Canada: Metro battles rising competition

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Grocery retailer Metro Inc. is battling industry pressures with an e-commerce push that includes extending online shopping to customers throughout Quebec and selling meal kits, its chief executive said Tuesday.

The news came after ongoing food price deflation dampened third-quarter earnings at Metro, which said a minimum wage hike in Ontario would further squeeze grocers in a highly competitive industry.


Given the industry headwinds that are keeping margins slim, chief executive Eric La Flèche called the quarter “satisfactory,” with a slight decline in customer traffic offset by a spending uptick on the average grocery basket. “Pricing is very intense and very promotional,” he said.

Like Loblaw before it, Metro said an announced minimum wage increase for Ontario would put “significant pressure” on the grocery industry in 2018. Metro estimated the wage increase will have an impact of $45 million to $50 million in 2018. In July, Loblaw estimated the proposed wage hikes will increase its labour costs by $190 million next year.

But La Flèche stopped short of saying the wage increase would lead to increased prices for consumers, saying that over time, structural cost increases can lead to inflation. La Flèche said the company would implement cost controls to mitigate the effect of minimum wage hikes in Ontario.

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Metro’s shares traded down slightly after reporting its net earnings rose 8 per cent to $183 million in the period ended July 1, or 78 cents per share, up from $176.5 million (72 cents), a year ago. That missed average analyst projections of 79 cents, according to Thomson Reuters.

“Metro’s the third largest grocer and they are pretty well run, but they are in a market that is really tough and it is going to get tougher,” said Bruce Winder, partner in Toronto-based Retail Advisors Network. “There is food deflation and Costco and Walmart have dialled up their food offerings and taken market share from the grocers in the last few years.”

As core food price deflation has eroded grocers’ top line sales, the retailers have kept their prices to consumers low in order to compete aggressively with one another on price. Metro said sales rose 1.4 per cent to $4.07 billion in the period, but same-store sales, an important retail bellwether, fell 0.2 per cent as the price of its average basket of food fell one per cent.

In the quarter ended June 17, same-store sales at Loblaw rose 1.2 per cent, but the country’s largest grocer said its own food prices fell lower than average national food price deflation of 1.4 per cent in the quarter.

“Competitive intensity increased in the quarter, resulting in an inability to pass through some commodity price increases,” BMO analyst Peter Sklar wrote in a note to clients regarding Metro. “We believe that cost increases in meat and poultry were not passed on to consumers, likely manifesting itself in deep feature prices on the front pages of flyers.” Sklar predicts decelerating deflation will benefit grocery retailers in the coming quarters.

More critically, Winder said, the low-margin business of grocery retail is grappling with the rise of online shopping.

“The smart folks realise that they have to have a direct-to-home delivery system and that’s not easy,” he said. “There is cost and complexity in home delivery and I think it will be very hard for anybody to make money on it.”

The erosion of business at traditional grocery stores will only get worse if Amazon starts selling fresh groceries in Canada in the wake of its Whole Foods purchase, Winder added.

La Flèche said Metro is extending its e-commerce program, which offers home delivery or in-store pickup, to a number of new urban areas in Quebec to reach about 60 per cent of the province’s population in total, and online shopping in Ontario will be introduced over time.

Conventional grocers are also trying to retain store traffic despite the siphoning of some store-based sales to e-commerce, through in-store special offers and improving their selections of to-go meals.

Eyeing the burgeoning meal kit business exemplified by companies such as Blue Apron, Metro recently acquired a majority stake in Montreal-based MissFresh Inc., which delivers recipes and portioned chilled ingredients to the homes of customers who subscribe to the service.

“We keep abreast of all trends,” La Flèche said. “It’s a small investment, with good promises of future development and we will see where it goes.”

Though the investment will enhance Metro’s online offering, he said the meal kits could also be offered for sale in Metro’s stores.


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