Sobeys’ parent Empire takes aim at major competitors after announcing solid third-quarter growth

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The head of one of Canada’s biggest supermarket chains used a routine earnings update on Wednesday to call out his top rivals over a series of controversies involving pandemic pay and new supplier fees that have tarnished the sector’s reputation.

Michael Medline, chief executive of Sobeys’ parent company Empire Co. Ltd., told investors on a conference call that his company paid millions of dollars in “hero pay” bonuses to frontline workers during the second wave of infections this winter, “even while much of the industry did not do so.”

Medline’s growing indignation with his competitors serves as more proof that big changes are in store for how a small group of dominant supermarket chains conduct business in Canada.

Farmers, food processors and independent grocers have spent much of the pandemic pushing back against what they believe are bully tactics in the industry and have pressed government to reign in the big grocers. Medline’s criticism on Wednesday further confirmed that Empire is throwing its weight behind a push for a more “values-driven” approach in the industry.

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Empire, which also owns Safeway and FreshCo, paid $9 million in bonuses to employees in lockdown regions this winter, nearly double its expectations for the third quarter ending Jan. 30, the company said in its earnings report.

“To us, it was certainly the right thing to do,” Medline said on the conference call.

The employee bonuses, up to $100 per week, started as COVID-19 cases spiked again late last year. At the time, only Manitoba and a few regions in Ontario were in lockdown. The company expected the program to cost up to $5 million in its third quarter. But Ontario and Quebec then entered full lockdown and the cost of the bonuses rose. The bonuses are expected to cost up to an additional $4 million in the fourth quarter.

Cancelling the first round of hero pay bonuses dealt a serious blow to the public image of the big grocers, which until that point had been widely celebrated for holding steady through a wave of panic buying last spring. On June 13, Empire, Loblaw Cos. Inc. and Metro Inc. stopped paying their $2-per-hour bonuses, which had been in place since March.

In the shadow of the pay cuts, the major grocers have also drawn scrutiny for rewarding shareholders with higher dividends and share buybacks. Empire raised its dividend shortly after removing the first bonus program in June.

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The heads of the three chains were subsequently summoned by the parliamentary standing committee on industry, science and technology to explain the bonus rollback.

Loblaw president Sarah Davis told the committee that she sent a “courtesy email” informing her competitors in advance of her decision to cut pandemic pay. Metro chief executive Eric La Flèche said he made several calls to competitors in May and June to ask whether they planned to end the pandemic pay. Medline, however, told the committee that he made sure his legal counsel was also on the call and chose not to give La Flèche an answer.

All three companies have strongly denied any wrongdoing and have said they did not coordinate their decisions to cut the bonus pay.

The head of the Competition Bureau has since expressed concern about the issue, and the industry committee is now set to study whether Canada’s competition rules need changing, prompted in part by concerns around the cuts to pandemic pay.

Instead of bonus pay in the second wave, Metro gave staff two gift cards ranging from $75 to $300 each, one in December and another in February. Metro reported that the gift cards to its stores in December were worth $8 million, but hasn’t disclosed the value of the February bonus. Loblaw did not respond to a question on Wednesday about whether it has reinstated any bonuses.

Medline also took a thinly veiled shot at Walmart Inc. and Loblaw, both of which sent letters last year to announce they would charge their suppliers extra fees. The new fees were framed as a way to help offset the cost of necessary e-commerce and infrastructure upgrades to keep pace with consumers shifting to online grocery shopping during the pandemic.

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“I believe our strong market performance shows that you don’t need to send unilateral letters to your suppliers to do well in this business,” he said. “We try to treat our supplier partners with respect and transparency.”

Medline’s remarks were not the first time he has publicly criticized his competitors’ fees. In a speech last fall, he called the Walmart and Loblaw fees “repugnant” and backed calls from manufacturers and independent grocers to implement a code of conduct for the industry.

Empire reported a 47 per cent increase in earnings per share to 66 cents in the third quarter. Net earnings were $176.3 million, up 55.8 million over the previous year.

The company’s quarterly sales of $7 billion were up $623.5 million over the previous year, and included a 315 per cent increase in e-commerce sales. Despite the growth, major investments in Empire’s e-commerce platform Voilà will dilute earnings per share by 18 cents during fiscal 2021, though Medline noted that the estimate was an improvement on an earlier estimate of 20 cents.

“While we are seeing dilution now, this investment will pay off,” he said. “When we achieve scale, we expect to have the most profitable approach to e-commerce in Canada.”

Same store sales — a key metric for year-over-year performance in retail — were up 10.7 per cent, excluding fuel sales. The growth was well above expectations of eight per cent, Scotiabank analyst Patricia Baker said in a research note on Wednesday morning.

Empire’s quarterly results were a “nice beat,” she said.

Empire attributed its sales growth to the pandemic-related shift to eating at home, market share gains in food retailing as well as the western expansion of discount grocer FreshCo and the Ontario expansion of Farm Boy.

“There is a reason we are outperforming the competition,” Medline said, “and it ain’t all COVID.”