At Sobeys, ‘change is imminent’

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Michael Medline was on the job for just a few hours as chief executive officer at Sobeys Inc. when he met with about 600 employees to talk about what he had in mind for the struggling grocer.

On that crisp Friday morning in early January, the most frequent question posed to Mr. Medline, more than anything else, was whether a lot of change would be coming to Canada's second-largest food retailer. It was the dominant question at the five town halls he held across the country in the next two weeks.

"The answer was: 'Of course we're going to see change,'" Mr. Medline recalls telling the gathering in the sixth-floor meeting room of Sobeys's modern, spacious Mississauga regional offices.

"'Is anyone here happy with our results or how we're serving our customers? We have to get better and so you're going to see a lot of change.' I was very upfront about that right away."U.S. President Donald Trump isn't alone this month in marking his 100th day in his new position. Mr. Medline reached that point last weekend as the new chief executive officer of Sobeys and its parent Empire Co. Ltd., gearing up for the fight of his life in a business transformation he dubs 'Project Sunrise'.

The former CEO of Canadian Tire Corp. Ltd. is tasked with finding a new dawn in the darkness that has plagued both Stellarton, N.S.-based companies, Sobeys and Empire, since they botched a $5.8-billion takeover of 213 Safeway supermarkets in Western Canada in late 2013. The process of combining the companies' operations resulted in empty store shelves, irate customers and, last year, a painful writedown of half the Safeway purchase price.

Now, the new CEO is overseeing a turnaround plan that entails slashing costs, slimming down the company's "labyrinthine" structure, reconnecting with customers, especially at Safeway, and fixing problems in Sobeys's western division, he says. He must do all that in an increasingly intense grocery landscape, and in a period of food deflation that makes a recovery even tougher.

"He's got one of the hardest jobs in Canada," says Duncan Reith, a former Sobeys and Canadian Tire executive who is now a grocery consultant and marketing professor at Seneca College. "He's got a struggling company in an industry that is highly competitive and highly concentrated with a consumer who is reluctant to spend money … It's an unbelievably difficult assignment."

Financial urgency

Sobeys's financial results underscore the urgency for Mr. Medline to take "aggressive and bold actions," as he puts it. In the fiscal year to May 7, 2016, Empire (most of it Sobeys) posted a loss of $2.1-billion compared with a profit of $419-million a year earlier. Sales rose to $24.6-billion from $23.9-billion.

In its quarter to Feb. 4, the company generated a $30.5-million profit compared with a $1.4-billion loss a year earlier, mostly owing to the Safeway writedown, while sales slipped to $5.9-billion from $6-billion.

"Our results are not where they need to be," Mr. Medline says.

Empire's Class A shares tumbled almost 39 per cent last year but, year-to-date, are up nearly 34 per cent – essentially coinciding with Mr. Medline's arrival at the helm.

Mr. Reith, who was hired by Mr. Medline at Canadian Tire more than a decade ago, says the new Sobeys CEO is "a strong strategic thinker and he can build a team around him" of grocery experts, even though the CEO himself doesn't have a food-retailing background. But he needs to find a way to differentiate Sobeys from rivals and quickly regain momentum and customers, Mr. Reith says.

Mr. Medline also wrestles with Sobeys being alone among major chains in not running a discount chain in Western Canada at a time when rivals, including low-cost U.S. titans Wal-Mart Stores Inc. and Costco Wholesale Corp., are ramping up their grocery aisles. Mr. Medline says he is looking into expanding Sobeys's discount FreshCo chain in Ontario to the West, but probably not right away because of other priorities.

And Mr. Medline's intention to consolidate product purchasing could potentially shift too much decision-making to a centralized organization, risking further alienating customers by missing out on local preferences and tastes, added Kyle Murray, director of the school of retailing at the University of Alberta in Edmonton.

Mr. Medline says the snags at Sobeys stem from a "convoluted" and "very unwieldy" administrative structure that bogs down decision-making for months or more. For example, 12 people at the grocer across the country purchase pet food – a category he is familiar with from his Canadian Tire days – while only two or three are needed, he says.

He came to this view about Sobeys's "byzantine" structure after weeks of touring stores – starting in Calgary last fall even before he accepted the job – and speaking to hundreds of employees and customers. "I hate being chained to the desk."

Now he says he will act swiftly to streamline and centralize decision-making and slash costs and find creative ways to trumpet Sobeys's strengths – fresh fruits, vegetables, meat and seafood – to consumers. In the past year or so, the retailer has dropped prices, but the marketing has been mainly tied to discounting and shoppers need to be pitched more reasons to shop at the stores, he says. Even so, first he has to fix the basics, especially in Western Canada.

Not messing around

"Changes are imminent," he says as he sips a cup of Sobeys's private-label Compliments Earl Grey tea in the Mississauga offices' bright and airy cafeteria. Later he tours the mini grocery store behind the eatery and pulls out his wallet to pay for an 89-cent bagel at the checkout.

"We're not messing around here. We're going to get at it very soon. I don't see any reason to elongate the process. I think it's good for the customers and it's not fair to the employees, who have been hearing about this restructuring for over six months."

Peter Sklar, a retail analyst at BMO Nesbitt Burns Inc., expects Empire to take a substantial restructuring charge early in its next fiscal year (which begins next month) to cover consolidating regional management and shaving costs. The cutbacks can yield short-term improvements, however "the larger issues will take some period of time to work out," Mr. Sklar says. Industry observers generally say Mr. Medline will need 18 months to two years to turn the business around.

Still, for all the missteps of Mr. Medline's predecessor, Marc Poulin, who sealed the Safeway deal and oversaw its messy integration into Sobeys's operations, the new CEO insists the acquisition wasn't a mistake, and that Safeway is the jewel among Western Canada's grocers.

And contrary to rumours, Sobeys will not drop the Safeway name in favour of Sobeys because Safeway is a valuable banner in the West, he says. He's flattered that Jim Pattison of rival Overwaitea Food Group of Langley, B.C. has said he'd be interested in snapping up some Safeway or Sobeys stores, but they're not for sale, Mr. Medline says.

"In Western Canada, Safeway is the banner," he asserts. "It had the best locations and it had been great in terms of serving our customers … It was a prize at the time it was purchased. Many would have liked to own it. I've said to our employees: 'Yeah, we've had some stumbles. But we'll look back years from now and we'll be very pleased that we have that banner, with its locations and the scale it gives us in the West and across the country.'"

What went wrong?

Safeway converted its private labels, such as Lucerne dairy products, to Sobeys's Compliments line, while replacing the popular Club Card loyalty program with Air Miles, upsetting customers who coveted those items, he says. Its switch to new sourcing of fruits and vegetables also went awry, all exacerbated by the downturn in Western Canada and consumers' shift to discount shopping, which made Safeway's higher prices stand out.

"We went in there and believed we had all the answers for Safeway," Mr. Medline says. "We didn't understand how Safeway was different from all the grocers out there and the decades-long relationship these customers have with the banner. Their grandparents had shopped it. Their parents had shopped it. They had shopped it. Things like the loyalty program, the Club Card, the private labels which were so important – we changed them. When you do that people doubt whether you understand them or their heritage and how they've been shopping for a long period of time."

University of Alberta's Dr. Murray and his mother are among the Safeway shoppers who felt let down. He remembers his mother stocking up on Safeway brands when he was growing up. When the recent merchandise switch came "she was really unhappy and almost felt betrayed by the company. She felt they didn't have the loyalty to her that she had shown to them."

Mr. Medline has heard from other disappointed customers. He reads their e-mails and his team is conducting research of more than 6,000 current and past customers to learn more, with an emphasis on the West.

Although Safeway lost sight of what was important to its customers, it has improved its supermarkets over the past several months and reduced prices, he says. "I would put us up against anyone in the West."

'Retail is retail'

And though Mr. Medline lacks food-retailing experience, he held an array of executive positions at Canadian Tire in the 15 years he was there, including the top job beginning in 2015. He was instrumental in the acquisitions of clothier Mark's Work Wearhouse Ltd. in 2002 and, nine years later, Forzani Group Ltd., the country's largest sporting-goods retailer whose chains include Sport Chek, folding those operations into those of Canadian Tire. He left Canadian Tire abruptly last summer, replaced by its former CEO in a difference of opinion with the board of directors over the direction of the merchant in an increasingly fast-paced and more digital retail world, observers have said. Despite the disagreements, he left Canadian Tire in good shape, with robust financial results despite currency and Western economic pressures.

"I have a core belief that retail is retail – 95 per cent of the issues I face, I've faced at some other banner," he says. At Forzani, he led a shift to higher-margin apparel, younger styles and digital marketing, even though he was previously unfamiliar with fashion retail, he notes. He learned that detailed customer research is essential to formulating a strategy and understanding shoppers, an effort he is now applying at Sobeys. "It was a reminder that you've got to dream big," he says. "Many retailers don't dream big enough. You need to test, try new things and learn from those experiences."

When he arrived at Canadian Tire in 2001, the retailer faced tenuous times as it took on Wal-Mart in a similar situation, in some ways, to the one Sobeys finds itself in today, he says.

At Canadian Tire, "it was a tight-knit group of executives pulling in the same direction, and the company had a bit of a chip on its shoulder because everyone thought the first wave of big American retailers coming into Canada would crush them," he says.

Canadian Tire survived the Wal-Mart assault (and later Target Corp., which came and failed in Canada) by focusing on the domestic chain's strengths, such as tires and tools and other areas in which Wal-Mart didn't excel.

Now at Sobeys, Mr. Medline plans to follow a similar path and focus on its strengths of higher-margin fresh produce, meat and seafood, while bolstering its Compliments private labels, he says. That won't be easy, with formidable competition from leading grocer Loblaw Cos. Ltd. and its high-profile President's Choice and other store brands. "We need to up our game," he says. "We have to convince people that we're the place to come and shop."

Once he sets a firm foundation, he will move on to digital, e-commerce and other innovations, he says. For the time being, he's betting on the fighting spirit he noticed among staff in those first town halls.

"I thought I had come into a company, because of the results we had had, with low morale," he says. "People were disappointed. But they had been winners before. It's so hard not to be the winner, especially when you're so big and so prominent and so iconic. And so there is a winning mentality – but we hadn't been winning."