Sobeys parent company Empire is pausing warehouse plans in Vancouver due to e-commerce issues

Empire Co. food company Ltd. is pausing the opening of its fourth customer fulfillment center in Vancouver, citing a smaller grocery e-commerce market in Canada than the company anticipated when it launched its online delivery platform Voilà in 2020.

Empire President and CEO Michael Medline said the company is losing more money than initially estimated as it launches its first three warehouses in the Greater Toronto and Montreal areas and in Rocky View County, Alta.

“It actually masks the strength of our brick and mortar business,” he told analysts on the company’s fourth-quarter earnings call Thursday.

Medline says Empire planned a phased schedule for opening its various fulfillment centers that was intended to protect its level of profitability. He said the company hopes the “rapid growth” of grocery e-commerce will offset initial operating losses at its logistics centers.

However, all three existing warehouses remain loss-making, said Chief Financial Officer Matt Reindel.

“This is completely in line with our expectations, but everything is heading in the right direction,” he said.

In addition to halting plans for a fourth location, Medline said Empire was terminating a mutual exclusivity agreement signed in 2018 with British online grocery company Ocado Group Plc for use of its e-commerce platform.

He said that as a result of the early termination of the contract, Empire will incur a one-time charge of $12 million next quarter, which he believes will be offset by expected savings.

“We’re doing all sorts of things to make e-commerce more profitable for us,” he told Medline.

“But we’re looking forward to it. We owe it to our investors to be significantly more profitable year after year and then make this one of our best businesses in terms of returns.”

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

He said there is already “a lot of competition” in Canada among brick-and-mortar stores that serve customers well.

The second reason, which he says is open to debate, is that grocery e-commerce had a rocky start in the early days of the Covid-19 pandemic.

“When Canadians really had to rely on grocery e-commerce during the worst days of the pandemic, it stunk,” Medline said, recalling “terrible” deals and substitutes.

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

The parent company of grocery chains Sobeys and Safeway 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 after 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, compared with a profit of $182.9 million dollars, or 72 cents per diluted share a year earlier.

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

Same-store sales fell 0.3%. compared to the same quarter last year, while same-store sales, excluding fuel sales, increased by 0.2%.

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

Medline said consumer confidence remained low this quarter due to an inflation “hangover” and elevated interest rates. Shoppers remained cautious with their spending even as food inflation continues to trend downward, reaching 1.4% in April.

He said the Bank of Canada’s decision earlier this month to cut its policy rate “represents the beginning of an inflection point toward improved customer sentiment” and comes with hopes that Canadians will feel less pressure on their wallets.

“We expect customers will add more products to their cart and increase their sales,” Medline said.

“We are now more optimistic than we have been in a long time when it comes to the market and our prospects. We expect improvement to be gradual but inexorable.”

On an adjusted basis, Empire said it earned 63 cents per diluted share, compared with adjusted earnings 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, Canadian Press