In retrospect, the most prescient assessment of the original Sobeys-Safeway deal may have come from Perry Caicco, then an analyst at CIBC World Markets, who told the Globe and Mail the day of the announcement: “Now comes the hard part.”
Interestingly, Sobeys had been there before. So too, of course, have plenty of other companies, large and small. Having acquired a sought-after takeover prize, companies suddenly founder on the treacherous shoals of merging personnel, systems, cultures, customers into a new, unified, efficient, happy and profitable entity.
Following its 1998 acquisition of Oshawa, Sobeys had tried too quickly to impose a system-wide computerized inventory control system on all its stores. The system not only crashed its cash registers in the middle of the pre-Christmas rush but the various merger problems also ultimately forced the company to take a massive write-down. Sound familiar?
That time, the company almost immediately brought in a new president to right the listing corporate ship. Bill McEwan, a former senior vice president for Canada for Great Atlantic & Pacific Tea Company Limited, righted the ship — and more — sailing head to head against Loblaws, and often beating them. But then in 2012 — the year before the Safeway acquisition — McEwan resigned to deal with an ongoing but non-life-threatening health problem.
Curly-haired, bespectacled, smiling Marc Poulin, then 51, seemed his ideal successor. He’d originally joined Sobeys as part of the Oshawa Foods deal and quickly scaled the corporate ladder, overseeing Sobeys profitable Quebec operation for more than a decade before he was tapped to succeed McEwan as Sobeys president and CEO. Two years later, after a satisfied Paul Sobey decided to retire from Empire before the ink was even dry on the Safeway deal, Poulin assumed his roles there too.
Despite the problems that had followed the Oshawa takeover and despite the well documented potential for corporate disruption any change in leadership in the midst of a merger can create, Paul Sobey was not only confident Sobeys had learned its Oshawa lessons but also that Poulin was the right man for his new duties. (Sobey, who remains on the board at Empire, didn’t respond to email requests to discuss the current situation at the company. Bill McEwan too demurred “out of respect for the Sobey/Empire organization, its ownership and the people. Any Monday morning quarterbacking from me in the public domain would be neither respectful nor helpful… or well enough informed at this point.”)
Poulin seemingly made all the right early moves. He used Sobeys new marketplace clout to demand suppliers reduce their prices by one per cent and forego any dreams of price increases for 2014. He closed 50 “consistently underperforming” stores, most of them on the west coast, to streamline operations. For the same reason, he herded employees from Sobeys’ regional offices in Edmonton, Victoria and Winnipeg to Safeway’s head office in Calgary. Although Poulin himself remained based in Montreal and Sobeys corporate headquarters was still in Stellarton, N.S., Poulin spent a lot of his time out west, providing a present public face for the new regime.
Perhaps more significantly, Poulin — who’d convinced his then-new bosses in the late 1990s to maintain Oshawa’s popular IGA brand in Quebec rather than convert them to Sobeys stores — talked a similar talk about Safeway too. “We’re very pragmatic about branding,” he told the Toronto Star, explaining that customers would ultimately decide the name on the sign above the entrance. “The intention is to take the best of both worlds and build a great company.”
But then he turned around and did what far too many corporate executives do to screw up good intentions: he assumed his acquiring company’s brands, systems and processes were best for both companies — and, more significantly — for their customers.
Sobeys imposed its own back-end information technology SAP management systems on Safeway — with inevitable glitches and internal grumbles.
Less than six months after the takeover took effect, Poulin ended a popular Safeway customer loyalty program for what again seemed the best of possible corporate reasons — to help integrate those company systems. But in doing so, says Dalhousie’s Charlebois, “he disenfranchised the customer base.”
Customers felt even more disenfranchised when Sobeys then replaced Safeway’s popular traditional house brand, Lucerne, with Sobeys unfamiliar Compliments. Sobeys had done what it assumed was its best to create Poulin’s “best-of-both-worlds” approach by taste-testing competing private-label products and picking winners, but then packaged them as Compliments products. Safeway consumers weren’t buying. “Honestly,” a frustrated Poulin had told analysts on a December 2015 conference call, “we have to say we were a little bit caught off guard by the fact that we needed to work harder with the customer to get the proper adoption of the private-label program.” He never did.
And, in the age of social media, customers didn’t keep their unhappiness to themselves. Tweeted Allen R. Gibson to his 1,000-plus followers: “After about 30 years as a loyal customer, #Sobeys marketing have managed to put me off #Safeway in about 8 months. Idiots.”
To make a challenging situation worse, Sobeys also switched Safeway’s fresh produce supplier from one that had been controlled by Safeway’s American parent. The transition did not go well, and there were often empty shelves. Tweeted another unhappy customer: “Why is it every time I come to Safeway things aren’t stocked #Safeway.”
Same-store sales — often considered a sign of customer loyalty — fell by 3.6 per cent in Sobeys’ western Canadian stores, dragging down Sobeys national same-store average sales into minus territory at the same time that Loblaws similar sales numbers were increasing by 2.6 per cent and — more ominously — Walmart Canada’s were scampering ahead by 6.7 per cent.
Sylvain Charlebois says Empire “under-estimated just how different the Sobeys and Safeway cultures were,” and made a series of ill-considered decisions it carried out too quickly. The concept, he says, “was very good. The execution…” He pauses.
Whose fault was that?
“It boils down to leadership,” Charlebois says simply. While Bill McEwan had lived and breathed the retail food business from the inside since he was a 15-year-old boy bagging groceries in his hometown of Trail, B.C., “Marc Poulin is an actuary. He brought the value of analytics and big data into the grocery business. He analyzed the system through numbers, so human capital was not a critical part of his analysis. That was really his downfall.”
What was not Poulin’s fault, but became yet another key shove on his way out of the boardroom door was the reality that Alberta’s economy tanked just as Sobeys was trying to come to terms with its western Canadian acquisition.
Oil prices collapsed by 50 per cent and the industry quickly ran out of economy-expanding fuel, squeezing Sobeys western customers, especially in Alberta where Calgary reported its worst unemployment numbers in 20 years. Then, in part because of what was happening in the oil patch, Canada’s loonie fell back down to earth, driving up import prices for shoppers across the country. Sales at traditional grocery stores in the west, which had been chugging along at a comfortable two-or-more per cent a year increase for years, suddenly began to contract. In 2015, sales in traditional food outlets fell by one per cent in Alberta, and worse in Saskatchewan (4.2 per cent) and Manitoba (4.3 per cent). Price-weary consumers opted to buy their beans and wieners at discount operations, including Walmart, Costco and Loblaws’ own No Frills chain.
“We’re not dealing with the same customer psyche that we were dealing with even a year ago,” Poulin told analysts in March. “The behaviour of the customer in Western Canada has changed, and we have to acknowledge that.”
Complicating that issue for Sobeys was that, although it operates its own successful established discount chain, FreshCo, in Ontario, it doesn’t offer lower-priced outlets elsewhere, including in suddenly bargain-hungry western Canada. Despite changing industry economics — Canadian Grocer reports the overall market share for discount stores has risen from 34 per cent to 40 per cent since the 2008 recession, and it’s growing — Sobeys didn’t seem prepared, or agile enough, to roll out an alternative to its traditional stores in western Canada after it got hit by its Safeway-takeover/economic-meltdown perfect storm in 2015.
Converting some of its western stores to FreshCo might seem like a necessary quick fix but experts suggest that would create its own new and different problems. Sobeys would be introducing another new brand to compete against Alberta’s already established discounters like No Frills. Worse, explained Peter Chapman, a former Loblaw employee-turned-Halifax-based food-retail consultant, discount is “basically an entire new business” with its own issues and challenges. While one analyst did muse to Canadian Grocer that Sobeys should consider immediately launching FreshCo in Alberta, he stopped himself, adding the telling observation that its executives already had “more on their plate” than they could cope with.
They did — and do.
Earlier this year, Sobeys attempted to counter consumer perception that its products were too expensive by lowering prices across the board on thousands of meat and produce items, not as a one-off flyer promotion but as what a spokesperson called a “a major commitment” to lower prices for its customers.
“It’s not simple promotional fixes that will get the job done,” Poulin himself explained during that fateful June 29, 2016 conference call, “it’s more fundamental changes that will adapt the business for our customers.”
With the week, Empire’s directors had decided Marc Poulin was not the man to make those “fundamental changes,” not the man to “get the job done” — and he was gone.
Which begged the question: what now?