Sobeys expected to follow competitors, hike
prices (found at www.thechronicalherald.ca)
prices (found at www.thechronicalherald.ca)
We should find out today whether Sobeys Inc. will follow the lead of its competitors and raise food prices in response to inflation. All the signs suggest it will.
In the days leading up to its third-quarter results, out today, the Stellarton-based grocery chain, a wholly owned subsidiary of Empire Co. Ltd., was in a quiet period and could not respond publicly to the suggestion by competitor Loblaws that it’s expected to raise food prices.
In Empire’s second-quarter report, released in December, Sobeys did indicate it was willing to eat rising costs because it couldn’t afford to give up on competitive pricing at that time.
Sobeys president and CEO Bill McEwan told analysts during a conference call: "We have begun to see some commodity price increases but clearly we anticipate considerably more."
He said grocery prices at Sobeys had declined by about one per cent during the second quarter, which ended Oct. 30, 2010.
But since that time, dramatically rising fuel costs have been adding to the demand to raise food prices. That is why it is expected that Sobeys, Canada’s second-largest grocery chain, will re-evaluate the low- price strategy while remaining price competitive in an increasingly tough business.
Sobeys, market leader Loblaws and third place Metro, which together account for about 60 per cent of the Canadian grocery market, have complained in previous quarters that falling retail prices due to stiff competition were taking a toll on profits.
That is why food executives are hopeful consumers will be willing to accept at least some of the price inflation; otherwise, the companies will be forced to continue absorbing the increased costs, which will affect the bottom line.
When contacted for a comment on whether Sobeys believes it will be able to pass along price inflation to the consumer this time around, a company spokesman indicated management could not comment before today’s conference call.
However, I was referred to comments McEwan made at a CIBC World Markets conference in Toronto a couple of weeks ago:
"We remain committed to being price competitive in each market we serve. . . . We are seeing signs of balanced inflation starting, in which retail prices rise in step with manufacturer prices and the general cost of doing business. There appears to be an appetite for that to happen but we shall see. If we behave like a mature industry, it will happen.
"If we continue to pursue business that is not there, we will see continued deflation."
In the parent company’s second quarter, Sobeys reported strong profits despite heavy competition.
The grocery business in Canada is increasingly fragmented. It isn’t only the grocery stores selling food these days. Competition is coming from retail giant Walmart, drug chain Shoppers Drug Mart and even Canadian Tire has been experimenting with selling groceries.
In December, McEwan said he was optimistic the market would soon be in a position to hike prices in line with food inflation.
He also pointed out that some parts of the country have a more competitive retail marketplace than others, so price increases wouldn’t necessarily be felt equally across the country.
In the Toronto marketplace, for example, all companies are engaged in a cutthroat battle to gain market share that means the grocery chains will be watching each other very closely.
While no one wants higher food prices, it is important that Canada maintain a competitive retail food sector. In the end, competition is the best way to safeguard against unfair price rises.
It should be interesting to hear what Empire and Sobeys officials have to say today.
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