Some Questions Left Unanswered About The Safeway-Sobeys Deal

And so it ends…Safeway’s run in Canada has hit a close as rival Sobeys announced this week that it is purchasing the company for $5.8 billion.  Safeway has had a long run in Canada as it has graced our neighborhoods since 1929.

This deal propels Sobeys into closer contention with Loblaw, which has 1,058 stores across Canada and $32 billion in revenue.  When the deal is complete, Sobeys will have 1,538 stores and $24 billion in revenue, placing it second behind Loblaw in the grocery segment.

Currently, Stellarton, Nova Scotia based Sobeys has approximately 1,300 stores across Canada that are also labeled under the IGA, Foodland, FreshCo and Thrifty Foods banners.  The company also has a network of 23 distribution centers across the country.

Sobeys will purchase 213 Safeway stores with the heaviest concentration in Alberta and British Columbia where 168 stores are located.

The deal also includes 199 in-store pharmacies, 62 gas stations, 10 liquor stores, 12 manufacturing facilities and 4 distribution centers.

The deal gives Sobeys an immediate strong presence in the West and an additional boost to its supply chain capacity, in a region where Sobeys has been known to be operating over-capacity. This had created significant difficulties for suppliers and stores.  The new acquisition also sets Sobeys up in a strong position better fulfill its supply requirements for the new Target stores across Western Canada.

It remains unknown whether Sobeys will keep all purchased assets or sell some off and whether the company will keep the Safeway name or change everything to the Sobeys banners. It is likely Safeway will want to pull out of Canada completely rather than licensing its name to Sobeys.

Safeway also owns a number of manufacturing facilities that primarily manufacture the Lucerne brand so it will be interesting to see if Sobeys choses to continue their operation or sell them off to bakery and dairy operators like Canada Bread or Parmalat.

The Lucerne brand is a strong one in Western Canada (its even the main milk brand at Starbucks), but it is likely that private labels will convert to Sobeys brands (Compliments) relatively quickly, which will free up additional supply chain space and drive buying efficiencies.

Some stores located close to each other may result in closings or conversion to another Sobeys banner. Sobeys may also have to divest some stores to please competition authorities and it would be a good bet to say that they may be picked up by Overwaitea and operate as Save On Foods as part of OWFG’s expansion in Alberta.

Sobeys CEO Marc Poulin says the company expects to find cost savings of approximately $200 million annually within 3 years by integrating divisions of both grocers.  He also said its too early to give specific details on store closures, layoffs or survival of the Safeway brand.

Sobeys has a regional office in Edmonton, with another office in Victoria for Thrifty Foods.  Canada Safeway’s head office is in Calgary, so it will be interesting to see if the Calgary head office remains open or possibly amalgamates with the Edmonton office.  Head office reductions are a likely.

Mr. Poulin has also been looking at centralizing Sobeys in Toronto, especially in the area of procurement, so office locations are a major factor in this deal.

Safeway has been the main reason that many CPG industry staff continue to be located in Calgary, which is the major regional hub for CPG companies in the West.  However, as regional influence on merchandising and negotiations have waned in recent years, there has been a pullback from the CPG industry from Calgary so it is unclear how Calgary-based CPG staff will be affected by the deal.

Another possible impact for suppliers, beyond Sobeys’ increased negotiation power is the comparison of trade terms between Sobeys and its newly acquired division. While most suppliers have learned from earlier acquisition deals such as the Loblaw / Provigo deal, it is sure that there will be some that have been offering the smaller Safeway better trade terms than Sobeys.

Currently, Sobeys is a sponsor of the Air Miles program in Quebec and Atlantic Canada, while Safeway is the major sponsor in Western Canada.  Sobeys could expand the Air Miles program to all of its stores in the West or continue to develop the Club Sobeys program to make it a strong national program.

For Safeway, proceeds from the sale are expected to pay down $2 billion of debt for as well as enabling the company to buy back shares and invest in growth opportunities.

The grocery store landscape in Canada is about to change again as this new deal sets the tone for a major shift.  We will do our best to keep you informed as all the pieces fall in place.


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