As Sobeys’ parent organisation, the Empire Company Limited, signs an agreement to purchase 51% of Longo’s, a leading food retailer in the Greater Toronto Area (GTA), we look at what this means for the wider business.
Potential to acquire the entire business
With 36 locations in the GTA and Southwestern Ontario, along with a long-standing online business, Grocery Gateway, Longo’s has long been noted as one of Canada’s most admired grocery retailers. Last year, it generated sales of approximately $1.1bn. Under the terms of the deal, Empire will acquire 51% of the business for $357m, valuing the company at $700m, with an option to increase this to 100% over a five year period. This deal complements the acquisition of Farm Boy in the Ontario market in 2018 and aligns with its multi-banner approach. Longo’s will continue to be led by President and CEO, Anthony Longo, with the deal expected to close in the first quarter of fiscal 2022.
Source: IGD Research
1. Reducing operating and sourcing costs
Although managed separately, Longo’s will benefit from Empire’s infrastructure and capabilities, in areas such as sourcing, logistics and real estate. The addition of over $1bn to Sobeys’ sourcing volumes will also form the basis of trading discussions with its suppliers. The introduction of Longo’s warehouse and logistics capabilities into Empire’s network will also improve the customer experience and net delivery costs for both businesses.
2. A changing emphasis in urban locations
Having opened 10 new stores over the last five years, with several in the pipeline for the next five years, this is an area Sobeys can accelerate, including converting existing Sobeys stores to the banner. This reflects its strategy since it acquired Farm Boy. Longo’s stores are well regarded for their strengths in fresh and prepared foods, with most stores operated under the Longo’s banner. A total of 19 of the 36 stores are large format supermarkets. It also operates mid-sized supermarkets, ranging from 11,000 sq ft to 40,000 sq ft, along with five smaller format stores under ‘The Market by Longo’s’ banner.
The smaller format stores will be of particular interest to Sobeys, providing it with a new route to growth in urban locations. Without the acquisition of Farm Boy, this would be one of the key benefits of the deal. However, for the last two years, the Sobeys team has evangelised about the opportunity with Farm Boy in urban locations. The key question will be, can it continue to grow both formats?
3. Integrating the Grocery Gateway ecommerce business
Grocery Gateway, Longo’s ecommerce operation, currently serves 70,000 customers, and will continue as a stand-alone business. Empire will continue to invest in the growth of Grocery Gateway’s customer base, while seeking efficiencies through collaboration with Sobeys’ Voilà online business, which is operated as part of its strategic partnership with Ocado. Last year, Longo’s also established a curbside programme which Sobeys will be able to take some learnings from.
Over the longer term however, it is difficult not to imagine a scenario where the Grocery Gateway operation becomes part of Voilà, especially given the capacity available within the Toronto Customer Fulfilment Centre (CFC). This will shorten the path to profitability for Sobeys within the channel.
4. Closing the gap on private label development
This is one of the jewels in the deal. Sobeys will be able to tap into Longo’s expertise in private label development. The retailer has established a three-tier ranging strategy comprising of Longo’s Essentials, Longo’s and Longo’s Curato brands. Prepared foods is a particular area of strength, especially home meal replacements. It has a long track record of innovation and developing new products. Combined with the private label capabilities of the existing Sobeys business and its Farm Boy operation, the retailer is building new muscle in this area which, over time, could help it to compete with market leader, Loblaw. These ranges could also become part of the Voilà offer.
Retail Analysis subscribers: see inside Longo’s flagship store with our store visit report, Longo’s Leaside, which also features the first in-store brewery in Canada.
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