Focused

JON SPRINGER

Even as it operates a network of more than 1,300 stores stretching all the way from St. John's in Newfoundland to Fort St. John in British Columbia, Sobeys is still recognized in Canada primarily as a family-run enterprise with roots in Nova Scotia, with all the benefits and/or limitations that image might suggest.

“The fact that it's family-owned is good,” explained George Condon, a longtime observer of the Canadian grocery industry and consulting editor with Canadian Grocer magazine. “The fact that it's Eastern Canada-owned is a bit of a mystery to Central Canadians, anyway, though Central Canadians have been said to believe the world revolves around them. When they see what used to be a small, Nova Scotia-based company moving across Canada, it's a great mystery.”

What Canadians nationwide are discovering is what shoppers in the Maritimes have known now for 100 years: Sobeys is a retailer with a fanatical focus on food and a persistent determination to provide it. These attributes of Sobeys were in place long before the 1998 Oshawa Group acquisition vaulted it to national prominence and a rank as the second-largest supermarket chain in Canada. Though Sobeys celebrates its 100th anniversary this year, only the most recent chapters in company history are devoted to a nationwide presence.

Bill McEwan, who grew up in Trail, British Columbia, and worked for the B.C.-based chain Ferraro's Ltd., said he knew Sobeys only by reputation until taking a position with Coca-Cola in Toronto in 1989. Today, as chief executive officer of Sobeys, McEwan said he strives to lead a company that draws on the spirit and determination of the company's founders and carries it out at the individual store, wherever it may be located.

“Clearly the roots of the organization are here in Nova Scotia,” McEwan told SN in a recent interview. “I'm sitting in the building that was part of the original warehouse, built back in 1946. I'm a block and a half from the first Sobeys store. There's tremendous heritage here in Atlantic Canada, particularly as it regards an entrepreneurial spirit and generosity with the local community.

“At the same time, Sobeys is a culture of the store, where we try to make decisions as close to the customer as possible,” he added. “Sobeys Inc. is the aggregation of 1,300 stores in Western Canada, Ontario, Quebec and Atlantic Canada and is based in Nova Scotia; but the company is the local store. That's a reinforcement of a solid value system.”

To proudly serve local communities is among the four core values McEwan said drives Sobeys. It also endeavors to “get it done with passion and integrity,” stay focused on customer needs, and keep a long-term perspective, he said.

STRIVING TO OUTPERFORM

Sobeys today reflects its history in the amalgam of names and store formats under its watch. These included 543 corporate-owned stores (325 supermarkets, 158 convenience stores and 60 drug stores) and 753 franchised stores, as of last year. Its store-brand names include Sobeys, Sobeys Express, Foodland, IGA, IGA Extra, Needs, Lawton Drug, Bonichoix, Food Town and Commisso's. Sales for the fiscal year that ended in May are estimated to be around $12.5 billion (U.S.).

McEwan, who joined the organization in 2000, explained that Sobeys is a company of store formats, not store names. A major part of his strategic work has involved creating five distinct formats capable of serving multiple shopping occasions. All of them, he said, are focused on food.

The main vehicle is the full-service conventional stores, which operate under the Sobeys or IGA Extra banners and offer a broad assortment of items, have large fresh sections and cater to health and wellness trends. Sobeys also operates what McEwan calls fresh fill-in locations, which are small stores in dense urban markets focused on meal solutions and fill-in shopping trips such as Sobeys Express; community stores, such as those under the Foodland and IGA banners, which serve small, one-store towns; discount stores under the Price Chopper banner; and convenience stores under the Needs and Bonichoix flags.

“We're focused on the right-sized store and on sales per square foot, supported by great customer service,” said McEwan. “Where others are building supercenters, we are not.”

Sobeys' conventional stores, he added, intend to “out-food, out-fresh, out-service and out-market” its competitors, or gain market share by operating stores with a superior focus on food and service. Industry observers give those stores high marks for presentation and style.

“Their newer Sobeys stores, as well as IGA Extra in Quebec, are some of the nicest stores in the country,” said one analyst, who asked not to be identified. “IGA Extra has been beating Metro in Quebec, while both guys [IGA and Metro] have been taking share away from Loblaw and its Provigo banner. In the West, it's a safe bet that Sobeys is taking share away from Safeway.”

Bill Chisholm, an analyst at MacDougal, MacDougal and MacTier, Toronto, added that the conventional stores Sobeys is opening in the Toronto area today “are as good as anybody else's best store.”

Sobeys' current prototype traces its roots to the Garden Market IGA stores the company acquired in the late 1990s as part of the transformational Oshawa Group deal, said McEwan.

Garden Market, then operating in Alberta, had what then was considered a unique strategy of situating its fresh departments near the entrance to the store, rather than along the store perimeters. “It was a radical store, very distinct for its time,” said McEwan. Sobeys quickly adapted some of the same concepts for its stores nationwide. Garden Market, in the meantime, was converted to the Sobeys name as part of a national focus on formats.

The focus on formats has been driven in part by a competitive environment that requires stores to concentrate intensely on their niche. As a result, many Sobeys stores have recently undergone transformation or are scheduled to see changes soon, McEwan explained.

In many cases, Sobeys is persuading franchisees to adopt new formats, with IGA stores in the more populous Toronto area taking on the Sobeys name, for example. The company planned to spend around $676 million (U.S.) during the fiscal year that ended earlier this month, up from around $500 million budgeted for fiscal 2006. Company officials said they intended to increase square footage by 4% on the year.

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.’”

WORK BEHIND THE SCENES

McEwan joined Sobeys in late 2000, replacing retiring CEO Douglas B. Stewart. He said the task of shaping the future of the organization in the wake of the transformational Oshawa deal “was too compelling an opportunity to refuse.” Prior to taking the reins at Sobeys, McEwan spent 15 years with Ferraro's in Western Canada, five years at Coca-Cola in Toronto and, finally, serving A&P as president of its Canadian operations — and briefly as head of A&P's U.S. operations on the East Coast.

While McEwan's work at Sobeys is most visible in the format and banner changes, there has been just as much action behind the scenes as Sobeys addresses things like common technology platforms, distribution network efficiencies and an overarching need to become more cost-efficient. Sobeys also must continue to hone competitive advantages by emphasizing service, McEwan said.

Much of this work is still in progress. While initiatives to address technology systems in Ontario are nearing completion, the company is launching similar programs in Western Canada. A new automated warehouse going up in Vaughan, Ontario, will streamline Sobeys' supply chain there. An internal program to improve service was launched in Quebec and has showed promising results, while initiatives to improve operational performance and reduce shrink are showing progress, with those savings reinvested to maintain price competitiveness.

The company maintains that all those changes will eventually find their way to the bottom line, but earnings performance has been erratic in the meantime. Sobeys' stock was down considerably this year when Empire Cos. — the investment vehicle created and controlled by the founding Sobey family — announced an offer to buy the shares it did not own in the company and take it private.

While the price Empire offered — a 53% premium to Sobeys' current trading price — came as a shock to some observers (and at the same time, a pleasant surprise to investors), it ultimately signaled that the family's interest and faith in the business were still strong after 100 years.

“A truly entrepreneurial Nova Scotian is someone who is in the game for the long term and will do whatever it takes to be successful,” said Condon. “In time, they're going to make it. They're very patient. As a native Nova Scotian myself, I would never underestimate a Nova Scotian.”

A Sobey Family History

Sobeys traces its beginnings as a retailer to 1907, when John William “J.W.” Sobey traveled rural Nova Scotia by horse-drawn carriage, buying and selling livestock and their meat from local farmers.

J.W. was the son of William Sobey, a member of Britain's Royal Engineers who was stationed in the busy shipping port of Halifax in the mid-19th century. William met and married a local girl, Janet MacIntosh, in 1862 and after a brief return to England, raised the family on a northern Nova Scotia farm.

J.W., his wife Eliza, and their son Frank moved to Stellarton, Nova Scotia, in 1905 where he launched his meat-delivery business. Often helping him out was his precocious son Frank, who from a young age had a preternatural nose for business. Frank made $100 buying and selling stock of Canada Cement as an 8th grader. At age 16, he enrolled in business college and by 1924, Frank had persuaded his father to expand his business from meat and vegetables to a full line of grocery products.

While several members of the Sobey clan helped out in the early days of the company, Frank Sobey's dedication and innovation were most influential in making Sobeys a company that would last 100 years. He was quick to pick up on promising technology advances: for example, the cash register in 1925 and the electric door 20 years after that. By 1939 the company had five stores.

Frank Sobey in the meantime was getting ideas from visits to the United States with his wife Irene. They returned to Nova Scotia determined to emulate the early modern supermarkets they had seen, such as King Kullen, Piggly Wiggly and Publix.

Sobeys opened its own version of the self-serve, all-cash, low-price supermarket in 1949 in Truro, Nova Scotia. A newspaper ad of the times reminded readers in part, “Our low prices are the workingman's friend and shopping here for all your food needs is like getting a raise in pay because our low prices increase the buying power of your food dollar.”

Frank's three sons — Bill, David and Donald — continued their father's work, expanding Sobeys throughout Nova Scotia, New Brunswick and Newfoundland, and into Quebec in the mid-1960s. Frank Sobey passed away in 1987 — the same year the chain surpassed $1 billion in sales for the first time.

The Sobey sons took over management of the company in 1971 with Bill and David taking executive roles at Sobeys and Donald heading the affiliated investment firm, Empire Inc., which among other things made a shrewd investment in Maine-based retailer Hannaford Bros. Empire would also become influential in real estate through a controlling interest in Crombie REIT, a shopping-center owner and developer, and as the owner of Empire Theatres, Canada's second-largest movie theater chain. Empire went public in 1983.

Sobeys moved into Ontario for the first time in the early 1990s, and in 1998 captured great swaths of Quebec and Western Canada when it purchased the Oshawa Group, quadrupling the size of the company overnight.

Sobeys since then has worked on aligning its banners behind its brand of food-focused supermarkets and discount stores, and expanding through new store growth and acquisitions, such as Ontario-based Commisso's in 2004.

Sobeys went public in order to raise money for the Oshawa acquisition, with Empire, still controlled by the Sobey family, holding a significant stake. Earlier this year, Empire offered to buy all the remaining shares it didn't own so as to take the company private again. This, they said, will let the company grow back under the watchful eye of its founding family.
— J.S.

Source: Sobeys.com