Sobeys eyeing discount option for struggling stores

Sobeys is pondering a rollout of a discount format in Western Canada, as sales challenges at acquired Safeway stores there persisted in the first quarter, officials said late Thursday.

Francios Vimard, the interim CEO who replaced Marc Poulin at the head of the Stellarton, Nova Scotia, company in July, said Sobeys posted positive same-store sales outside of Western Canada, but that overall sales and tonnage was down as Canadians sought more value.

For the period, which ended Aug. 6, overall sales were down by 1% to $4.7 billion (U.S.), and same-store sales excluding fuel fell by 1.2%. Excluding Western Canada, non-fuel same-store sales improved by 0.6%, the company said. Net earnings of $55.7 million (U.S.) were down by 39.5%.

The results underscore a need to continue with a program of reducing everyday retail prices, slashing costs and improving the customer experience in stores, Vimard said in a conference call with analysts. Cost reductions will include additional initiatives to ongoing plans to consolidate distribution centers, he added.

"Our cost base is too high given our sales challenges across the country," Vimard said. "Therefore, it is critical that we optimize our cost structure so we can reinvest cost savings via the top line. We need to work over the next few months to identify additional cost reductions and improve our efficiency."

As previously reported, Sobeys is suffering what Vimard described as "self-inflicted" struggles stemming from a rocky acquisition and integration of Safeway Canada, along with a weak economy in the Western provinces where those stores do business.

Sobeys earlier this month enacted a comprehensive plan of everyday price cuts and a reduction in promotions there through it's "Simplified Buy & Sell" initiative, but Vimard said he expected that customer response would be gradual, and that the company would likely experience additional gross margin pressure as it ramps up there.

"It's going to take time until the customer understands the change in pricing structure," he said.

While Vimard said Sobeys was committed to continuing that program, under questioning from analysts he did not deny considering making broader store format changes. Like most grocers in Canada Sobeys operates conventional and discount banners, but its latter format, known as Freshco, is concentrated in Eastern provinces.

Such an announcement may wait until Sobeys names a permanent CEO.

"At this stage I can tell you the board gave me full power to do whatever I think is good for the business," Vimard said in response to that question. "If I see a need to do it short-term, I'll do it. Right now I want to focus the team on the execution of what we're doing out West. That's the critical part for me."