Empire Co. Ltd., the expansive network of Canadian grocery brands, believes its recently acquired Farm Boy chain is what it needs to finally take on Ontario’s biggest grocery markets.
“We’ve never had a weapon like this to go at an area like the GTA,” chief executive Michael Medline told analysts Wednesday following the release of Empire’s third quarter results.
“Ontario,” he said, “has historically been our Achilles heel.”
Empire, the parent to Sobeys, acquired Farm Boy, a chain of boutique groceries with a loyal following in eastern Ontario and popular line of private label products, for $800 million last year.
At the time, Medline promised Farm Boy fans he wouldn’t “screw this up,” a reference to Empire’s ill-fated acquisition of the western Safeway grocery chain, which alienated many long-time customers.
While Medline suggested Wednesday that he does not want to expand Farm Boy too quickly, his ambitions for the brand were apparent.
By combining Farm Boy with Empire’s real estate “prowess,” Medline believes he can eventually “blanket” Toronto and its suburbs with stores.
Farm Boy — now at 28 stores around Ontario — is already in the middle of an expansion in the Toronto area.
The growth plans come as Empire enters the late stages of Project Sunrise, Medline’s 2017 plan to cut costs and improve Empire’s fortunes, which had been dragged down by the Safeway deal.
One element of the plan involves expanding Empire’s bargain brand, FreshCo, to meet rising demand for discount grocers. Empire is currently working to close 15 Safeway stores in B.C., converting 10 of them to FreshCo locations — part of a broader objective of converting 25 per cent of its network of 255 Safeway and Sobeys stores in Western Canada.
But while Empire boosts the profile of its discount brand on one end of the spectrum, and its fancier Farm Boy brand on the other, some industry observers are asking: What becomes of its massive Sobeys banner in the middle?
“That, to me, is the biggest question that grocers face,” said Kevin Grier, an analyst who focuses on the grocery industry. Grier noted that it isn’t a challenge that Sobeys faces alone. Other major chains, like Loblaw and Metro, are also caught in a shrinking middle ground, between the growth luxury brands like Whole Foods and discounters like Walmart.
But Medline doesn’t see it that way. First, he said, Farm Boy isn’t part of that luxury category like Whole Foods. “It treats the customer so well, it perhaps it appears like that,” he said in an interview Wednesday. “But it is not that.”
What it is, Medline said, is a flexible store format — 25,000 sq-ft on average — that can squeeze into urban markets in a way that traditional, big-box grocers cannot.
“It does more sales-per-square-feet than anyone else,” he said.
The description of the market — with discount and luxury stores luring customers away from conventional brands — doesn’t fit with reality, Medline said. Shoppers, he said, aren’t exclusively going to a discount store or a luxury store. They’re going to whatever store fits their needs on any given day. Farm Boy, for instance, isn’t where customers go for staples like toilet paper or tooth paste; it’s for produce, meat and prepared food.
“Full-service” Sobeys stores, though, are “where you can do your weekly shopping and fill your basket with whatever you want,” Medline said.
Empire is expected to add a fourth option in spring 2020, when it starts offering grocery delivery in the Toronto area as part of a partnership with the U.K. grocery delivery company Ocado. Medline expects the e-commerce option to help Empire continue its push into urban and suburban Ontario.
On Wednesday, Empire reported $6.24 billion in sales its third quarter, $218 million more than the previous year. Its adjusted earnings per share, however, dipped to $0.27 per share from $0.33 per share, which Empire attributed primarily to a one-time charge of $45 million ($0.12 per share).
The charge includes $35 million in expected buyouts offered to long-serving Safeway employees, which were approved by a B.C. labour ruling in January. It also includes $10 million in costs associated with five store upcoming Safeway store closures, which are part of the FreshCo conversions.