Sobeys parent Empire Co. Ltd. EMP-A-T is slowing the pace of its e-commerce expansion and ending its exclusive partnership with technology provider Ocado Group PLC as the grocer seeks to make its Voilà online service profitable.
The company is delaying the opening of its fourth distribution centre, in Vancouver, designed to serve Voilà customers in that region. Empire will focus on improving the performance of its other three distribution centres, in Ontario, Quebec and Alberta, president and chief executive officer Michael Medline said on a conference call with analysts on Thursday.
Voilà continues to report increasing revenues – including its highest-ever sales growth of 23.5 per cent in the fourth quarter, which ended May 4. But the business is not yet profitable, and Empire is working on cutting the costs of its operations.
Voilà first launched in 2020, with the opening of a distribution centre north of Toronto, using robotic technology provided by British-based Ocado in an exclusive deal for the Canadian market. (Ocado also operates an e-commerce service in Britain and partners with grocers in other countries on their facilities.)
Since the launch during the pandemic-fuelled boom in e-commerce grocery sales, the overall size and rate of growth of the market for online groceries in Canada has been smaller than Empire expected.
“So we’re losing more money than we had initially estimated, and this is actually masking the strength of our bricks-and-mortar business,” Mr. Medline said on the call.
Ending the exclusive agreement with Ocado earlier than planned will allow Empire to “pursue complementary growth opportunities in the market,” Mr. Medline said on Thursday’s call, adding that the company remains “very optimistic” about the long-term prospect for Voilà.
These opportunities could involve serving customers in ways besides delivery orders from the distribution centres, Mr. Medline said. Third-party delivery services such as DoorDash and Uber Eats have been working with more grocery retailers looking to offer quicker delivery options from stores, often for smaller orders. Mr. Medline said the company is currently in talks with potential partners, but did not specify whom.
Empire will incur a one-time charge of $11.9-million in its first quarter related to the end of the deal.
“We are becoming much more confident in the industry growing. Part of that will be the industry growing, and part of that is we’re going to grow the industry,” Mr. Medline said, noting that e-commerce currently represents roughly 4 per cent of grocery sales in Canada, while the company expected it would have been closer to 6 or 7 per cent by this time. At that level of sales, the service would be profitable, he added.
In Western Canada, the company’s Thrifty Foods banner already has an e-commerce service and 28 of Empire’s stores offer store pickup. Construction of the Voilà distribution centre in Vancouver is mostly finished, but has not yet completed the installation of robotics.
Also on Thursday, the Stellarton, N.S.-based grocer announced a 9.6-per-cent annualized increase in its quarterly dividend, to 20 cents a share, as it reported a decline in fourth-quarter profits.
Empire’s net earnings fell to $148.9-million or 61 cents a share in the fourth quarter, compared with $182.9-million or 72 cents in the same period last year.
A number of factors affected net earnings in the quarter, including a gain of $10.4-million in insurance recoveries related to a 2022 cyberattack, a $7-million decrease related to the merging of its Grocery Gateway business into Voilà last year, and a $15.5-million decrease related to cost-cutting initiatives that included organizational changes and employee buyouts.
On an adjusted basis, net earnings fell to $154-million or 63 cents a share, compared with $184.9-million or 72 cents in the prior year.
Empire’s profit margins have grown as the company has improved operations at chains such as Sobeys and Safeway; cut its supply chain costs through more efficient product distribution; and expanded businesses such as Voilà, its discount grocery banner FreshCo and the higher-end Farm Boy chain. Gross margin increased to 27.1 per cent in the quarter, compared with 26.4 per cent in the same period last year.
Canada’s largest grocers have come under scrutiny in recent years because of soaring food inflation. While the rate of inflation has decreased significantly, customers are still coping with prices that remain significantly higher than just a couple of years ago. Mr. Medline noted on Thursday’s call that Empire’s internal measures of food inflation are “well below” Statistics Canada’s Consumer Price Index, and fell to a low of 1.4 per cent in April.
“These are not heady days,” Mr. Medline said, reflecting consumer confidence that remains low because of multiple interest-rate increases and the continuing effects of inflation. However, Mr. Medline said the Bank of Canada’s recent interest-rate cut should be a “turning point for improved consumer sentiment,” and said that the business stands to benefit as confidence improves. (Compared with competitors such as Loblaw Cos. Ltd. and Metro Inc., a smaller percentage of Empire’s stores are discount formats.)
Sales were roughly flat in the fourth quarter, increasing by 0.4 per cent to $7.4-billion.
Sales growth was led by FreshCo, Farm Boy and Voilà. Offsetting that growth was a decline in fuel sales, related to the $100-million sale of all of Empire’s Western Canadian gas station locations to Shell Canada subsidiary Canadian Mobility Services Ltd. That deal closed in July of 2023.
For the full year ended May 4, Empire’s earnings grew to $725.2-million or $2.92 per share, compared to $686-million or $2.64 in the prior year. On an adjusted bases, earnings fell to $681.6-million or $2.74 per share compared to $727.1-million or $2.80 the year before.
Empire expects to reduce its capital expenditures slightly in the coming year, from $831.4-million in fiscal 2024 to roughly $700-million this fiscal year; roughly half of that will be spent on store renovations and building new stores. The retailer is aiming to renovate between 20 to 25 per cent of its stores by the end of fiscal 2026.