Sobeys parent Empire pausing warehouse plans in Vancouver amid e-commerce woes

Grocery company Empire Co. Ltd. is pausing the opening of a fourth customer fulfilment centre in Vancouver, citing a smaller e-commerce market for groceries in Canada than the company anticipated when it launched its Voilà online delivery platform in 2020.

Empire president and chief executive Michael Medline said the company is losing more money than it had initially estimated when launching its first three warehouses in the Greater Toronto and Montreal areas, along with Rocky View County, Alta.

“This is actually masking the strength of our bricks and mortar business,” he told analysts on the company’s fourth-quarter earnings call Thursday.

Medline said Empire had planned a phased timeline for opening its various fulfilment centres, which was designed to protect its profitability levels. He said the company hoped “rapid growth” in grocery e-commerce would compensate for the initial operating losses at the fulfilment centres.

But all three existing warehouses are still losing money, said chief financial officer Matt Reindel.

“That’s absolutely in our expectations, but they’re all heading in the right direction,” he said.

Along with halting plans for its fourth location, Medline said Empire is ending the mutual exclusivity agreement it signed in 2018 with British online grocery company Ocado Group Plc to use its e-commerce platform.

As a result of ending the deal early, he said Empire will incur a one-time $12-million charge next quarter, which he said would be offset by its expected savings.

“We are doing all sorts of things to make e-commerce more profitable for us,” Medline said.

“But we can’t wait for that. We owe it to our investors to become much more profitable year-after-year and then make this one of our best businesses in terms of returns.”

Medline said he has two theories of why grocery e-commerce hasn’t caught on in Canada the same way it has in the U.S. and the U.K.

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He said Canada already has “great competition” among its brick and mortar stores, which serve customers well.

The second reason, which he said is open to debate, is that grocery e-commerce got off to a rough start during the early days of the COVID-19 pandemic.

“When Canadians really needed to count on grocery e-commerce during the worst days of the pandemic, it stunk,” said Medline, recalling “terrible” offerings and substitutions.

“People were just trying to get food to people in crisis and I understand that. But I think that hurt the brand.”

The parent company of the Sobeys and Safeway grocery chains said Thursday it will now pay a quarterly dividend of 20 cents per share, up from 18.25 cents per share.

The increased payment to shareholders came as the Stellarton, N.S.-based grocer reported a profit of $148.9 million or 61 cents per diluted share for the quarter ended May 4, down from a profit of $182.9 million or 72 cents per diluted share a year earlier.

Sales for the quarter totalled $7.4 billion, about the same as a year ago.

Same-store sales fell 0.3 per cent compared with the same quarter last year, while same-store sales, excluding fuel sales, rose 0.2 per cent.

RBC Dominion Securities Inc. analyst Irene Nattel said in a note the results were in line with expectations, as “consumer value-seeking behaviour continues to be a headwind.”

Medline said consumer confidence remained low in the quarter due to the “hangover” of inflation and elevated interest rates. Shoppers remained careful with their spending, he said, despite food inflation continuing its downward trend to reach 1.4 per cent in April.

He said the Bank of Canada’s decision earlier this month to lower its key interest rate “represents the start of a turning point for improved customer sentiment,” with hopes that Canadians will feel less pressure on their wallets.

“We expect to see customers adding more items in their basket and trading up,” Medline said.

“We are currently more optimistic about the market and our prospects than we have been in a long time. We expect that improvements will be gradual, but inexorable.”

On an adjusted basis, Empire said it earned 63 cents per diluted share, down from an adjusted profit of 72 cents per diluted share a year ago.

This report by The Canadian Press was first published June 20, 2024.

Companies in this story: (TSX:EMP.A)

Sammy Hudes, The Canadian Press