In 2018, Empire Company, the parent company of national grocery chain Sobeys, bought a regional Ottawa-based grocer for $800 million.
That grocer is Farm Boy and they're set to expand nationwide as part of Sobey's push to compete with the Loblaws, Whole Foods and Metro.
Farm Boy's rise from Southern Ontario produce stand to grocery empire is a unique and under-celebrated Canadian success story that's disrupting the country's grocery landscape.
In this email, we're going to explore...
- Farm Boy's humble origins;
- Their jaw-dropping deal with Sobeys;
- What the deal means to the Canadian grocery industry at-large; and
- Sobey's strategy to compete against Loblaws and Metro.
In a fiercely competitive industry facing significant technological disruption, Canada's big three grocers (Loblaws, Metro and Sobeys) are all vying to gain a leg-up on each other, especially with Amazon's entry into the market a looming threat.
The Farm Boy story gives us insight into how one of Canada's biggest companies is thinking about the future, and how you might be buying groceries in the near future.
Small Town Business with Big Ambitions
In 1981, Jean-Louis and Colette Bellemare opened the doors to the first Farm Boy, a 300 sq ft fresh produce store in Cornwall, ON.
Unlike big box grocers, the original Farm Boy was focused on retailing the freshest produce from the surrounding community. The store was a hit in Cornwall and the Bellemare family expanded to Ottawa in 1992.
In 2007, the company grew in Ottawa to eight stores and grew a cult-like following in the Nation's Capital.
Their quick success caught the eye of Boston private equity fund Berkshire Partners who infused capital into Farm Boy to fund continued expansion in the region.
The Trader Joe's of Canada
For Farm Boy, it's all about produce. In contrast to other grocers, Farm Boy is uniquely focused on selling the freshest and best priced produce.
CEO Jeff York emphasized that point when he told Canadian Grocer that Farm Boy's strategy is to build around other big box stores so customers can buy produce from them and pick-up other items – pet food, cleaning supplies, etc – from a would-be competitor like Wal Mart.
- And they take their commitment to produce seriously. Farm Boy doesn't sign long term contracts with suppliers. Instead, they send teams of buyers to food terminals every day to pick-out the best produce available at any given point.
Over the years, Farm Boy has taken cues from Whole Foods and Trader Joe's in the US to provide a unique shopping experience that goes beyond their commitment to fresh produce. Here's what makes them different:
- Hot Foods: Enter any Food Boy and you'll notice a huge hot food bar with tasty (and high-end) items ranging from exotic tofu coconut curry and comfort food mac-and-cheese. Food Boy's embrace of a buffet style hot bar is a strategic customer acquisition play. They've found that it's easier to take sales away from restaurants than Wal Mart – and it doesn't hurt if they buy a few apples while their in-store.
- Staff: Farm Boy takes staffing seriously and, unlike other grocers, manages all hiring internally. Prospective team members go through three in-house interviews and are trained on the unique local offerings at each of their stores.
- Private Label: Similar to Trader Joe's in the US, Farm Boy has developed nearly 1,200 private label products which many customers consider best-in-class. A friend of mine is obsessed with their salad dressings.
- Community: To build a loyal following, each Farm Boy stocks produce and groceries relevant to their community; for instance, the Farm Boys in Ottawa will sell ingredients geared towards a more French Canadian population, while the Etobicoke location will be more Eastern European centric.
Farm Boy CEO Jeff York himself has called the grocer a hybrid between Trader Joe's and Whole Foods but 25% cheaper – and we think that's the perfect description.
Battle for Toronto
In 2018, Sobeys' parent company – Nova Scotia-based Empire Company – bought Farm Boy from Berkshire Partners for $800 million.
- The deal valued Farm Boy at a 14x multiple on their 2020 EBITDA of $57 million, which yes, is a high multiple...
But it's important to look at the deal in context. Sobeys has consistently struggled to gain a foothold in Canada's largest urban market: Toronto.
In 2013, Empire purchased Western Canadian grocer Safeway. Empire botched the merger by raising prices and replacing Safeway's popular private label products. This, plus a soft Western economy, hit the grocer's bottom line hard. New leadership took over and their turnaround mandate was clear – compete in Toronto.
Farm Boy's niche offering and rabid following better reflects the changing urban Canadian shopping preference. Customers in big cities prefer alternative grocery stores to big boxes, and Farm Boy's success in Ottawa is evidence of that.
And in Toronto they grow... Empire wants to double Farm Boy's 26 stores within 5 years and Empire Chief Executive Michael Medline once said the plan was to, "blanket Toronto with Farm Boy".
- Importantly, the company's learned from their last acquisition. Farm Boy is still an independent entity and operates separate from Sobeys. Where they need support, such as real estate, Sobeys is happy to step up but Empire is committed to maintaining Farm Boy's unique charm.
Bottom line: Brand is Farm Boy's moat. And that's what Sobeys is betting on. Customer affinity with a brand is invaluable and difficult for others to compete with. If Farm Boy does carry the Trade Joe's caché, Empire's acquisition of them was a brilliant move and could bite into Loblaws' market share – on their home turf.