Pedestrians pass in front of a Sobeys Inc. grocery store stands in Toronto, Ontario, Canada, on Wednesday, July 24, 2013.Brent Lewin/Bloomberg
Three years after acquiring Safeway Inc.'s Western Canada stores, Sobeys Inc. is admitting the $5.8-billion deal's been a blunder.
As part of its quarterly earnings release, the Canadian grocer incurred a $1.7-billion impairment charge, the vast majority of which stemmed from a writedown of assets in its Sobeys West division, which includes the Safeway assets.
The weak Alberta economy, which affects all grocers, is a major problem. The tough market translates into lower prices amid endless promotions from rivals, who are all trying to lure shoppers.
But Sobeys is also admitting its own operational missteps. Combining the two businesses "continues to present significant challenges as the organizational, training and educational gaps related to the information technology system and process integration of the acquired business continue to be identified by the company," Sobeys wrote in its financial statements.
"These business integration challenges were coupled with operational challenges, experienced during the second and third quarters of fiscal 2016," the grocer added.
Two major problems exist. The first relates to product offerings. After closing the acquisition, Sobeys put its own private label, Compliments, in Safeway stores. Customers weren't happy.
Produce has also been an issue, largely driven by a shaky supply chain. Before the acquisition Safeway's produce was handled by its U.S. parent. That service agreement was scrapped when Sobeys took over. The transition didn't go smoothly.
Staffing issues have also been troublesome. Integrating the two companies took a lot of work, which sucked up resources and mental energy. Physical relocations were also required, including moving operations staff from Sobeys in Edmonton to a former Safeway office in Calgary.
Safeway staff also struggled to learn the SAP software and point-of-sale Sobeys uses in its own stores. That created resentment and some Safeway employees simply tried to revert back to their old methods.
Investors have been aware of these issues for some time, but there was hope Sobeys would work out the kinks. The grocer is now admitting that process is taking longer than it hoped. And it's also had to manage the problems amid Alberta's economic woes. Put together, the writedown was unavoidable.
The impairment should serve as a reminder that execution is critical for all mergers and acquisitions. Safeway's Canadian stores were highly coveted, and rival grocers such as Metro Inc. had long wanted them. Investors were largely impressed with Sobeys for scooping them up. The fine details, though, have come back to haunt the grocer.