Sobeys looking to dominate with Safeway Canada deal

The supermarket wars are heating up with Sobeys Inc.’s $5.8 billion purchase of Safeway's Canadian assets, but it’s unlikely the battle will translate into lower grocery bills for consumers.

The shareholders of both Sobeys Nova-Scotia-based parent Empire Co. Ltd. and U.S.-based Safeway Inc. are expected to receive the biggest benefit from the blockbuster deal announced Wednesday.

Both retailers are better positioning themselves for increased competition in the grocery aisles across North America, particularly from discount retailers such as Wal-Mart and Target. Wal-Mart began selling food in Canada a few years back, and Target is just entering the market.

Unfortunately for consumers, the increase of choices hasn't led to cheaper food prices.

A recent RBC study shows 84 per cent of Canadians believe food prices have increased over the past year, and about 33 per cent say that’s had a significant impact on their budget.

It also says 57 per cent of Canadians are comparison shopping more than in the past.

Soon there will be fewer choices for those shoppers once Sobeys adds Safeway’s 213 stores across western Canada to its roster. That’s on top of Sobeys current lineup of about 1,500 owned or franchised stories across all 10 provinces, which includes brands such as IGA, Thrifty Foods, Foodland and FreshCo.

The deal also includes 199 in-store pharmacies, 62 gas stations, 10 liquor stories, 12 manufacturing facilities and four distribution centres. Sobeys has a national network of 23 distribution centres currently.

"The acquisition allows us to leverage our existing assets and in turn position Sobeys to compete even more effectively within the changing, and increasingly competitive, grocery retail landscape,” Empire CEO Paul Sobey said of the transaction, calling the deal a “significant and historic event.”

Grocery price war to come?

CIBC analyst Perry Caicco notes the western Canadian market is "high priced" and while the deal will mean lower cost-of-goods for the merged company, which will help it better compete with the Wal-Marts and Targets: "We do not see this deal, in and of itself, triggering any price wars."

Caicco also forecasts this is the first step in the consolidation of the Canadian grocery business.

"By making the first move, and doing so at a reasonable price, Sobeys puts pressure on the market to make similar moves – and likely at higher prices," he said in a note on Thursday.

Retail consultant David Ian Gray, of DIG360 Consulting, says the Sobeys/Safeway deal puts the chain solidly in second place in the Canadian grocery retail market, behind Loblaw Companies Ltd.

He also doesn't see an impact on food prices for consumers as a result of the deal, at least in the short term.

"There are similar number of stores, so the consumer in the short run should not be impacted," said Gray.

"Longer term, it should yield better quality for the price compared to the other nationals and in fact, I believe Safeway chain will become better for it. Canadian product vendors may worry that, should buying centralize, their options for selling product will be reduced."

Empire Co. is expecting to save $200 million over three years by combining operations and cutting costs. It’s unclear whether there will be a name change to either brand, or whether layoffs are expected.

The United Food & Commercial Workers (UFCW) union, which represents workers at both Safeway and Sobeys across Canada, said it expects the collective agreements with workers will remain in place.

“We do expect Sobeys to live up to the labour commitments in place at Canada Safeway, and have no reason to doubt they will,” said UFCW representative Michael Forman.