Empire (Sobeys) CEO exits in wake of $2.9-billion Safeway blunder

Grocer Sobeys Inc. and parent company Empire Co. Ltd. stunned investors Friday with the sudden departure of their chief executive officer, after his high-profile acquisition of Safeway Inc.s Western Canada stores proved to be a blunder.

In a statement, the board of directors of Sobeys and Empire said CEO Marc Poulin has left the companies effective immediately. Franois Vimard, Empires chief financial and administrative officer, and a two-decade veteran with Sobeys, has been appointed interim president and CEO.

Mr. Poulin took over Empire in 2013, and that same year he struck a $5.8-billion deal to buy Safeway Canada. Initially, Bay Street heralded the acquisition; three years into it, the prospects turned ugly, and half of the total purchase price, or $2.9-billion, was written off during the first six months of 2016.

The CEOs departure is a stunning change for Canadas second-largest grocer, which has roots on the East Coast. When Sobeys bought Canada Safeway Ltd., hundreds of millions of dollars in synergies were promised and the transaction appeared to give the grocer new life. Target Corp.s northern expansion had Canadian retailers spooked and Wal-Mart Canada Corp. was broadening its food offerings, so it seemed as though Sobeys could get left in the dust. The market also grew more competitive after Loblaw Cos. Ltd. acquired Shoppers Drug Mart.

But Sobeys' costly missteps related to the deals execution proved to be insurmountable for the former CEO. Empire is now left with a hole at the top, and the person who takes over must find ways to salvage the acquisition and compete in an grocery market where consumers are increasingly cost-conscious.

Empire and Sobeys declined to comment Friday, but analysts are already speculating as to who could be the next CEO. For now the frontrunners are assumed to be Beth Newlands Campbell, who runs the Atlantic and Ontario business unit and joined the grocer in April, as well as external candidate Robert Sawyer, who most recently ran Rona Inc. and turned the retailer around before it was acquired by Lowes Cos Inc. Mr. Sawyer also worked at Metro for 33 years before that, rising to chief operating officer.

Whoever takes over is likely to need a cost-conscious strategy. We have argued that Empire will need to expand its Ontario discount banner (FreshCo) to the West and Maritimes to adequately address the ongoing shift in consumer traffic into the discount channel and put the company on a more level playing field long-term versus Loblaw and Metro, TD Securities analyst Michael Van Aelst wrote in a note to clients. We expect this to be a crucial part of a new CEO's initial three-to-five year strategic plan.

Executing such a plan will be costly. Any FreshCo expansion will involve re-working labour contracts, converting stores and building brand awareness all of which could cost $550-million in Western Canada and $250-million in the Maritimes, according to Mr. Van Aelst.

Salvaging the Safeway deal will also take work, but because it has been a major focus for some time, there is hope many of the integration issues are in the past or at least contained.

Among the missteps, a challenging supply chain proved to be one of the biggest problems. When Safeway was a separate company, its U.S. parent handled its produce delivery; when Sobeys took over, it installed new SAP software and point-of-sale technology that troubled Safeway staff.

Sobeys also relocated all head-office functions to a Safeway centre in Calgary just a few years after setting up regional hubs in cities such as Edmonton and Winnipeg. The change sapped employee morale.

Adding to the woes, Sobeys underestimated how attached Canadians were to Safeway in the West, and put its own private label, Compliments, in Safeway stores. Consumer backlash came quickly.

Investors will likely need some time to digest the writedowns, which partly stem from overpaying for Canada Safeway. When Sobeys acquired the business, rival eastern grocer Metro Inc. was hoping to do the same deal yet, Metro was cautious about price. Safeway knew our interest. We were not invited to negotiate. We doubt that we would have been ready to pay that amount for these assets, a spokeswoman wrote to The Globe and Mail when the Sobeys-Safeway deal was announced.

The share price performances of the two grocers since tell dramatically different stories. Metro Inc.s shares have doubled in value, after adjusting for a stock split. Empires climbed higher in the first two years after the deal, but fell 39 per cent from their peak, in April, 2015, before the CEO news came out Friday.

The Globe and Mail, July 9, 2016

Assignment 8 Refer to G&M article "Empire (Sobeys) CEO exits in wake of $2.9-billion Safeway blunder" in eConestoga Assignments. Answer the following questions: Why was the acquisition of Safeway's Western Canada by Empire (Sobeys) a blunder? Was it a strategic or implementation issue? . With the firing of the CEO, will the company change its strategy? Explain your answers. When appropriate use point form. 29