Braking Into the Curve

"Sobeys is selling its milk, yogurt and ice cream manufacturing operations in Western Canada for $356 million to Agropur, a Quebec-based dairy co-operative.
The sale includes a total of four plants: two in Edmonton and one each in Winnipeg and Burnaby, B.C.
Together the manufacturing operations employ 281 people, process more than 160 million litres of milk per year and generate about $400 million of annual revenue.
Agropur will license the Lucerne trademark from Sobeys and supply Sobeys, Safeway and IGA stores in the West through long-term supply arrangements.
The co-op's brands include Natrel, Quebon, Agropur, Sealtest and Island Farms and its 6,500 employees process more than 3.4 billion litres of milk per year at 32 plants across North America.
Sobeys is the national grocery division and main subsidiary of Empire Co. (TSX:EMP.A), which acquired the western dairy manufacturing operations as part of its purchase of Canada Safeway last year." [CBC]

The Canadian Broadcasting Corporation illustrates the story with a Sobey's banner.


I suggest an alternative graphic.

I wouldn't be posting this if it were an isolated incident, and you probably do not want to hear about the complicated context. Though you might be entertained by the email that told us that since Agropur was shorting 4 litre jug delliveries 30%, we should increase our orders by 30%. That's not how it works, guys.

In fairness, I should probably also wait to see if it's "growing pains." Truth to tell, I'm sure that it is. We also sold our bakeries to Canada Bread, and they didn't drop the ball. Now, admittedly, that's because our fresh bread shelves, like the yogourt shelves, have intermittently looked like this for years, but at least it hasn't gotten any worse. 

The problem is that in the life of companies, especially supermarkets that live and die on the premise that you go there when you run out of milk, you only get so much time for growing pains. This was avoidable: we used to avoid it all the time. In the future, we will no doubt avoid it again.  But. . . . 

In the future where our relationship with Agropur has settled back into business as usual, we will no longer have dairy operations to sell off to generate a quick $365 million. Don't think that we didn't know what we were doing, either. We hoped that Agropur could handle the business, but there was a reason that we went into the milk business to begin with. The reason we went out of milk was $365 million. 

What with linkrot and stuff, I should probably summarise that the company's financials were weak last spring, and the company told Bay Street that it was looking to cut jobs and costs. Financials for the last quarter of 2014 showed significant improvements. 

Now: the reason I'm summarising my links is that this next bit doesn't seem to have been covered in the Canadian journamalism press at all:

For some reason, not a cut-and-paste friendly format.

Neither is this, from the Globe & Mail, still, thank God, doing actual real journalism:

These are not things of which my employer is unaware. In some remote, ideotypical alternative universe, the price of a stock reflects the value of a company. In that same universe, which quite clearly has no bearing on the way things are done in this one, a retail company's value depends on its sales. Therefore (in this universe), if sales are, in fact, falling, then so should be the shares! 

This is not a good thing. Investments that lose value are bad investments. You should not own them.

In the case of food, it is not hard to understand the main driving force of sales. You look at your target demographic (Canadians), multiply the number by the calories required (adjusted by sex and age profiles), and you get your sales base. All other things (value added, competition, etc) being equal, static or declining calories consumption means declining sales. 

Oh, look!

I know, I know. The notion that Canada's population growth might be flatlining or even going negative is old, old news on this blog. It's still kind of a key point for retail planners. (If you can't pick it up on the crowded right hand side of the graph, the key takeaway here is that in the low-growth projection, which I find most plausible, but which at least should be the planning assumption, the Canadian population rises from 34,754,300 in 2013 to 39,994,000 or so in 2063, and then begins to decline quite quickly. In business terms, the Canadian population has basically ceased to grow. It should also be noted that because of changes in the population age profile, its calorie consumption will decline as population increases but also ages, but that might be getting a little too complicated.It's also fair to observe that by 2063 we may very well have much more serious issues to deal with. 

Not to put too fine a point on it, but if your sales are going to fall indefinitely, there is no future for Canadian retail. You need to sell your Empire shares and buy investments that have a positive return. Government bonds have a positive return. Hiding money under your mattress at least avoids a negative return.

Needless to say, when fundamental issues of money are invoked, the problem ceases to be one which a retail company can fix.  the buck is firmly passed to the government.

Is there a politician reading this? (I know, fat chance of that.) But, if there is, there's this guy, Jim Keynes. He has an idea how to fix it. Don't believe him? Look at the war. Really, any war, but World War II is the really good example.

So, if you're frustrated by the fact that your grocery store ran out of milk the other night, now you know what you should do. Start a war. Or something.

The End of Target

Target died in Canada this week, for a lot of reasons. Here, I'll point you to the Globe and Mail, though I did not think that its story was particularly good. It stresses prices, speed of rollout and locations. All of these are important, but in each area it was stepping into the shoes of an existing retailer, Zellers.

The exception was one of adding groceries to the mix. So, uhm ha, ha! Harder than it looks, isn't it, losers? Grocery might prove to have been a category error, and an explanation for chainwide problems, but the  focus on Target Canada's terrible Out-of-Stock conditions has been on durable goods. The pictorial that should still be up at the last link was taken last spring. Target has been floundering for months.

I'm going to, very briefly, offer an alternative explanation. Sometimes, you run out of time to do something, so it doesn't get done. For example, it's 2:30 in the afternoon, and I got too ambitious with another project earlier in the week, and now I've run out of time for fiction this week. Hence this brief post. (Which may have taken longer than four pages of fiction, but never mind.)

Running out of time is a normal thing. Jobs get skated. Here's a slightly whimsical meditation on Canada's current below trend inflation rate as an index of things-getting-skated.

The trend is 0.05% below the Bank of Canada target, so, I'm suggesting, the Canadian economy is 0.05% behind the amount of work that is budgeted. Don't press me on causality --this is magical thinking, here.

Why does a work force skate the work? Because its target in productivity per hour is unrealistic. In stores that have been open for more than one year, this is because the target has been cut beyond what the work force can deliver. In stores that haven't, you have a problem.

Target, as we know, is a non-union workplace. By keeping the Zellers locations it bought closed for a year, it avoided being classified as a "successor employer" and opened free of the encumbrance of the United Food and Commercial Workers, with what it deemed market-place competitive wages. So far, no-one has suggested that it was because the work force it got at the rates that it paid wasn't up to the job.

But, come on, $10.50/hour?  This random site claims that a one-bedroom in Vancouver "outside city centre" is going for over a grand a month. Math: 40 times 10.5 times 4.5 is $1800/month. You can pay your rent on a Target wage, or you can eat, but not both. 

This isn't to say that people aren't working at Target. Remember that old horror story about the familly with the child locked in the attic because [insert scary bit here?] In the retail sector of our modern age, the cash registers are increasingly staffed by those kids, because the families have found that they can let them out for the day and they'll make $10.50/ hour at Target.

Or they're desperate immigrants. Employers like Target hope that they'll be houswives and students, but then they write schedules that people with outside commitments can't meet, and you're back to relying on people-who-experience-life's-challenges-more-intensely-than-some-other-people. And that's why jobs get skated.

The key thing is to not skate crucial jobs. The failure of Target shows that they're already being skated. I won't get into my work place, but I will say this: I heard a story the other day about a burst colostomy bag in the produce department of one of our stores back in 1986. They had a janitor and two service clerks to help clean it up back then. I'm sometimes down to  three people in the store, period, these days! (For all of five minutes when night crew is late and it's the relief janitor, but still.)

In twenty years or so, at the rate things are going, it'll happen in a grocery store in, oh, say, Prince Albert, and a typhus epidemic will start and sweep through the old age homes and exterminate my generation and give Canada a fresh new start.  You, me? We're going to die, alone, in a cot on a concrete floor in an overcrowded arena under triage in Victorian-style quarantine rules, and a nurse from Cameroon or the CAR, or wherever there's left for Canada to draw immigrants from, will take the bedding out one door, while the orderlies take your body out the other, both for burning. 

It's going to happen. That's the end game. Unless someone does something somewhere. Note that this is really easy to fix. We did it without even hardly noticing in 1939--45. Not fixing it now is a choice we're making.

Hair on Fire: The Decline and Wait For It of the Educational Complex State

Tonight, because a storm was in the forecast, I took the bus to the University of British Columbia's "Irving K. Barber Learning Centre."* forcing me to walk the maze of cordoned off routes through ongoing construction projects between bus loop and, uhm, "Learning Centre."

Or not, as the case may be. As an old man, I am inclined to curse these latter days, and suspect them to be as loose and ready to fail as my joints or my bowels. My enthusiasms have become strange, my judgement suspect.

I do not like what they have done to my university. But I think I have something more here than the rambling free association of my own aging (I have, for example, no hair to set on fire). I returned, not through the quiet off-streets of the designated cycle route, but down the West 19th-Dunbar-West Broadway bus route that I have been taking, on and off, since I first enrolled at the university in September of 1982. This gave me the opportunity to see some commercial space that is not where I work, dressed up for Christmas.

Or not, as the case may be. I wasn't racing a supervillain in a fun, if cheesy, television show shot in Vancouver, but the lack of Christmas decorations is not restricted to the store at which I work. They are spotty, limited to a few neighbourhoods, probably the ones with mroe energetic business associations. It is certainly no lack of inclination for the season that is holding my company back.  It's our current paid hours target, about which subject I would be more discrete if my corporate board were to show up to help me pull dairy skids off the delivery truck with an unpowered handjack. (Though such is the way of things that they would be shocked, just shocked, to know that such things were happening, and the blame would fall upon my boss, or my boss's boss, because what else is middle management for?) 

As for confirmation of my suspicion that it is lack of time and energy, and not a War on Christmas,, I will note that it is pretty much the chain stores that are falling down on the job here. (To be fair, the Subway down the street as a strand of Christmas lights up in the window.)

So that's the symptom, the gesture of the hand at the idea that there is something larger going on here. Now let's take a walk through campus.   

Hours Down, Work Up: What's With Canadian Retail, Doc?

So. Like a lot of my friends, I work in retail. And Canadian retail is a pretty scary place right now. From company to company and sector to sector, you may or may not be hearing about how competition, "the economy," cross-border shopping, or bad management is hurting sales and forcing labour cuts.

So there you are, looking at the endless lineups at your cash register, and the heaps of work to be done in the backroom, and you're wondering what's going on.

First, the problem isn't just where you work. It's everywhere. Sales were down 0.4% in June, or 1% in B.C. By the way, June is which is the latest date we have, because apparently StatsCan is a month behind the rest of the world. Don't worry, Statistics Canada. Canadian business wouldn't use the numbers anyway!

Second, don't put much faith in the explanations people keep giving you. The gigantic (2150 stores) American chain, Supervalu (not to be confused with the Canadian Supervalu chain) is a good example of a grocery chain that's in real trouble.

Here's a quote from that link, which is to an article by  David Welch, Leslie Patton and Cristina Alesci. “The No. 1 problem is, everything in Supervalu costs too much” and is more expensive than Kroger and the discounters, said David Dietze, president and chief investment strategist at Summit, New Jersey-based Point View Wealth Management."

Where have I heard that one before? Well, stop for a moment. Grocery stores are in the business of selling staples. If you can get your milk at one grocery store for less than at another, you don't buy more milk. You spend less money on groceries. So grocery stores try not to compete on staples like milk, bread, or mayonnaise. What they try to do is sell you "impulse buys." If you walk into a grocery store intending to spend $25, and you spend $30, whether it's because you buy a more expensive brand of ketchup or add a bag of chips to your basket, you just turned from an average shopper to a super shopper. If everyone who walked into an urban supermarket spent $30, the industry would be rolling in money. Conversely, if you walk in intending to spend $25 and walk out with $20 in groceries, you are a retail sales disaster. If every customer did that, the grocery store you're shopping at would have to close. 

So while you might be able to shop economically at a store that has lots of expensive stuff in it, just by buying the inexpensive staples that you really need, we're betting that you won't, and the margin is incredibly thin. We're not trying to rip off poor people. We're trying to sell you a bag of chips. You would have to be a pretty price conscious shopper to care about this. 

Of course, some people are extremely price-sensitive shoppers for various reasons, but mainly because they just don't have much money. For various reasons, it is cheaper to run a store that just stocks the staples, but the business model isn't about just selling the staples. How do you make money off of people like that? In the tricky range between a staple and a luxury. Take ketchup. Is it a staple or a luxury? The answer is that it is somewhere in between. So, at an upscale grocery store like Supervalu, you have a big bottle of generic ketchup at one price, and a small bottle of brand-name organic ketchup at another, much higher price. Or you can run a store that just stocks the big bottle of generic ketchup (along with milk, bread, eggs and such.)  A store like that will sell everything cheaper, probably even including the ketchup, and still make money.

Good news for Supervalu. It has exactly that kind of store in its inventory: the Save-a-Lot chain. Bad news for Supevalu: it's hurting, too.  And not just a little bit: same sale stores are down 3.4%! Ouch. So what's going on there? Mike Hughlett reports for the Minnesota Star-Tribune. "Jimmie Gipson, head of the largest Save-A-Lot licensee, agreed on the pricing issue. Supervalu, as wholesaler to Save-A-Lot stores, "had kept its costs pretty much in line for several years, but I think they've lost a little of that focus."

Price comparison. It's hard. Save-a-Lot management has forgotten how to do it, and its core clientele of extremely poor people have noticed and are driving down to Wal-Mart instead. Fortunately, Save-a-Lot has a brilliant strategy. It's going to drive the milk and the egg deliveries right out onto the sales floor and let people help themselves, instead of stocking them.

Yeah, I don't think so. Even Walmart has problems keeping its prices down, and milk and eggs are already very time-efficient to work. I wouldn't be surprised if it took longer to drive a skid of milk into a walk-in display on the sales floor than it does to work liquid milk to the shelf from a back-loading cooler.

Excuses. That's what we're seeing here. What is going on? Well, my argument hinges on the idea that it doesn't take much time to work the liquid milk, so this plan won't save very much. That doesn't have to be how you manage the place, though. You could decree that it takes 2 hours, and chop that much time off the store labour budget. Chances are that won't lead to the store exploding and burning to the ground. Instead, it will lead to lineups and out-of-stocks at dinner time, and neither of those things leaves, like, a big greasy mark on the floor or anything. They happen, they end, and the next day, everything is back to normal except for the sales report, which shows that customers spent an average of $20 at the store last night.

Okay, I don't have to lecture you on why this is bad. It's not like the idea that you can underinvest in a business is news. I think that might be what's going on at Save-a-Lot. I don't think  that it is what is going on in Canada. It's just an example.

So what is happening? Well, it's not the economy. Canadians made more money in June, even as retail sales went down. It's not discretionary spending. While stores were struggling, the Vancouver Fireworks, Calgary Stampede, Winnipeg Folk Festival, and Toronto Fan Expo all reported record crowds. Is it cross-border shopping, with the new, increased duty-free allowance?

Probably: to a point, but only to a point. Canada's total trade deficit with the US only went up 1.4% in June, and the trend well predates the change in the rules.

I'm just going to throw it right out there. Consumers' behaviour is changing. Why shouldn't it change? Our clientele looks different every year, because the composition of the population changes every year. In 1990, at the peak of the echo boom, 405,000 Canadians were born. Compare that with the least populous year ever (before --well, let's not get ahead of ourselves), 1973, when only 344,000 Canadians were born. Do you remember what retail was like in 1989, or 2006? I don't remember 1989. I was out of the job market, hiding in graduate school. Two years later, Douglas Coupland explained why in his Generation X, a book that explained that there were hardly any jobs, and they all sucked.

 I do remember 2006.  It was crazy. We were actually facing a labour shortage in downtown Vancouver.

So why did I pick 1989 and 2006? Because those came 16 years after. Sixteen isn't when you go to the grocery store by yourself for the first time, but it is when you get your first job. It's when you party all night and work all day on a buzz of Red Bull, keeping yourself fueled with Slim Jims and Tahiti Treat drunk through a Twizzler. (True story.)

Oh, oh, Doc, you ask. How many people were born in 1996? Good question, which I answered a few weeks ago, here: 365,000, and the birthrate just kept on going lower. Only 327,000 people were born in Canada in 2001. Cumulatively, in the ten years 1993--2003, 3.138 million Canadians were born. These are today's 9-19 year-olds. They're not the peak impulse-buying demographic, but they are an important one. In the 1987--97 period, it was 3.84 million.

The good news, such as it is, is that the birth rate has recovered quite a bit in the last few years. There are 3.6 million kids in the 0--10 bracket right now. This is the glimmer of hope I see on the horizon. The attendance numbers I just quoted might mean that the kids have all been away on summer vacation. The dip in the June retail sales might even be the first blip in that. (We'll see if the July-August numbers hold).

If so, then we should see a rebound in retail sales come September. Well, we expect that in the grocery business anyway, but perhaps it'll be healthier than we expect. I hope it will be.

As a final point, may I end this by politely requesting that the government maybe do something about this? Best estimates are that last year saw 376,000 births, or 10.28 births per thousand women. I'm not labouring under the delusion that women just want to be baby-making machines, but there's no way that that number isn't depressed by longstanding economic disincentives to baby having in Canada, and it's not just retail sale jobs that hang on turning that trend around.

Birth Crisis in Grocery Retail?

Last two times I did this, I was taking hard aim at the way that Hostess Frito-Lay was leaving money on the table with an excess of sheer stupid.

This, I'm more sympathetic about. This is a shot in an ice cream novelties section window of a stand-up freezer display case on a hot Saturday afternoon. There's a case to be made for it being empty. Running out of things happens, this is the time of the day and season when you expect to run out of ice cream, and at some point, it is physically impossible to do more.

But, the translucent plastic flaps at the front of the empty displays are the spring loaded plates at the back of a self-facing display installation. Facing builds sales, but the display takes up space that could be used to stock more product in the first place. Has the tradeoff really been costed out?

Of course not.