Sobeys: Integration goofs trigger 'challenging' 1Q

Integration issues as Sobeys took ordering and inventory control of its acquired Safeway stores in Western Canada triggered a decline in margins and profits in a "challenging" first quarter, parent company Empire Cos. said Thursday.

“Although we had identified the various risks associated with integration, including the amount and pace of change required, we underestimated the impact and the time needed for the organization to adapt to those changes,” Empire and Sobeys CEO Marc Poulin said in a statement. “This had a clear and negative impact on our first quarter results.”

Poulin in a conference call with analysts Thursday said the company had identified the issues — primary a lack of follow-up training for former Safeway workers adapting to Sobeys’ systems — and has allocated resources to bring performance back in line with expectations, but acknowledged it may take “a few quarters for sure” to stabilize the situation.

Former Safeway workers unfamiliar with the nuances of Sobeys systems over-ordered fresh items, leading to increased costs for shrink — and subsequent issues running promotions effectively, Poulin said.

"The reality of this business is that if you make a mistake anywhere in the total supply chain, it will have an impact on customers and somewhat of an impact on sales,” he said.

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Sobeys, Stellarton, Nova Scotia, operates a “state of the art” SAP system for demand forecasting and ordering while Safeway’s was “primitive” by comparison, a source who asked not to be identified, told SN. They moved to the Sobeys' systems in March following the termination of a transitional services agreement with Safeway.

“Sobeys trained Safeway’s people in how to use the new systems but they didn’t devote enough oversight to it,” the source said. The issues triggered a 14% decline in net earnings for the first quarter, which ended Aug. 1. Sales for the period increased 0.4% to $4.7 billion (U.S.), driven primarily by price inflation, while same-store sales, excluding fuel, improved by 1.2%. EBITDA was down by 8.3%, Gross margins as a percent of sales were down 50 basis points to 24.3% of sales.

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