A strong set of quarterly results at Metro Inc. has underscored the outstanding performance of the grocery chain's management team in the face of wafer-thin margins and rising costs.
Metro has invested in its supply chain, made tuck-in acquisitions like Montreal retailer Adonis, and emphasized fresh produce. Thanks to these and other strategic moves, the company's five-year average annual profit growth of 12.4 per cent has easily outdistanced the 7.7-per-cent expansion at Loblaw Cos. Ltd., its prime competitor.
Profit margins in the grocery industry are notoriously thin because of the complex supply chains necessary to get goods from farms to stores. Operating margins for Loblaw and Metro have averaged a meagre 4 to 5 per cent since 2010, leaving management scant room for error. (To put that into context, average operating profit margins in the banking and energy sectors were 33 and 20 per cent, respectively, over the same period.)
To add to the challenges, food and energy costs have risen in recent years. Grocers often find it difficult to pass on these rising costs to their consumers. The problems are particularly acute now as many Canadians, burdened with debt, respond to rising food costs by switching to cheaper brands on which retailers earn lower profits. As a larger share of consumer budgets are allocated to food, the pain is also being felt in the non-grocery segments of Metro stores that are there to increase profitability. (You didn't think those flower shops were there for your convenience, did you?)
In the face of all this, Metro has achieved solid earnings per share growth by keeping a firm hand on costs and finding smart ways to augment its grocery mainstay. At a time when popular resource stocks are finding it difficult to expand their bottom lines because of the global economic slowdown, a steady, dependable growth story like Metro becomes far more attractive.
Metro will no doubt face increased challenges in the years ahead as Wal-Mart Canada Corp. continues its grocery expansion. However, Metro management has shown it has the ability to adapt to changing conditions. Investors should pay attention to this low-key star.
Scott Barlow