Costs, Price Competition Hit Sobeys

STELLARTON, Nova Scotia Sobeys officials last week acknowledged that price competition in Ontario has become but said it was obligated to continue playing along. The marketplace went a little irrational, and we wanted to make sure that we protected the price-competitive position that was so difficult to achieve over the last two to three years, Bill McEwan, president and chief executive officer, said

STELLARTON, Nova Scotia — Sobeys officials last week acknowledged that price competition in Ontario has become “irrational,” but said it was obligated to continue playing along.

“The marketplace went a little irrational, and we wanted to make sure that we protected the price-competitive position that was so difficult to achieve over the last two to three years,” Bill McEwan, president and chief executive officer, said in a conference call discussing the retailer's third-quarter earnings.

Sobeys saw profits plunge 27% during the period, which ended Feb. 3, in part because of margin investments in Ontario, McEwan said. Charges related to an ongoing systems initiative and a corporate head count reduction also weighed heavily as net income fell to $28.3 million (U.S.) from $40.2 million in the same period a year ago.

Net profit margins as a percent of sales fell to 1.03% from 1.46% in the same period a year ago.

McEwan said 90% of the company's price investments occurred in Ontario, where Wal-Mart has begun rolling out supercenters for the first time. He described Sobeys' challenge as sustaining a leading price position while competitors are frantically dropping their prices due to Wal-Mart's arrival.

“We didn't wait for an external event to reduce our pricing,” he said. “What we didn't anticipate was the short-term overreaction to the entry of a new competitor.”

He added that the pricing pressure has continued into the current quarter, and that Sobeys intends to stay in the game. “We're not going to give up our competitive position,” he said.

Sales of $2.75 billion represented an increase of 3% over the same period a year ago, with same-store sales increasing by 1.8%, Sobeys said.

Sobeys recognized about $17.1 million in charges during the quarter, including $6.7 million to cover severance and asset write-offs in Atlantic Canada, where the first phase of an ongoing systems initiative allowed for staff rationalization. The company also incurred $4.5 million in severance expenses related to preparations for a new automated distribution center in Vaughn, Ontario.