The parent company of Sobeys Inc. has agreed to acquire Ontario grocery chain Farm Boy in an $800-million deal that aims to beef up its business in fast-growing cities and suburbs.
It marks the first sizable acquisition by Empire Co. Ltd., based in Stellarton, N.S., since its $5.8-billion takeover of Safeway Canada in 2013. Sobeys struggled to merge its business with that of Safeway, resulting in red ink and large writedowns that erased half the value of the Safeway transaction.
Michael Medline, who became chief executive of Sobeys and Empire in early 2017, said in an interview that the company will do things differently with Farm Boy. It will keep the operations and management team of Ottawa-based Farm Boy intact and will hold on to its popular private labels. It will also maintain Farm Boy’s focus on fresh and prepared foods, which are fast-growing and potentially high-margin categories.
“I don’t want any change to Farm Boy other than if we can assist them in growing faster,” Mr. Medline said of the deal, which was unveiled Monday morning.
The acquisition comes at a pivotal time for Sobeys, which is in the midst of a three-year turnaround. The country’s second-largest supermarket retailer, behind Loblaw Cos. Ltd., is aiming to slash $500-million in costs, turn a web of regional fiefdoms into a centralized organization, fix the former Safeway business in Western Canada and win back customers online and in bricks-and-mortar stores.
For its online business, Sobeys has partnered with British grocery e-commerce specialist Ocado Group PLC to build high-tech distribution centres for delivery of fresh food, starting in 2020, and take on rivals such as powerhouse Amazon.com Inc., which acquired Whole Foods Market last year.
“Ocado plus Farm Boy is going to give us a killer edge on our competition,” Mr. Medline said.
In its most recent quarter, the retailer’s same-store sales – a key measure – gained 2.3 per cent, while profit rose to $95.6-million from $54-million a year earlier. Still, it failed to meet analysts’ forecasts.
Retail analyst Michael Van Aelst at TD Securities said in a report Monday that “management has done a good job addressing areas that are within its control. … But much of this has already been priced in and the market now wants to see sustainable tonnage [sales volume] growth without sacrificing margins.”
He said the acquisition of Farm Boy will account for just 2 per cent of Sobeys’ sales. But combined with its e-commerce, FreshCo discount expansion and other pending improvements, “it should give Empire a fighting chance at regaining lost share and closing the margin gap vs. its peers,” he said. Even so, there are no weak competitors from which to steal business, and Sobeys’ "recent margin pressure raised some concerns.”
Still, Mr. Medline is racing to find new potential growth areas – and Farm Boy is one of them.
He said he approached Farm Boy’s CEOs, founder Jean-Louis Bellemare and Jeff York, last spring. They toured stores in Ottawa in May and by mid-July were in serious takeover talks.
“We hit it off right away,” Mr. York said in an interview. “I saw something right there in the initial meeting that would be great for Farm Boy and for Empire.”
Mr. York said Sobeys’ real estate connections and sway will help Farm Boy nab more prominent retail locations from landlords. Currently “we get the crumbs.”
The deal helps Farm Boy expand in Ontario and across the country, Mr. York said. For Sobeys, the move helps it deal with its under-representation in the province and urban markets, Mr. Medline said.
Sobeys expects to double Farm Boy’s number of stores and annual sales within five years, to $1-billion, Mr. Medline said. It currently has 26 locations, 14 of them in Ottawa.
He said he expects some synergies from the takeover, but bolstering and expanding Farm Boy – rather than finding cost savings – is the key to the deal. The acquisition, which is expected to close early next year, should be accretive in the first year, he said.
Farm Boy, whose private labels are often compared with those of U.S.-based Trader Joe’s, will be an important part of the e-commerce strategy with Ocado, Mr. Medline said. In the competitive online shopping universe, retailers are increasingly using private labels to entice customers who can’t find those products elsewhere.
Started in Cornwall, Ont., in 1981, Farm Boy focuses on smaller stores, fresh items and catering to shoppers who want more of a foodie experience.
Sobeys is buying 88 per cent of Farm Boy, and its two co-CEOs are buying the rest from Boston-based Berkshire Partners, which acquired control of Farm Boy in 2012.
Investors seemed pleased with the deal. Empire’s class A shares rose 2.51 per cent Monday to $23.26 on the Toronto Stock Exchange.