Oil downturn eats into grocery sales, slams Sobeys owner Empire with $1.36-billion loss

Tough times in the oilpatch are resulting in deep frugality within the grocery aisles, delivering a harsh blow towards the owner of Sobeys and Safeway.

Empire Co. posted adjusted third-quarter earnings Thursday which were far below analyst estimates and also the Stellarton, N.S.-based retailer lost $1.36 billion in the third quarter after writing down the value of its Western Canadian business, primarily its Safeway banner.

“We are not dealing with exactly the same customer psyche that people were coping with, even a last year,” Marc Poulin, leader of Sobeys, told analysts on a conference call Thursday. “The behaviour from the customer has changed in Western Canada, and we have to acknowledge that,” particularly in Alberta and Saskatchewan.

After earnings adjustments, the retailer recorded profit of 30 cents per be part of the 13-week period ended Jan. 30, or $82.5 million, down from $118.6 million (43 cents), last year.

Analysts have been anticipating earnings of 35 cents, based on mean estimates from Thomson Reuters.

Revenue rose to $6.03 billion from $5.94 billion last year. But same-store sales, a vital bellwether of retail health, rose a meagre 0.4 per cent. Excluding the negative impact of fuel sales and its Western Canadian business unit, same-store sales rose 2.7 percent, Sobeys said.

Poulin said the grocery chain has moved to stem the sales erosion by lowering prices, citing some success with a brand new lower-priced produce program and said hello continues to change costs to be able to respond to changes in customer behaviour.

Overall food prices rose four percent for that year ending in January, according to Statistics Canada, with prices soaring in particular for fresh vegetables and fruit, up 18 percent and 13 per cent, respectively.

While Loblaw president Galen Weston also noted alterations in Western Canadian consumer behaviour in a fourth-quarter business call with analysts last month, there is a critical difference – he cited a “disproportionate momentum” in Loblaw’s discount store business in the western world, a segment Safeway lacks.

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“The most illustrative illustration of that’s in Alberta, and the great news for all of us in that province is the fact that we’re really well positioned in terms of discount,” Weston said. “I don’t wish to say that’s entirely helpful, but certainly I think we’re more insulated from the impact than others.”

In Western Canada, Loblaw operates the large-sized Real Canadian Superstore outlets and discount division No Frills, with prices less than its conventional full-concept grocery stores.

Poulin told analysts that Safeway increased the number of price promotions within the third quarter, however the efforts were met with “disappointing” consumer response.

“It did not have the outcomes those actions usually resulted in previously, which basically is telling us that we have to deal with the problem from the more structural perspective.”

In addition to ongoing strategic pricing changes, Poulin said the retailer expects to realize cost savings from harmonizing flyers between its retail chains and can still renovate stores in Western Canada to some popular newer model.

He predicts the grocery business will return to operating margin growth and top-line sales momentum over “the next few quarters.”

Empire wrote down $1.59 billion of goodwill at that time in recognition that the long-term worth of its Safeway clients are less than previously estimated. The net loss amounted to $5.03 per share.

Sobeys’ purchase of Safeway in 2013 for $5.8 billion was followed quickly by Loblaw’s announcement it would acquire Shoppers Drug Mart, and the subsequent industry realignment intensified an extended duration of price competition between your chains.

“Between 2012 and 2014, these were competing very, very strongly in price and consumer packaged goods prices also declined over that time, and grocery store sq footage was growing,” said Kevin Grier, a food industry analyst based in Guelph. Ont. at Kevin Grier Market Analysis & Consulting Inc.

The pressure let up just a little: Over time, Metro, Sobeys and Loblaw closed down unproductive stores while the failure of Target diminished some price competition and cemented the successes of the incumbent retailers.

“The (grocery chains) happen to be peaceful and enjoyed 2015, but I think they will start competing again,” Grier said.

He said as the depreciating dollar has taken some of the heat for food price inflation, “global commodity prices – corn, cocoa, coffee, sugar, cattle – are down, and that’s important because, they are also correlated with grocery prices.”

Financial Post

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