From the Globe and Mail’s Report of Business Magazine, 2003
Bill McEwan is like a kid in a candy shop. His candy shop. “Stand here,” he tells me, pointing to a spot just inside the entrance of this airy, modern, less-than-year-old Sobeys supermarket in Vaughan, a fast-growing suburban community north of Toronto. “We call this the vista.” His arm sweeps across the store from right to left. “A customer should be able to see every department in the store from this one spot.”
I can. Almost.
Directly in front of me there’s a Sobeys Ready to Go, a food counter filled with a cornucopia of prepared, plunk-on-the-table meals, salads and snacks for the too-busy-to-cook consumer who’s also too busy to wander the supermarket aisles looking for something for dinner. “Look over there,” he urges. To my right, the greens, reds and yellows of the fresh fruit and vegetable section stand out against a complementary, colour-coded backdrop in shades of green. “Every department is colour-coded,” McEwan enthuses. I follow his arm leftward past the bakery (earthy shades of brown) to the butcher’s counter, which is strategically located at the back of the store just to the right of the Ready to Go, so it too is visible from the vista.
Suddenly, McEwan’s arm smacks up against a visual barrier. The top of the florist’s kiosk to the left of the store entrance is too high. You can’t see past it to the dairy, frozen foods and general merchandise sections. McEwan lowers his arm. “This store,” he allows ruefully, “was completed before the new store prototypes were completed. But you get the idea.”
The idea, quite simply, is that Sobeys, the venerable, family-controlled east coast grocery chain that — under nearly two dozen different names from Sobeys to Food Town to IGA Market Express to Price Chopper — is Canada’s second largest supermarket chain, wants to be number one. That’s why it hired McEwan, the former president of A&P Canada, as its president and chief executive officer in 2000. That’s why it’s refocusing, refurbishing and re-branding its more than 1,350 stores. And, perhaps most importantly, that’s why the company has been quietly paying down its debt and building up a growth nest egg.
But, like the too-tall florist’s kiosk in this Vaughan store, there’s still work to be done.
* * *
Until five years ago, what passed for Canada’s grocery industry was really little more than a series of regional fiefdoms. Loblaws and A&P duked it out for pre-eminence in Central Canada, Safeway was the dominant force in its Western Canadian market, Metro Richelieu staked its claim to Quebec and the Sobey family ruled over the Maritimes and Newfoundland.
That changed dramatically in the 1990s after Loblaw gobbled up Bolands-IGA and began expanding into the Maritimes, and then acquired Provigo to give it a toehold in the Quebec market. In1998, Sobeys countered in spectacular fashion by buying the Ontario-based Oshawa Group, a grocery and food distribution operation twice its size, for $1.5 billion, nearly quadrupling its annual sales from $3 billion to $11 billion and instantly making it the second largest food company in Canada.
But a distant number two, still only half as big as Loblaws.
Sobeys post-Oshawa challenge — to digest its elephantine acquisition while closing its market share gap with Loblaws — would turn out to be a crossroads moment for the family business and its aging third generation of operators.
In the second generation, Frank Sobey, a legendary Nova Scotia entrepreneur, had transformed his father’s hometown grocery store in Stellarton, NS, into a regional business empire (see sidebar). Since taking over the company’s day-to-day operations in 1971, his three sons had slowly built the supermarket chain into what was now finally a national retailing force.
But Frank’s son, William Sobey, the head of the company’s real estate wing, was dead now, and Bill’s two brothers, Donald, the Chair of Empire Company Limited, the family holding company that controlled 62 per cent of Sobeys, and David, the Chair of Sobeys Inc., were nearing retirement. So were John R. Sobey, Frank’s nephew and the president and COO of Sobeys, and Doug Stewart, one of the few key non-family members in the corporate hierarchy, who’d just completed 10 years as Sobeys Vice Chairman and CEO.
While David’s chartered accountant son, Paul, had become president of Empire, and Bill’s son, Frank C., chaired Empire’s Atlantic Shopping Centres subsidiary, and while various fourth and fifth generation family members held lesser positions in the family enterprises, there were no young Sobeys currently waiting in the wings to take over the grocery business that bore their name. For the first time in its history, it seemed, none of the people running the Sobeys’ day-to-day grocery business would soon be Sobeys.
That wasn’t the only way in which the company was changing. After the Oshawa acquisition, it became clear Sobeys had outgrown its Maritime roots. Ontario Premier Mike Harris even wooed the company to move its head office there. While the Nova Scotia Government effectively gave Sobeys $3.5 million just to stay put, it was clear that, wherever its titular head office, real corporate power in Sobeys was tilting westward.
Sobeys couldn’t even count on regional loyalty to maintain its traditionally dominant position in the Maritimes. For close to a decade, Loblaws had been quietly poaching Sobeys’ Maritime customers with an aggressive expansion program. By 2002, it would finally nudge past Sobeys and claim 35 per cent of the region’s grocery market compared with Sobeys’ 34 per cent share.
In the spring of 2000, the Sobey family had some important decisions to make. The most important was figuring out who should run its grocery operations. Which was why David Sobey quietly telephoned a friend of a friend of Bill McEwan’s to enquire whether the newly appointed Canadian-born president of the Great Atlantic and Pacific Tea Company’s U.S. Atlantic Division might be interested in a job back in Canada.
* * *
Bill McEwan was not a Sobey to the manor, or the manner, born, but he had come of age in a family-owned grocery business. As an adult, however, he’d spread his business wings, getting a feel for the industry from the suppliers’ side and had learned to navigate his way around in a much larger corporate grocery enterprise.
When he was just 15, McEwan lucked into a part-time job bagging groceries at Ferraro’s Super Valu in his hometown of Trail, BC. There, he quickly discovered what would become a lifelong passion for the peculiar rhythms and routines of food retailing. “I fell in love with everything” about the food business, he recalls, from packing groceries to carrying out orders to stocking shelves. Recognizing that, Jimmy Ferraro, the imposing six-foot, 270-pound Italian-Canadian who co-owned the nine-store regional supermarket chain with his two sisters, took the young McEwan under his wing and not only taught him the art of buying, pricing, advertising and merchandising groceries but also passed on his own outsized passion for the business.
After high school, McEwan spent a year-and-a-half studying Arts at the University of British Columbia in Vancouver before Jimmy lured him back to the business fulltime. There was a crisis at Ferraro’s Cranbrook, BC, store, he explained, and he needed someone he could trust to manage it for him. “You can go back to school later,” he said. Bill McEwan was 20 years old. He never returned to university.
“I felt like I’d arrived,” McEwan says now. Over the next 13 years, he played career hopscotch through Ferraro’s informal management ranks. In 1983, Jimmy sent him to Calgary as general manager of merchandising though “that wasn’t my title. . . Jimmy didn’t believe in titles.”
McEwan might have stayed on at Ferraro’s indefinitely if Jimmy hadn’t died in 1988. “Jimmy was the greatest influence on my business career,” McEwan allows today. “The guy was magic. ” He was also the “glue” that held the family business together. After he died, the business was divided among the remaining family members.
“It wasn’t the same,” McEwan says. So the next year, he took a job as a Toronto-based national marketing manager for Coca Cola Ltd. Facing an increasing challenge from supermarket house-brand soft drinks, Coca Cola decided it wanted someone who understood retailing. For his part, McEwan wanted to understand the grocery business from the supplier side.
Though he was eventually promoted to Vice President, Market Development, McEwan’s five-year sojourn at the soft drink company wasn’t an entirely satisfying one. McEwan is reluctant to get into specifics. “I don’t want to badmouth Coke or downplay its importance as a learning experience for me, but it was just a different corporate culture and I didn’t fit in.”
So, in 1994, McEwan returned to the grocery business as Canadian Senior Vice President of Grocery and Non-Food Merchandising for Great Atlantic & Pacific Tea Company Limited. After Coke, he jokes, A&P “felt like coming home, but coming home to a much bigger house.”
At A&P Canada, which at the time was in need of a turnaround, McEwan gained a reputation as a problem solver. So much so that, three years later, A&P CEO Christian Haup tapped him to head up an important company-wide “total supply chain re-engineering initiative” to figure out how to deal with the messy fallout from dozens of corporate acquisitions.
He did such a good job the company rewarded him by appointing him president of its newly formed U.S. Atlantic Division in March 2000. For McEwan, it represented a major promotion — he’d be in charge of 435 stores and 37,000 employees — but it came with a personal price tag. It would mean moving permanently to the U.S. while the three children from his first marriage remained in Toronto.
Through the friend of a friend, he sent a message back to David Sobey. Yes, he was interested in talking.
* * *
It was raining heavily in White Plains, NY, on the late June morning in 2000 when Bill McEwan boarded Sobeys corporate jet for a flight to Stellarton to meet The Family.
He’d already passed muster with the presidential search committee in Toronto, so today’s visit to the company’s head office was a critical test. Could McEwan work with the Sobey family who, after all, still controlled more than 60 per cent of the supermarket chain? And, almost as important, could McEwan really live in Stellarton, a tiny — population 4,600 — mining town an hour-and-a-half from Halifax? The portents weren’t promising. While working for Coke, McEwan had visited Stellarton three times, each time in a blinding snowstorm. When he and his second wife Donna, a former marketing executive at Coke, talked about the idea of moving to Stellarton, she joked that “she’d miss him.”
Those thoughts were still rumbling around in his head as the jet approached the Bay of Fundy. Suddenly, he recalls, the sky cleared and the sun shone. “It turned out to be a glorious day.” In more ways than one.
Stellarton, a smokestack community, reminded McEwan of Trail. Better, David Sobey, who took him on a tour of local Sobeys stores, reminded him of Jimmy Ferraro. “David had the same instincts, the same passion and focus on the business as Jimmy did. It seemed like going from one great merchant to another great merchant. It felt like I was coming full circle.” As for the rest of the family, McEwan was struck by how “unbelievably respectful” the Sobeys were of the interests of non-family shareholders. David Sobey, for his part was equally enthusiastic. “I only wish I’d had a guy like Bill around to work with me when I was in my 40s and 50s.”
When they offered him the job, Bill McEwan was quick to say yes. And so was Donna.
* * *
Value? Bill McEwan stared out into the icy void, rolled the word around in his head. No, value wasn’t quite the word he was looking for. Value-added? Shareholder value? The whole idea of value had somehow become debased, a cliché of modern business-speak. And too top-down for his liking. No, the word he wanted needed to be more serviceable, more inclusive. . .
It was bloody cold at Melmerby Beach today. The temperature hovered on the wrong side of zero and a face-numbing wind whipped in from the Northumberland Strait. Wrapped in a parka he’d bought years ago to attend a winter Olympics, Bill Mc Ewan unfolded a lawn chair and sat down in the middle of the empty beach. Six months before, he remembered first glimpsing this beach — a spectacular mile-long mile crescent of white sand and warm sea water that is among Nova Scotia’s most popular summer destinations — from the air as the Sobeys jet made its approach to Trenton airport. Today, on this bleak, late-December day, the beach seemed like the right place to “clear my head.”
Bill McEwan had been Sobeys’ president and chief executive officer for just over a month. It had not been a good month. On Nov. 28, just three days after he officially took charge, Sobeys much-ballyhooed, two-year-old computerized inventory control system had cacked. The $89-million SAP Retail software system simply couldn’t cope with the Christmas rush in Sobeys’ still complex, cumbersome post-Oshawa operations. The system stayed down for five days. In supermarket terms, that put Sobeys operations five weeks behind in the middle of the busy Christmas period. Worse, it quickly became clear to McEwan that the problem was systemic. An enterprise-wide inventory system that had worked well for a homogeneous regional supermarket chain, which is what Sobeys was when it bought the software, simply couldn’t handle what it was being asked to do for 1,300 stores operating across the country under more than 20 different names. The system would have to go. And that would cost the company plenty, not only in actual dollars but also — and more importantly — in street credibility.
McEwan had explained all of that to Sir Graham Day, the new Chair of the Sobeys Board, the first non-company executive, non-Sobey to hold that title. Day, a Nova Scotia-born entrepreneur, had earned his reputation — and his fortune — in England as Margaret Thatcher’s favourite corporate troubleshooter during the late seventies. “I think it’s fair to say that Bill’s predecessor (Doug Stewart, who was largely responsible for the Oshawa acquisition) didn’t fully understand the consequences of integrating the two companies,” Day notes, adding that the majority of corporate mergers ultimately fail because the “integration isn’t handled properly. I think Sobeys was on the cusp of that happening when Bill came along. He grasped the problems pretty early on and he also immediately understood what needed to be done.”
Day had called a special Board meeting for Jan. 24, less than a month from today, so McEwan could make his report directly to the Board. What should he tell them? Aside from the obvious, of course. That the company would have to take a $49.2 million dollar after-tax writedown in the fourth quarter to make the computer mess go away. McEwan didn’t want to just be the bearer of such bad news. Since this was to be his first real board meeting as president he wanted to give his new bosses a sense of where he saw the company heading.
That’s why he’d been sitting on this lawn chair on the beach in the middle of winter for close to three hours. He was trying to articulate his vision of Sobeys’ future.
He stood up, walked up and down the beach, then sat back down again. Worth? What was it that made shopping at Sobeys worth it? For customers, of course, but not just for customers. Perhaps he was on to something. What made it worth an employee’s time and talent to come in and do the job every day? McEwan had put in enough time in his youth humping bags of groceries from checkouts to car trunks to know what a difference an employee’s attitude could make to a customer’s shopping experience. The same with franchisees. And Sobeys had more than 900 of them. And what would make it worthwhile for suppliers to go that extra mile to service Sobeys and its customers? Retailers’ relationships with their suppliers, McEwan had discovered during the four weeks he’d spent on delivery trucks just after he’d joined Coca Cola in 1989, were often defensive or arrogant. If Sobeys became worth it for its shoppers, its staff, its franchisees and its suppliers, wouldn’t that inevitably make it worthwhile for shareholders too? Worth it for their net worth? Their sustainable worth. McEwan got up, folded his lawn chair and headed back to his car. He knew now what he wanted to tell the Board.
* * *
It is two-and-a-half years later, and Sobeys is at yet another crossroads in its corporate evolution. Thanks to Bill McEwan.
Though the Sobeys’ Board supported McEwan’s decision to abandon the SAP inventory program and his plan to focus on what he called “sustainable worth,” his first year at the helm seemed to careen from crisis to crisis.
The company’s stock price took a major hit — losing 15 per cent of its value — after McEwan announced the writedown. It absorbed still another blow a month later when the company issued a terse press release announcing the resignation, “effective immediately,” of its long-time chief financial officer. Though it was a logical first step in a makeover that would transform the Sobeys management team into the McEwan team, the suddenness of the resignation so soon after the computer debacle spooked investors.
Things didn’t finally begin to look up, in fact, until April 2002 when McEwan announced Sobeys had sold SERCA, for $440 million. Ostensibly, selling SERCA, a high-volume, low-margin hotel and restaurant supplier thath had been part of the Oshawa Group, was part of the process of refocusing the company on its core retail grocery business. But the deal also helped Sobeys pay down $700 million worth of debt, giving it the wherewithal to possibly buy its way to within striking distance of Loblaws.
Most analysts now credit the sale — and McEwan — for turning around the company’s fortunes. As Jonathan Norwood, a retail analyst with Beacon Securities, puts it: “He fixed all the things that needed to be fixed. He doubled the share price, he doubled the bottom line and the balance sheet is in great shape. He’s done a great job of picking the low-hanging fruit from the tree.” He pauses. “But from here on, his job becomes much harder.”
* * *
We are back on Bill McEwan’s guided tour of the new, fresh faces of Sobeys stores. We’ve already visited the full-service Vaughan store, where the customers are mainly commuters and the emphasis is on convenience; the downtown Young and St. Clair store, where high-rise and Rosedale customers tend to buy what they need almost daily so the store’s focus is freshness and more exotic fare (the butcher’s section, for example, features fresh buffalo, quail, venison and duck); and now we are pulling into the parking lot of a strip mall in working-class, ethnically diverse Scarborough where the name above the recently renovated and refurbished store — Price Chopper — says it all. “It’s a game of niches,” McEwan says.
Over the course of the next few years, he wants to consolidate Sobeys confusing collection of 22 operating banners into five main ones — Sobeys Full Serve (IGA Extra in Quebec), Sobeys Fresh, Price Chopper, Sobeys Express convenience stores and IGA community stores — each tailored in size, products, hours of operation and service to the desires of its specific customers.
Last year, Sobeys — which rang up fiscal 2003 sales of $10.41 billion, seven per cent higher than the year before and had net earnings of $179 million ($2.72 a share), 11 per cent higher than in 2002 — poured $546 million into renovating and expanding its own chain of stores, and will spend another $600 million this year.
Today, inside the Scarborough Price Chopper which got its makeover less than a year ago, McEwan shakes hands with the franchise associate, Carmen Sprovieri. “How’s it going?” he asks. “Are you getting the support you need?” They talk for a while. “Is Sheri around?” McEwan asks. Sheri is Carmen’s wife and business partner.
McEwan spends much of his time on the road these days, encouraging employees, quizzing customers, checking what’s on offer in the bakery. While Stellarton is still the company’s official head office and McEwan and his wife Donna maintain a house in the community, more than half of Sobeys nearly 300 corporate staff now work out of a non-descript office tower on the edge of Toronto’s Pearson airport, so McEwan has a Toronto condo too. When he’s not at his offices in Stellarton or Toronto, he’s visiting Sobeys stores across the country. He’s been to 850 so far and, if he could squeeze out the time, he’d says he’d visit even more.
Today, after leading me on a whirlwind tour of the Scarborough store’s warehouse-style aisles and pointing out how this store differs from the others we’ve seen — “There’s less variety and you don’t get the same services, like a butcher on site, that you do at other stores, but the price is right and, in these stores, price equals worth” — we finally find Sheri, who is talking with a customer near the checkout.
Sheri introduces him to McEwan who asks how he likes the renovated store. The man does. “It’s brighter but the value’s still the same, still good,” he says. After he leaves, McEwan turns to Sheri. “The store looks very good,” he tells her. “You’re doing a great job.” She beams. He reaches into his suit pocket and pulls out a small gold pin. It features an image of a key beneath the Sobeys logo. “I want you to have one of these,” he says as he pins it on her. “I’ve been handing these out to people just to say thanks for what you’ve done. We appreciate it.” He pauses. “You know what the pin means?” he asks her. Sheri shakes her head. “It means, ‘I’m the key to the business.’ So I want you to tell yourself that everyday when you put it on. ‘I’m the key to the business.’”
* * *
It will take more than cheerleading and key pins to overcome Sobeys’ most glaring weakness: anaemic sales per square foot in its stores, which are 18 per cent below the industry average.
Consolidatiion and “worth” strategies notwithstanding, Cynthia Rose-Martel, an analyst with Jennings Capital Inc., says Sobeys still hasn’t demonstrated it has a viable strategy for increasing sales productivity in its stores. Largely as a result, she pegs Sobeys’ stock as a “grudging hold.”
Jonathan Norwood, who remains bullish on Sobeys, is more sanguine. With more than 22 million square feet of under-performing retail space under its collective roof, he says “the company can continue to grow its bottom line in double digits each year for the foreseeable future just by continuing to find more efficiencies and doing what it does better.”
But will that be enough to overtake Loblaws, which, of course, isn’t waiting for Sobeys to get its sales act together. Canada’s biggest supermarket chain is embarked on its own bigger-is-better strategy, building 120,000 square-foot behemoth megastores and peddling general merchandise — everything from clothing to home furnishings, to gasoline and financial services — along with its traditional grocery lines.
McEwan professes not to be concerned. “We don’t believe our customers necessarily want to shop in those huge warehouse-type stores,” he adds. “They want to be able find what they’re looking for when they need it. They want convenience, and they want a worthwhile shopping experience.”
Analysts are divided on that. While many see the big box stores as de rigueur for serious retail players, Norwood, for one, believes “there is still a real opportunity for a pure grocery store.”
McEwan is also bucking Loblaws — and industry trends — with his approach to private label products. Loblaws changed the dynamics of the supermarket industry in the early eighties by introducing the President’s Choice line of premium private-label products. It now offers more than 5,000 private label products, even services like personal banking and mortgages, and the program now accounts for close to 30 per cent of its annual sales. At Sobeys, where private label products make up less than 15 per cent of sales, McEwan is actually planning to reduce the number of separate private labels it stocks. While that may simply be a response to the crazy-quilt of house brands McEwan inherited in the Oshawa takeover, some analysts believe it could also help the company develop better relations with — and perhaps get better deals from — suppliers whose own national brands were squeezed off Loblaws’ shelves to make room for the company’s private label products.
McEwan will need all the support he can get. As a Globe and Mail report starkly summed up the state of the industry recently, Loblaws still boasts “twice the market share, twice the profit margin and twice the expansion budget” of Sobeys.
* * *
The fastest way for Sobeys to catch up to Loblaws, of course, would be for it to buy one of its competitors, preferably one with strengths to offset Sobeys weaknesses.
It almost happened. In October 2002, McEwan’s former employer, Montvale, NJ-based A&P, announced it was re-evaluating its business strategy and was prepared to take “tough decisions,” including selling off some of its stores, in order to return to profitability. Most observers saw that as a signal that A&P’s profitable Canadian assets were on the block.
At first blush, a Sobeys-A&P marriage, which analysts estimated would have cost Sobeys $1–1.5 million, seemed made in corporate heaven. While Sobeys now operates in all 10 provinces, its weak retail link is in Ontario, especially Toronto, where it is virtually invisible and where prime downtown real estate it could use to build its own stores is almost impossible to find. A&P’s 220 stores, on the other hand, are concentrated in Canada’s most populous province where it boasts a 34 per cent share of the Toronto market. And, of course, Bill McEwan, who was credited with A&P Canada’s turnaround in the nineties, also knew A&P’s Canadian assets as well as anyone. As McEwan told a CIBC World Markets conference, Sobeys would be a “willing purchaser” if A&P was prepared to sell. “I’ll say that up front.”
But the deal never happened. Why not? Bill McEwan shakes his head. Despite A&P’s earlier signals, he says, “they’ve now told us it’s not for sale.”
Even if it had been, of course, there’s no guarantee Sobeys would have been the successful suitor. Safeway and Metro, Sobeys’ next closest rivals, were reportedly interested in bidding as well.
And the industry is still rife with rumours of other possible mergers, takeovers and consolidations that could threaten Sobeys’ hold on second place, or even, ultimately, its very survival. There was speculation, for example, a non-food company — Wal-Mart or Zellers perhaps — might decide to try to buy out Sobeys, not only to gain access to the grocery business for its own sake but also to counteract Loblaws growing presence on their turf.
“I’ve heard all of those rumours,” Graham Day says, “and while I never would say never, I can tell you with my hand on my heart that, so far as the Sobeys are concerned, the idea of selling has never even been on the fringes of any conversation I’ve had with them. They believe in the business and they’re in it for the long term.”
As for McEwan, he says the company remains open to the idea of buying A&P, or any other company that would be a strategic fit, but he isn’t sitting around waiting for it to happen. “We have our own strategy and we’re implementing it.”
There’s still plenty to do.