When Safeway made the announcement last week that it was selling its Canadian operations to Sobeys, it appeared to be a classic win-win situation for both parties.
By selling the business, Safeway gets a bunch of cash to pay down $2 billion in debt, buy back stock and focus on its core business here in the U.S. It also enables Safeway to exit the market as competition begins to heat up with Target and Walmart duking it out for share with homegrown Canadian chains.
For its part, Sobeys gets a strong and immediate presence in the west of Canada with the addition of Safeway's 223 stores, including 199 with in-store pharmacies. Also part of the deal are four distribution centers (Sobeys is both competing with and supplying Target in Canada), 62 gas stations, 10 liquor stores and 12 manufacturing plants.
David Ian Gray, a retail consultant in Canada, told the Vancouver Sun, that the deal puts Sobeys "very much in competitive fight mode" against its larger U.S. rivals. Mr. Gray said the purchase will also give Sobeys access to Safeway's loyalty program data, which is superior to much of what's available in the Canadian grocery sector today.
A piece on the MarketWatch website by Matt Andrejczak questions the wisdom of the deal for Safeway. He maintains that while a smaller portion of Safeway's business, the higher margin Canadian operation generated 40 percent of its operating profits last year.
"The sale will strip Safeway of valuable free cash flow, or excess funds that can be used to cut prices in the increasingly heated U.S. market for everyday grocery shoppers," wrote Mr. Andrejczak.