Empire, the parent of Sobeys, is limiting e-commerce investments due to profitability problems

Empire (EMP-A.TO) is scaling back investment in its e-commerce business Voilà, pausing the opening of a fulfillment center in Vancouver and ending its exclusive deal with technology provider Ocado as the company struggles with profitability.

Empire, which operates the Sobeys, Safeway, FreshCo and Farm Boy brands, says it will suspend the opening of its fourth Voilà customer service center (CFC) and focus on existing centers in Toronto, Montreal and Calgary. The company says construction of the Vancouver center is “substantially” completed, although internal work to launch the networks and robots – supplied and operated by Ocado – has not started.

“As we have stated several times over the last two years, the current size of the grocery e-commerce market in Canada is smaller than we or anyone else had anticipated,” Empire CEO Michael Medline said on a conference call. on Thursday with analysts, noted that the company’s business model includes a phased opening of fulfillment centers across the country “designed to protect Empire’s level of profitability while growing rapidly.”

“That didn’t happen. We are losing more money than we initially estimated, which actually masks the strength of our brick-and-mortar business. As a result, we are taking several immediate actions to address the higher-than-expected dilution from Voilà and rapidly improving performance.”

In addition to the opening pause in Vancouver, Empire has also ended its exclusive partnership with Ocado, a technology group that provides and operates automated CFCs. Termination of the agreement will result in a one-time payment to Empire of $11.9 million.

The news caused Ocado Group shares to fall on Thursday, closing down 12% on the London Stock Exchange. Meanwhile, Empire shares rose as much as eight percent. Its shares rose about five percent in afternoon trading on the Toronto Stock Exchange.

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Empire first launched its Voilà grocery delivery service in 2020, delivering products from automated fulfillment centers that only handle online orders.

While sales at Voilà have increased — Empire says sales were up 23.5 percent in the fourth quarter ending May 4 compared to the same period last year — growth has been slower than expected. Medline says grocery e-commerce penetration is four percent, and while it didn’t disclose what penetration rates would translate into profitability, it says that “at six to seven percent we’ll all be happy, us and our shareholders.”

“We are extremely pleased with Voilà and continue to believe that it is the best e-commerce solution for the grocery industry in Canada and that it will be attractively profitable over the medium to long term,” Medline said.

“Customers love it. We just need more people to try it.”

Sales at the empire were broadly flat from a year ago, totaling $7.4 billion in the fourth quarter. In the fourth quarter of the year, the company reported earnings of $148.9 million, or 61 cents per diluted share, compared with $182.9 million, or 72 cents per diluted share, in the prior-year period.

Alicja Siekierska is a senior reporter at Yahoo Finance Canada. Follow her on Twitter @alicjawithaj.

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