June 18, 2013
Is Safeway Wise to Exit the Canadian Market?
When Safeway made the announcement last week that it was selling its Canadian operations to Sobeys, it appeared to be a classic win-win situation for both parties.
By selling the business, Safeway gets a bunch of cash to pay down $2 billion in debt, buy back stock and focus on its core business here in the U.S. It also enables Safeway to exit the market as competition begins to heat up with Target and Walmart duking it out for share with homegrown Canadian chains.
For its part, Sobeys gets a strong and immediate presence in the west of Canada with the addition of Safeway’s 223 stores, including 199 with in-store pharmacies. Also part of the deal are four distribution centers (Sobeys is both competing with and supplying Target in Canada), 62 gas stations, 10 liquor stores and 12 manufacturing plants.
David Ian Gray, a retail consultant in Canada, told the Vancouver Sun, that the deal puts Sobeys "very much in competitive fight mode" against its larger U.S. rivals. Mr. Gray said the purchase will also give Sobeys access to Safeway’s loyalty program data, which is superior to much of what’s available in the Canadian grocery sector today.
A piece on the MarketWatch website by Matt Andrejczak questions the wisdom of the deal for Safeway. He maintains that while a smaller portion of Safeway’s business, the higher margin Canadian operation generated 40 percent of its operating profits last year.
"The sale will strip Safeway of valuable free cash flow, or excess funds that can be used to cut prices in the increasingly heated U.S. market for everyday grocery shoppers," wrote Mr. Andrejczak.
BrainTrust
Recent Discussions
Discussion Questions
What is your assessment of the sale of Safeway Canada to Sobeys? What challenges and opportunities will Safeway and Sobeys have before them once the deal is completed?
Poll
First, Safeway simply is not a very good supermarket operator. They don’t get a lot of press for their success in selling groceries, but rather things like health care, debt problems, loyalty cards, acquisition flops, and perhaps organics. Never any real gains in sales or market share. So for Safeway to survive against the privately held, debt free, non union companies of today, they need to scale back and pay down debt. Canada would be a lost cause over time since they had a weak sales per square foot compared to their competitors, Walmart keeps building, and perhaps a little bit of a hit when Target sells groceries. Although Safeway was profitable, mostly likely it was going to turn out badly for Safeway as time goes on.
As for Sobeys, they got a good start by buying Thrifty which was an over-performing private chain. The difference between Sobeys and Safeway is that Sobeys is actually a pretty good retailer where as Safeway is the old school, plain vanilla conventional operator of the 1990s.
Sobeys is a well-entrenched eastern Canadian grocer. By buying Safeway’s Canada, it bought some ready-made expansion into western Canada.
Now Sobeys’ hard work begins. They have to put those bought Safeway pieces together at a time when Target and Walmart are aggressive and expansive. Sobeys wants to grow in their home country. They are in a fighting mode and believe they can afford to invest the money and time necessary to be successful against established and intrusive retailers.
Safeway realizes that it isn’t Canadian; that it can’t become what it needs to be in Canada by remaining what it is there.
By selling its Canadian operations Safeway concedes it isn’t as good or as motivated a Canadian retailer as is Sobeys; that it needs to focus on U.S. operations, reduce debt and possibly learn how to be a better retailer here. Safeway is playing defense while Sobeys is on the offense.
I agree with Gene Hoffman, at least in the main.
The challenge for Sobeys will be to integrate the acquisition properties at a time when its competitors are busy destabilizing the status quo Canadian supermarket industry. That said, they are a solid operator and may well prove up to the task.
Safeway’s desperation for immediate cash—at the expense on ongoing free cash flow—is understandable, but a trifle unsettling and may be sending a strong signal to its competitors.
As to whether this will allow Safeway (U.S.) to become a better operator, I’d say the jury is still out on that one. Seems like a short-term cash grab to me.
Not only was it wise for Safeway to exit Canada, it would be wise for them to exit Chicago, Baltimore-Washington, Texas, and the rest of the Southwest. In my opinion they are hopelessly beaten there as well and no sense in whipping a horse that’s no longer in the race. Safeway has been through this before with Philly, Iowa, Nebraska, Oklahoma, Kansas and Texas…twice before. They are the A&P of the west.
The Sobeys-Safeway deal is a logical transaction. By selling its Canadian operations to Sobeys, Safeway gets the funds to pay down debt and the ability to focus on its important U.S. operations. Sobeys, meanwhile, will be able to expand a significant footprint into Western Canada.
Among other synergies, both entities have a loyalty offering—and each is a sponsor in the AIR MILES Reward Program (only Safeway in the west, however). These programs provide access to customer insights that extend beyond each company’s own data and brands, so they will be able to make well-informed decisions about how to manage their real estate assets after the deal is closed.
Good for Sobeys in a number of ways. Makes them truly a national company. Also it will increase use of their massive warehouse in Ontario that was only operating at 50% of capacity. Gives them their own dairy.
May be a short-term gain for Safeway, but questionable long-term benefits. I have to disagree with David on this. The Canadian arm of Safeway contributed most of the profits to the corporate Safeway operation.
Could be some interesting possibilities crop up down the road as a result of this deal being scrutinized by the competition bureau.
I believe we’ll see some more acquisitions happen in the coming year or two. HY Louie’s IGA operations in BC could be next or Jimmy Pattison’s grocery empire.
I think it’s safe to say David doesn’t think much of Safeway, and while I feel a certain neighborly obligation to defend them, because he knows more about it than I do, the effort wouldn’t go very far. I would agree with him, though, that it doesn’t seem like much of a “win” to obtain cash to either pay down debt or buy back stock, since it’s a tacit admission that you tried to get bigger and couldn’t make a go of it. The same with “focus on its core business”: 200+ stores, proximate to its West Coast base, is hardly some minor frolic being deservedly cast aside; one could easily say it IS a core business (or at least should be). But it’s nice to see someone carry on the good fight against the Walmart juggernaut, and I wish Sobeys well…since we were neighbors, let’s stay friends, eh?
Western Canada represents a challenge for grocery retailers with challenging supply scenarios and smaller population centers. Safeway Canada is profitable today and has many loyal shoppers, but may not be strong enough to fight new US competitors over the long term. Safeway has tough competitors in the US, and needs stronger focus there.
Sobeys is better positioned to succeed with hard won experience in growing the business in Ontario against Loblaws. Safeway Canada shoppers will look for the best value and quality going forward—Canadian Lucerne Products have a strong consumer following earned over many years, especially in meat, cheese and dairy.
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First, Safeway simply is not a very good supermarket operator. They don’t get a lot of press for their success in selling groceries, but rather things like health care, debt problems, loyalty cards, acquisition flops, and perhaps organics. Never any real gains in sales or market share. So for Safeway to survive against the privately held, debt free, non union companies of today, they need to scale back and pay down debt. Canada would be a lost cause over time since they had a weak sales per square foot compared to their competitors, Walmart keeps building, and perhaps a little bit of a hit when Target sells groceries. Although Safeway was profitable, mostly likely it was going to turn out badly for Safeway as time goes on.
As for Sobeys, they got a good start by buying Thrifty which was an over-performing private chain. The difference between Sobeys and Safeway is that Sobeys is actually a pretty good retailer where as Safeway is the old school, plain vanilla conventional operator of the 1990s.
Sobeys is a well-entrenched eastern Canadian grocer. By buying Safeway’s Canada, it bought some ready-made expansion into western Canada.
Now Sobeys’ hard work begins. They have to put those bought Safeway pieces together at a time when Target and Walmart are aggressive and expansive. Sobeys wants to grow in their home country. They are in a fighting mode and believe they can afford to invest the money and time necessary to be successful against established and intrusive retailers.
Safeway realizes that it isn’t Canadian; that it can’t become what it needs to be in Canada by remaining what it is there.
By selling its Canadian operations Safeway concedes it isn’t as good or as motivated a Canadian retailer as is Sobeys; that it needs to focus on U.S. operations, reduce debt and possibly learn how to be a better retailer here. Safeway is playing defense while Sobeys is on the offense.
I agree with Gene Hoffman, at least in the main.
The challenge for Sobeys will be to integrate the acquisition properties at a time when its competitors are busy destabilizing the status quo Canadian supermarket industry. That said, they are a solid operator and may well prove up to the task.
Safeway’s desperation for immediate cash—at the expense on ongoing free cash flow—is understandable, but a trifle unsettling and may be sending a strong signal to its competitors.
As to whether this will allow Safeway (U.S.) to become a better operator, I’d say the jury is still out on that one. Seems like a short-term cash grab to me.
Not only was it wise for Safeway to exit Canada, it would be wise for them to exit Chicago, Baltimore-Washington, Texas, and the rest of the Southwest. In my opinion they are hopelessly beaten there as well and no sense in whipping a horse that’s no longer in the race. Safeway has been through this before with Philly, Iowa, Nebraska, Oklahoma, Kansas and Texas…twice before. They are the A&P of the west.
The Sobeys-Safeway deal is a logical transaction. By selling its Canadian operations to Sobeys, Safeway gets the funds to pay down debt and the ability to focus on its important U.S. operations. Sobeys, meanwhile, will be able to expand a significant footprint into Western Canada.
Among other synergies, both entities have a loyalty offering—and each is a sponsor in the AIR MILES Reward Program (only Safeway in the west, however). These programs provide access to customer insights that extend beyond each company’s own data and brands, so they will be able to make well-informed decisions about how to manage their real estate assets after the deal is closed.
Good for Sobeys in a number of ways. Makes them truly a national company. Also it will increase use of their massive warehouse in Ontario that was only operating at 50% of capacity. Gives them their own dairy.
May be a short-term gain for Safeway, but questionable long-term benefits. I have to disagree with David on this. The Canadian arm of Safeway contributed most of the profits to the corporate Safeway operation.
Could be some interesting possibilities crop up down the road as a result of this deal being scrutinized by the competition bureau.
I believe we’ll see some more acquisitions happen in the coming year or two. HY Louie’s IGA operations in BC could be next or Jimmy Pattison’s grocery empire.
I think it’s safe to say David doesn’t think much of Safeway, and while I feel a certain neighborly obligation to defend them, because he knows more about it than I do, the effort wouldn’t go very far. I would agree with him, though, that it doesn’t seem like much of a “win” to obtain cash to either pay down debt or buy back stock, since it’s a tacit admission that you tried to get bigger and couldn’t make a go of it. The same with “focus on its core business”: 200+ stores, proximate to its West Coast base, is hardly some minor frolic being deservedly cast aside; one could easily say it IS a core business (or at least should be). But it’s nice to see someone carry on the good fight against the Walmart juggernaut, and I wish Sobeys well…since we were neighbors, let’s stay friends, eh?
Western Canada represents a challenge for grocery retailers with challenging supply scenarios and smaller population centers. Safeway Canada is profitable today and has many loyal shoppers, but may not be strong enough to fight new US competitors over the long term. Safeway has tough competitors in the US, and needs stronger focus there.
Sobeys is better positioned to succeed with hard won experience in growing the business in Ontario against Loblaws. Safeway Canada shoppers will look for the best value and quality going forward—Canadian Lucerne Products have a strong consumer following earned over many years, especially in meat, cheese and dairy.