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Monday, September 22, 2014

Canadian Grocery Wars

by Amy Erixon, Toronto

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. 


Friday, September 12, 2014

Mid-Year Industrial Momentum Will Continue

by Erik Foster (Chicago)

Investors have been on a buying spree in the industrial sector nationally for a number of reasons.  Many are drawn by the potential for income stability and by the long-term growth trends given the positive macroeconomic outlook for distribution facilities, as well as tempered spec development keeping rental growth on it's positive pace.  According to Avison Young’s review of data from the past two years, investment in industrial assets across the United States rose 55 percent since mid-year 2012, from $15 billion to $23 billion.

The West region continued to see the majority of activity, moving from $5.2 billion in investments at mid-year 2012 to approximately $6.6 million in 2014, according to research from Real Capital Analytics.

The gains from 2013 were particularly strong in secondary markets such as San Diego (260% increase), Orlando (202% increase), Indianapolis (138% increase), Memphis (125% increase) Atlanta (96% increase) and Charlotte (90% increase). Investors are moving into these and other secondary markets as activity, and pricing, is peaking in core markets.

The mid-year statistics also showed that the Midwest was a steady performer. It was the only region to experience gains in each period, moving from 15.1 percent of activity in 2012 to 16.4 percent in 2013 to 16.5 percent in 2014. This is not surprising, as recoveries always come later to the Central U.S.

The Southeast region was the most volatile during that time period, moving from the second most active region in 2012 to fifth in 2013 and back to second again in 2014. Markets with the greatest declines in sales activity from mid-year 2013 to mid-year 2014 were Miami, 71 percent; Eastern Pennsylvania, 56 percent; and Baltimore, 50 percent.

For the remainder of the year, look for continued strong demand from investors for all classes of industrial assets, core, core-plus and value add.  Also, look for new players to be arriving on the acquisition scene, it is not the same old cast of characters; the global marketplace is taking a very strong interest in industrial assets.

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