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"Because things are tight, almost any significant new entrant into the market, like Target, is simply going to ratchet things up a little higher. Everyone’s concerned about it.”
— Ed Strapagiel, retail consultant
Freshco 'Freaked the Market Out'
Stellarton, Nova Scotia-based Sobeys is lauded for stores that appeal to food lovers but the jury is still out on a newly crafted discount division, sources said.
Freshco, which Sobeys introduced in 2010 as a replacement for its lagging Price Chopper discount banner, has created a stir behind aggressive pricing on perishables. “That freaked the market out a bit because perishables are where the money is,” one observer told SN. “But when you’re cornered like Price Chopper was, you might do things that aren’t so rational.”
Although Sobeys has not reported results of Freshco separately, officials recently said its top and bottom line results were improving. “The assumption is they are not as profitable as they need to be and ultimately, that is not sustainable,” the observer added. “They’re still investment spending.”
Read more: Acquisition Boosts Sobeys' Q1 Results
Elsewhere, Sobeys is making progress on the cost front behind robotic warehouses in Ontario and Quebec, providing dramatic labor savings. Some believe the company will eventually open a third unit to serve its stores in Western Canada. Sobeys earlier this year transitioned to a new chief executive officer, Marc Poulin, lauded for building Sobeys’ strong IGA division in Quebec.
By one estimate, the grocer least vulnerable to the Canadian supercenter rollout is Metro, as the Montreal-based retailer operates the fewest stores in areas where supercenters have targeted the most future growth. Analysts laud Metro for consistent execution and for growing sales modestly even as consumer sentiment soured. “They wake up every morning and run their business well,” one observer said. “Nothing sexy.”
Read more: Metro to Sell Gas Foodservice Division
While Target’s impending arrival remains the big issue facing Canadian grocers, those looking for the next big thing may turn their attention from Minneapolis to California and Safeway’s home offices in Pleasanton. With concern over Safeway’s lagging performance in the U.S., and the need for supermarket operators in Canada to respond to the growing supercenter threat, many believe the time is right for Safeway to sell its Canadian division.
Safeway Canada operates 225 stores in Western Canada with a leading market position in Vancouver and Winnipeg. Its strength in Canada has provided Safeway recent financial help — namely a $1.1 billion dividend from Canada to the U.S. last year, which the company used to pay off debt.
“Canada Safeway is seen as the next prize, the next logical takeover candidate,” Strapagiel said. “However, my understanding is that they are doing quite well, in part because the economy in Alberta is doing better than the Eastern part of Canada due to oil and gas development. So unless the U.S. company really needs the money, I don’t know why they would sell.”
U.S. analysts believe Safeway is not getting credit for its operations in Canada. One observer said the unit could generate up to $5.5 billion in a sale — more than its parent company’s total market capitalization today. Spinning the unit off in an initial public offering in Canada is also a possibility, although that would require more enthusiasm from Canadian investors around the grocery space than they have shown recently.