FOCUS ON ONTARIO

McEwan acknowledges that Sobeys needs to gain better strength in metro Toronto, Canada's largest population center. That job became more difficult when Sobeys failed to acquire the assets of A&P Canada when it went up for sale two years ago, even though it had offered what some reports described as a richer offer than the eventual winning bid by Montreal's Metro.

“If they had bought A&P, Sobeys would have been a very strong No. 2 in Ontario, but as it is they're No. 3 and perhaps headed to No. 4 as Wal-Mart expands,” said Chisholm. “What Metro offered that Sobeys wasn't prepared to give up was control,” he added, referring to the 15% stake A&P acquired of Metro as part of their complicated deal to sell.

Perry Caicco, an analyst for CIBC World Markets, Toronto, said the A&P outcome “doomed” Sobeys to “permanent No. 3 status” in Ontario, but McEwan said he doesn't concern himself with his competitors' businesses. “We compete for the customer, not against others,” he said.

The expansion of Wal-Mart into groceries, concurrent with Loblaw's attempt to redefine its price image, has caused recent upheaval in Ontario, with all the chains operating stores there seeing margins and profits plummet. But one analyst predicted Sobeys could survive it. “Once Loblaw is happy with the price adjustments, they'll ease off on the price wars, and there still won't be enough supercenters to really mess things up,” said the analyst, who asked to remain anonymous. “It won't be nice, but it won't be ugly, as it is now. At that point, Sobeys could make some money.”

While Sobeys has the right vehicle for conventional store growth in Ontario, the locations that can support them are largely built out already, and new growth is difficult to come by, observers said. So Sobeys has turned to its sharp-priced discount banner Price Chopper, along with innovation, to grow. The latter is evident in the Sobeys Express stores the company recently opened in Toronto. These stores — there were three in Toronto as of last year — focus on shoppers making “fill-in” and “today's meal” trips and are located in small urban locations near workplaces. Sobeys studied Tesco Express stores in England before creating the concept, McEwan said.

A change to a more uniform collection of franchised stores should also help Sobeys in Ontario, sources said, though that transition has not been easy.

“Their franchise affiliates who have been IGA stores for a number years under the Oshawa Group were used to making pretty fair margins,” Condon explained. “But given the new environment of the grocery industry, where there's incredible competition, Sobeys needs to squeeze their IGA dealers a little to keep them competitive, and not all the IGA dealers are happy.”

Changing the franchise agreements in Ontario “is an aggressive move,” added one analyst. “This is saying, ‘We're going to change.’”