Freshco Drives More Sales in Perishables

ELLIOT ZWIEBACH

STELLARTON, Nova Scotia — Sobeys here is experiencing strong perishables sales at its converted Freshco stores but hopes to increase dry grocery sales, said Bill McEwan, president and chief executive officer, during a conference call discussing first-quarter results.

Produce sales at its 18 Freshco units have been “very powerful,” he said, while deli, meat and bakery have performed at or above the company's “high expectations, and traffic is solid.”

“However, we hope to encourage shoppers to buy more groceries over time,” he added.

Sobeys introduced the Freshco banner in June at nine former Price Chopper locations in Ontario, featuring expanded perishables selections — “It's not called Freshco for nothing,” McEwan pointed out — plus more local and international offerings, all at discount pricing, in a controlled-flow format.

McEwan said the company has converted nine more stores to Freshco during the second quarter, with plans to convert additional locations in batches of nine per quarter over the next 12 to 14 months.

Sobeys was operating approximately 90 Price Choppers — not affiliated with the Schenectady, N.Y.-based Price Chopper chain — before the conversions began.

NEW STORE OPENING

Sobeys also plans to open its first ground-up Freshco in an undisclosed location “very soon,” McEwan said, though he declined to say where it would be. That store will be between 25,000 square feet and 35,000 square feet, he noted, which he said would be the optimum size for the format.

McEwan made his remarks during a conference call conducted by Empire Co. here, Sobeys corporate parent, to discuss financial results for the first quarter, which ended July 31.

Net income for Sobeys for the 13-week quarter climbed 7.9% to $72.7 million (U.S.), while sales rose 1.8% to $3.84 billion and same-store sales increased 0.3%. Sobeys results accounted for 92% of Empire's earnings and 98% of sales, with the balance coming from real estate and other investments.

McEwan said the competitive reaction to the initial Freshco conversions increased the level of deflation to 2.5%. He said gross margin grew 39 basis points during the quarter to 24.3%, “and we are completely committed to ongoing competitive and promotional pricing.”

HIGHER SG&A

The store conversions resulted in an increase in first-quarter SG&A expenses, excluding an asset impairment charge.

“We've worked very hard on productivity initiatives involving labor scheduling and shrink reduction, but irrespective of those initiatives, there will be peaks and drops from quarter to quarter in gross margin and SG&A results,” McEwan said.

“We are committed to improving both, but there will be some lumpiness along the way, though over a period of six to eight quarters, we expect positive trends on average.”