How Sobeys’ parent company crafted $357M deal for popular Toronto grocer Longo’s

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Michael Medline, who runs one of the biggest grocery chains in Canada, was looking for a place last summer to meet with the head of a rival chain. It was a sensitive meeting about a potential acquisition, so it had to happen someplace where they wouldn’t know anyone.

“We couldn’t, obviously, go to each other’s offices,” said Medline, chief executive of Sobeys’ parent company Empire Co. Ltd., partly because of the pandemic, but mostly because he worried his staff would recognize Anthony Longo, chief executive of the popular southern Ontario chain Longo Brothers Fruit Markets Inc.

Restaurant patios were out, too.

“There was nowhere to hide,” Medline said. “So I suggested something to Anthony that, in normal times, would be literally insane because we didn’t want to be seen together.”

They ended up meeting on Bay Street in downtown Toronto, generally the teeming centre of Canadian commerce on weekdays, but mostly — and eerily — empty during the pandemic.

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“I knew we’d never run into any one there, and no one would recognize us,” he said.

The two sat on a bench in a little park, alone at the base of the humongous Bay Adelaide Centre, and discussed what would become a $357-million deal for Empire to acquire 51 per cent of Longo’s, details of which were announced on Tuesday morning.

Longo’s, though relatively small, is so deeply rooted in the Greater Toronto Area that many of its avid shoppers would be surprised to learn that few elsewhere have even heard of it. But popularity in that particular market is exactly what Medline has been after.

Empire and its flagship Sobeys brand have historically struggled to strengthen their foothold in Ontario, and Medline has heavily invested to change that.

The company has accelerated the roll out of its Voilà e-commerce platform in Ontario to meet spiking demand during the pandemic and rapidly opened new GTA locations of Farm Boy, an Eastern Ontario specialty grocer that Empire acquired for $800 million in 2018.

Adding Longo’s to that mix, Medline said, is another powerful way to grow Empire’s share of the country’s biggest grocery market.

Scotiabank analyst Patricia Baker agrees that the deal will “seriously bolster” Empire’s presence in the Toronto area.

“While a relatively small acquisition for Sobeys, it is very much on strategy and will see its position and potential enhanced in the all-important market of Ontario,” she said in a note to investors on Tuesday.

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Longo said one of his main concerns when acquisition talks started was whether Empire would let current management run the business their own way.

Longo’s father and two uncles founded the company in 1956, and more than 20 family members across three generations continue to work at the business, so he wanted to make sure Empire’s vision of the future matched his own.

After the Farm Boy acquisition, its devoted customer base worried Empire would meddle in the same way it did when it acquired Western Canadian grocery chain Safeway in 2013.

But Medline, who took over at Empire in 2017, promised to let Farm Boy’s leadership stay to run the business separate from Empire and promised the faithful that he wouldn’t “screw this up.”

He has made a similar pledge with the Longo’s acquisition.

Talks on the Longo’s deal last summer coincided with a rash of infighting in the food sector, as independent grocers, farmers and food processors accused Canada’s most powerful grocery chains of bullying.

Both Walmart Inc. and Loblaw Cos. Ltd., enraged suppliers last year by instituting higher fees on suppliers to help pay for modernization investments during the pandemic.

But last October, Medline called his rivals’ behaviour “repugnant” and threw his support behind the independent grocers and suppliers.

Longo, an independent grocer, took notice.

“I was just so proud that he had done that. No other CEO in this country has done anything like that. To take a stance like that, I think, was critical,” he said. “We were deep into discussions at that point and it really did cement that they mean what they say.”

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While a relatively small acquisition for Sobeys, it is very much on strategy

The acquisition values Longo’s, with 36 stores and a pioneering e-commerce operation known as Grocery Gateway, at $700 million. The structure of the deal allows Empire to eventually acquire 100-per-cent ownership of Longo’s.

As in the Farm Boy deal, Longo and his executive team will stay on and the company will be managed separately from Empire.

Industry insiders and competition law experts have suggested that heavy consolidation among the big grocery chains is at the root of the controversies that have rankled the sector over the past year. The three top supermarket chains in Canada — Loblaw, Empire and Metro Inc. — control 75 per cent of sales, according to an IBISWorld report in August 2020.

But Medline said the Longo’s acquisition shouldn’t be cause for concern.

“No, I don’t think so at all. This is a separate partnership first of all. Our market share historically in Ontario hasn’t been that high. We’ve only started to grow it in the recent past,” he said. “This can only be good for customers. It’s not going to be bad at all.”