When Sobeys bought all 213 Safeway stores in Western Canada last year, it looked like a savvy market-share grab. Sobeys, after all, beat its rivals, Loblaw and Metro, to the last mega-supermarket chain in Canada still for sale.
The deal instantly made Sobeys the biggest grocer in Alberta and likely–by a smidgen over Loblaw–the largest in the West. But now the merger is giving other retailers a chance to grab market share.
In February, Sobeys sold 15 of its stores to B.C.-based independent Overwaitea Food Group and 14 to Saskatoon-based Federated Co-operatives Limited (FCL). The deals, worth $430 million total, followed a requirement that Sobeys sell 23 stores in order to get Competition Bureau OK for the takeover of Safeway.
Acquiring slightly more than a dozen stores here and there may not seem like a lot for the two regional chains. Overwaitea, for instance, already operates nearly 130 stores with estimated annual grocery sales of $2.7 billion, according to CIBC World Markets.
But the new stores will help Overwaitea and FCL gain ground and, possibly, set them up for future expansion. FCL is getting a four-store foothold in both Edmonton and Winnipeg. Previously it had no grocery stores in either city.
Overwaitea, meanwhile, is adding eight more stores on Vancouver Island and several more in Alberta, where it is growing. A distribution centre is being built in Edmonton and Overwaitea is looking at long-term expansion across the Prairies.
“Trying to find new stores or real estate anywhere in Canada is tough, particularly if you are an independent, because the real estate gets gobbled up years in advance by the big guys,” says Tom Barlow, president and CEO of the Canadian Federation of Independent Grocers.
Overwaitea is buying 10 Safeway, three Thrifty Foods and two Sobeys stores. Darrell Jones, Overwaitea’s president, says 14 stores will operate under the company’s most prevalent banner, Save-on-Foods, while a Thrifty Foods in Abbotsford, B.C., will become a Cooper’s Foods.
Overwaitea has tended to grow by opening its own stores. But this deal was too good to pass up, says Jones. “It’s difficult to find good acquisitions, so when Sobeys called us and offered us a package of stores, we were very pleased.”
FCL, meanwhile, is heading both west and east, adding stores in six new markets. In addition to Edmonton and Winnipeg, FCL will gain a presence in Taber, Leduc, Wetaskiwin and Fort Saskatchewan, Alta.
“It’s an excellent strategic fit and it will strengthen all the co-ops across Western Canada and provide an exciting opportunity for us to continue our growth in our marketplace,” Scott Banda, CEO of FCL, said at a news conference after the deal was announced.
Banda said four locations have gas bars and that FCL will transfer ownership of 12 of the sites to its local retail co-ops. Two in Edmonton will go to its Grocery People subsidiary.
Jeff Doucette, general manager at Field Agent Canada in Calgary, says the deal is “opportunistic” for both buyers. Overwaitea can strengthen its position in B.C. and Alberta, and FCL can try to become a big player in Winnipeg in the same way that one of its members, Calgary Co-op, is huge in Calgary.
“So much of [FCL’s] business is concentrated in the Calgary area–those 24 stores drive the majority of the volume for the chain,” says Doucette.
“They only had one Co-op on the outskirts of Winnipeg. Now that they have properties in town, this may be the beginning of Winnipeg being the next Calgary for Fed Co-op,” he added.
Peter Kaufmann, a Winnipeg businessman and former Winnipeg grocer, says the four stores in Winnipeg will be operated by Red River Co-op, which he says has around 40% of the retail gasoline market in that city already.
“This is a chance for [Red River] to get back into the grocery business, which they left over 20 years ago,” says Kaufmann.
He added that Red River Co-op already has 240,000 members “who buy gasoline, and now they’ll be able to buy groceries and be rewarded depending on how they do as far as profit. With 240,000 people already having that Co-op brand in their mind, I think they’ll do fine.”
CFIG’s Barlow says bulking up the size of Overwaitea and FCL will give the grocers more buying clout with manufacturers. But he thinks the Competition Bureau didn’t go far enough answering concerns about Sobeys’ takeover of Safeway.
“We are happy that our members got their stores, but we don’t think it addresses a key issue, which is access to the wholesale side of the business and making sure that the independents continue to have the opportunity to buy groceries,” Barlow says.
As evidence, Barlow points to a letter Sobeys sent to suppliers in December demanding they shave prices 1%. “A lot of our independents buy through the Sobeys system and we are seeing significant price increases. So the money that they are looking for from manufacturers is really looking to offset the price of the acquisition–it’s not going back to the consumer.”