In September 2013, Loblaws and Metro, two of Canada’s three
largest Grocers, announced comfortable single digit increases in revenues
accompanied by a shocking 40% decline in net profits. Both of these
chains had recently commenced restructuring/repricing programs designed to
blunt the erosion of market share from the onslaught of American retailers,
recognizing the risk that matters could soon get a whole lot worse.
Nova Scotia based Sobey’s, the #2 Canadian chain, had just completed
acquisition of Safeway Canada’s 200 western Canadian stores,
and reported a respectable high single digit growth in both same store revenues
and profits, while anticipating cost savings synergies from the
acquisition. But its shares fell just like the others;
approximately 6% on these announcements. Later that same
month Amazon announced it would begin rolling out on-line groceries in Canada
in 2014 (Amazon enjoys a 2.5% share of the US grocery market) and shares fell
again – in the background was more bad news - Target was scheduled to open an initial 124 stores
across Canada beginning in Q2, 2014.
Wal-Mart’s response to these market changes was to redouble
its expansion plans (delivering some 60 new superstores across Canada in 2014
with an additional 35 planned for 2015, bringing its store count to 430) while
concurrently ramping up its on-line grocery service to include some 2000 items
(Amazon now delivers over 15,000). Grocery e-commerce in Canada currently
represents less than 1% of total sales, but is growing rapidly as more
providers add offerings. Wal-Mart has a third leg to its strategy (yet to
be seen in Canada); small footprint urban “green” grocery stores
comprising 12,000-18,000 sf, featuring broad day-lighting, organic produce and
super energy efficient building construction and operating systems. These
stores have been wildly successful in the pilot U.S. markets.
Wal-Mart is currently petitioning the City of Vancouver to build Canada’s first
Net-Zero store in this format (so far the Vancouver planning department isn’t
biting).
Fast forward to September 2014 and a high octane offensive
and defensive battle is evident. Not broadly publicized, but very quickly
growing Quebec based Dollarama expanded its footprint from 800 to 880 stores in
Ontario and Quebec this year and has plans to add an additional 400 stores over
the next few years as it moves into Central and Western Canada.
(Not surprisingly, Dollarama together with its counterparts Dollar Store and
Dollar Tree are also the fastest growing format south of the border.)
Costco, another American discounter, reported earnings this week.
Canadian division profits increased 18% on 14% higher same store sales and
Costco announced it is planning to add 85 stores to its 110 store Canadian
footprint, including 25 next year. Target, the most recent American
entrant, is not enjoying the same success. Although it continues to
struggle with logistics and maintaining stock in its far-flung store network,
last week contrary to market expectations, Target announced it will expand by
constructing 34 more stores in Canada in 2015, bringing its total to nearly
160.
Canada’s first American player, Safeway, has been struggling
on both sides of the border. Following a series of well publicized labor
disputes and market positioning difficulties, Safeway began capitulating last
year - closing 72 of its Chicago area Dominick’s stores, and selling its 200
store footprint in Canada to Sobey’s in a transaction valued at $5.4
billion. A year earlier Sobeys acquired 236 retail gas
stations in Quebec and Atlantic Canada with proceeds from sale of Empire
Theatres chain to Century Theatres, narrowing its focus on business lines
synergistic with food and drug offerings.
Sobey’s, founded in Nova Scotia in 1907, is now 100% owned
by conglomerate Empire Holdings, TSX:EMP-A.TO, whose retail roots are Lawtons
Drug Stores Limited. Empire expanded into groceries in 1981 with the
acquisition of Sobey’s and this combination has so far, been the home country
winner - and the company appears to be the industry’s strategic leader.
In 1964 Sobey’s organized its real estate holdings in a separate holding
company and became an active shopping center developer. It was able to
IPO the property company, Crombie, in 2006 as a REIT, TSX:CRR.UN. Empire still
holds 40%+ of the Crombie shares. In 2004 Sobey’s acquired a 72
store discount chain for $61 million and launched a successful brand in this
segment. In 2013 to capitalize on the rising “foodie” movement, Sobey’s formed
an association with renown Canadian Chef, Jamie Oliver to enhance food
education in its stores and promote what he refers to as a “fresh food
revolution”. Oliver hosts a popular CBC TV series, and is author of a
number of award winning cookbooks. Consistent with these market
leading decisions, on September 10, 2014 Sobey’s announced continued strong
results, with same store sales rising 1.3% - and thanks to the Safeway
acquisition synergies being realized, revenues were up 35%, and earnings rose
46.8%.
In July, 2013 Toronto based Loblaws, Canada’s largest
grocer, successfully IPO’d 415 of its 2300 Corporate owned stores into a
publicly traded Real Estate Investment Trust TSX:CHP.UN, in a transaction
valued at $7 billion (Loblaws also operates 4,700 independently owned grocery
stores). In April of this year Loblaw’s, announced a $12.6 billion
take-over of Shopper’s Drug, also Canada’s largest with over 1300 pharmacies.
This summer Loblaws rolled-out an e-commerce platform with the unique feature
that you can order groceries on-line and pick them up at your local drug store
if that is more convenient than the superstore location. But below the
surface Loblaws continues to show signs of trouble. On July 17 Galen
Westin, heir to the company, announced the third management shakeup in as many
years, including personally taking the helm as its President as well as
Executive Chairman. Anticipated synergies are not to be found and several
top executives at Shoppers Drug announced their departure as the company
announced a second quarter loss of $456 million, as compared to earnings of
$116 million for the same quarter a year earlier (which were down 40% from
2012). The grocer noted that Shoppers added 40% more revenue and same
store sales were up 1.6%, signaling that corporate restructuring at Loblaws is
far from over. In the most recent Analyst call Mr. Westin
noted that the chain is looking to upscale its offerings including more fresh
and pre-prepared offerings.
Meanwhile Quebec based Metro, which acquired Canada’s #4
Grocer A&P in a $1.7 billion transaction back in 2005 was at that time
already in the drug store business, operating 573 grocery stores and 256 drug
stores under 11 brands. In 2008 Metro undertook a rebranding and
retrofit program to unify the store layouts and format to 2 distinctive brands,
both catering to the discount end of the market. Metro same store
sales were up nearly 2% year over year, but earnings were flat due to “extreme
pricing pressure”, according to the CFO on a recent analyst call.
Grocery store wars are far from new. Between 1927 and
2005, 31 grocery chains went out of business in Canada. What many
Canadians don’t know is that for the last 5 years in the US grocery stores have
been the most rapidly shrinking segment of the retail scene. The
grocery business, like all of retailing today is feeling the pinch of rising
income inequality (with all growth at the top and bottom ends of the price
scale), changing formats (buy local, fresh, and on-line) and growing store
oversupply.
In my affluent suburban Toronto neighborhood, every single
grocery store (including the 3 privately owned and operated organic specialty
stores) is undergoing a facelift, while the local retailer association together
with a lot of support from the neighbors has redoubled efforts to keep Target,
Costco and WalMart more than 5 miles away, north of the QEW. My
local stores are beginning to offer cooking classes, recipes in the aisles and
are beginning to install energy efficient enclosed refrigerated
units. Competition is rising and change is evident
everywhere.
