more fresh prepared foods in stores and encouraging Canadians to cook more at home.

Poulin explained that it’s common when launching new fresh programs to experience higher shrink at first.

“But long-term, these programs will create differentiation that will make the business stronger so obviously it’s something that we feel is important,” he said.

Poulin also pointed to further business-differentiating efforts at Sobeys, namely the company’s new Sobeys Extra store, launched in Burlington, Ont., in the fall as well as new-concept Sobeys opened in Winnipeg, Calgary and in St. Catharines and London in Ontario.

The grocery landscape in Canada remains hotly competitive due to price pressure and mounting retail food square footage from the likes of Walmart and Target.

“2014 continues to be a challenging year for numerous Canadian retailers, most notably those who have made large acquisitions,” CIBC analyst Perry Caicco wrote in a research note yesterday. “Empire’s first reported quarter with Safeway inside shows us the type of issues facing acquirers, even those with quality assets.”

Asked by one analyst yesterday whether Sobeys has been able to pass on price increases caused by the lower Canadian dollar, Poulin, responded that the supermarket operator has “had some success” but added that “it’s very difficult to get price movement, even on commodities…everybody is fighting for their ground…and nobody wants to be the first to blink.”

READ: The high cost of low food prices

Poulin also answered a question about Sobeys’ now-infamous letter to suppliers asking for a one per cent price cut.

Several suppliers have since struck back, telling grocery retailers that they will pull promotional funding unless the retailers agree to a new pricing policy.

An article published in the Globe and Mail last week identified Coke, ConAngra foods as well as several other suppliers that have pushed back on retailer demands.

“Some of the pricing dynamics have gotten so aggressive that they’re detrimental to what we’re trying to do,” Stephen Kouri, vice-president of sales at Smucker Foods of Canada Corp. said in the Globe story.

Poulin said his company is talking to suppliers about the issue.

“The discussions with our suppliers are ongoing. We are pleased with what we’re seeing so far. I think suppliers are realizing that we have a lot to offer in terms of partnering with them to drive our mutual business,” he said.

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