Last week Sobeys announced their results for their 4th quarter and full year ending May 7, 2016.  The news had industry observers commenting quickly and these disappointing results prompted the resignation of CEO Marc Poulin. There are a number of reasons Sobeys needed to make changes at the top. Some within the company’s control and others are a function of the unpredictable economy. Here is the summary of the results:

-Q4 absolute sales up .9% when adjusted to remove an extra week in 2016.

-Q4 same store sales decreased 1.8%.  Excluding fuel sales and the western Canada business same store sales were up .2%.

-Q4 EBITDA ($1,047,200,000)

-Total year absolute sales up 1.0% when adjusted to remove an extra week in 2016.

-Total year same store sales decreased .2%. Excluding fuel sales and the western Canada business same store sales were up 1.5%.

-Total year EBITDA ($1,944,700,000)

Western Canada

It is obvious the integration of Safeway into Sobeys distribution and retail network is not going well. Consumers liked the Safeway stores and they liked the Safeway control label program. Store renovations always drive consumers away.  Retailers are too optimistic on the leakage when they build budgets and Sobeys Compliments program is not as strong as the Safeway program. The big question for Sobeys is: when the store is renovated, is it drawing consumers back? Is the pricing, shopping environment and food offering strong enough to differentiate Sobeys in the market? These answers are buried in Sobeys results but early indications are it is not working well.

The Alberta economy is not what it was with the significant changes to the oil industry and the Fort McMurray fires. Consumer confidence is down which has big impacts on total sales and product mix.

Sobeys food first strategy

Sobeys embarked on a high-profile food first strategy with a big investment in celebrity chef Jamie Oliver. In a marketplace driven by temporary price reductions and growth in discount banners this was risky. Their competition continues to be aggressive with price while they promote healthier (usually more expensive) alternatives. It is better for consumers but they seem unable or unwilling to make the investment in their own health.

Sobeys regional structure

The two competitors growing fastest in the market (Walmart and Costco) see Canada as one market. They have a lower cost of operation and their stores are cheaper to run. Loblaw sits in the middle with most decisions made in Ontario but regional presence, especially in Quebec. Sobeys continues to operate four regions, which is the costliest structure. The reality is they have to charge more at retail because their structure and store set-up require it.

Conventional vs. discount stores

Sobeys has a much bigger commitment to delivering sales in the conventional stores. This is a challenge in the face of tough competition from discount stores. The shopping experience has to be superior. If the shopping experience is that much better like a Whole Foods store consumers will pay. For Sobeys, the reality is they have not been able to differentiate the shopping experience enough to offset the difference.

What should suppliers do?

Sobeys is a major player in the Canadian food industry and a critical customer for many producers and processors. It is not that long ago that Loblaw struggled through changes at the top and with delivering results. Sobeys needs to get the conversions done in the west and settle on a strategy that is executed throughout the organization. The cost structure must be affordable with retail margins that translate into pricing consumers will accept.

Suppliers need to watch carefully and be more nimble when it comes to Sobeys. They have replaced the CEO because they want a new strategy and better execution. This will filter through the organization and suppliers will feel it. A good gauge of the challenge is how sweeping the changes will be. You might see some different focus, so don’t be surprised.

There will be pressure on costs as Sobeys tries to deliver more margin. In a competitive market they will not get much chance to grow sales unless consumers really embrace the offering at retail.

Sobeys has strong loyalty programs, which could be a valuable tool as they try to maintain their base of shoppers. Watch for programs that could be sales opportunities and a chance to solidify your position within Sobeys as part of the solution.

They might review their cost structure but it is difficult to implement programs and improve results in an environment of cutting staff and resources.

Talk to your category manager as often as possible to ensure you are part of the solution and do the little things right. Working for a retailer under pressure is no fun. Execute and be proactive so you do not add to the problem so that when the ship gets turned around you will be there to benefit from the results.