Sobeys integration of Safeway grocery stores has been challenging, CEO says

STELLARTON, N.S. – Sobeys underestimated the difficulty in integrating Safeway stores in Western Canada into its retail grocery network, company executives said Wednesday in a conference call with financial analysts.

Among the problems is a switch to the Sobeys private-label brand, Compliments, which the Nova Scotia-based company has introduced to replace Safeway-branded products.

“In some cases, it’s perception,” said Marc Poulin, president and CEO of Empire Co., the parent of Sobeys.

He said the company needs to convince customers that the quality of the products is just as good, and in some case the products are exactly the same, as before the switch, even though the packaging is different.

“Honestly, we have to say that we were a little bit caught off guard by the fact that we needed to work a little bit harder with the customer to get the proper adoption of the private label program,” Poulin said. “Now that’s being addressed in earnest.”

Another challenge for Sobeys has been the distraction caused by internal organizational changes, such as moving some operations people from a Sobeys office in Edmonton to a Safeway office in Calgary.

In addition, Sobeys faces lingering problems since taking over procurement of fresh produce in the company’s first quarter from Safeway’s former parent, which is based in the United States.

“We’ve made significant progress on that front and we believe that the customer experience has significantly improved on produce since Q1, but now we have to get customer confidence back,” Poulin said.

Empire Co. (TSX:EMP.A), which gets most of its revenue and profit from Sobeys, announced Tuesday that overall sales for the fiscal second quarter were $6.06 billion — up $64.1 million from a year earlier. Net income fell to $68.5 million from $116.9 million while adjusted earnings contracted to $110.7 million from $126.6 million.

Earnings per share dropped to 25 cents from 42 cents in last year’s fiscal second quarter, while adjusted EPS fell to 40 cents from 46 cents. The quarterly dividend of 10 cents per share is unchanged and payable on Jan. 29.

The company says it remains confident of achieving $200 million of annualized operational savings within three years of its $5.8-billion cash purchase of Safeway Canada, which was completed in November 2013.