Grocery wars spur industry consolidation

Call it the Target effect.

The U.S. discount chain's arrival has forced big Canadian retailers to rethink their strategies. Montreal-based Metro Inc. is the latest to make a move, announcing Wednesday it will restructure its Ontario operations and bolster its pharmacy business in Quebec – teaming up with none other than Target Corp. itself.

Metro struck a deal with the U.S. company to operate pharmacies within its Quebec stores, starting in 2014, while also being on the lookout for potential ways to expand its provincial drugstore business further.

"We said before that we would be interested in growing that business, especially in the province of Quebec," said Eric La Fleche, chief executive officer at Metro.

"If there's an opportunity that becomes available, we certainly would be interested and would look at it."

Target's arrival has set off a flurry of activity, as rivals revamp their operations and, in some cases, lower prices to compete.

Metro is under pressure to find a takeover candidate after Loblaw Cos. Ltd., the country's top grocer, sealed a $12.4-billion deal for Shoppers Drug Mart Corp. last month and Sobeys Inc., the second-ranked grocer, signed an agreement in June to buy Safeway Canada for $5.8-billion.

But while Metro has seen its sales squeezed, it's not necessarily because customers are heading for Target stores. "Over all there is a slight impact, but pretty modest," Mr. La Fleche said.

It's the reaction of other competitors that has created heat in some markets, he said. It is "a very intense, challenging environment," with some products' front-page flyer prices below those of last year. "We have to work very hard to get the full basket" of customers' purchases.

Metro already is seeing signs of contraction. In its third quarter, its sales at stores open a year or more – a key retail measure – fell 0.9 per cent while overall revenue slipped 0.7 per cent to $3.6-billion. Helped by cost cutting, its profit rose 3.7 per cent to $149.8-million.

A drugstore acquisition would be attractive to Metro. It already runs Brunet pharmacies, and it would see benefits from an aging population that increasingly needs more medications – although it doesn't need more groceries, analysts say. Jean Coutu "could be a buyer or a seller, but either way, it is likely to play in consolidation," Perry Caicco, retail analyst at CIBC World Markets, said in a note last month.

"There is no acquisition that Metro could make that would be lower-risk and higher-reward," he said earlier.

Stewart Samuel, senior business analyst at researcher IGD Services (Canada) Inc., said Jean Coutu is the main takeover candidate for a company wanting to build its pharmacy presence in Quebec. "There is a lot of pressure on Metro right now. Everyone is expecting them to do a deal. Loblaw has done a deal. Sobeys has done a deal."

Metro spokeswoman Marie-Claude Bacon said in an interview that the company is not looking into buying Jean Coutu now, despite rumours of a potential marriage for years. "Jean Coutu said many times that they were not for sale."

It may make more sense for Metro to acquire Quebec-based drugstore rivals Uniprix or Famiprix, although no talks are under way, she said. "But we're in a good position to make an acquisition."

Metro already runs McMahon Distributeur Pharmaceutique, which will oversee the Target drugstores under the company's Brunet banner in 18 of Target's stores in Quebec, bringing the total of Brunet pharmacies to 168. The Minneapolis-based retailer is opening its first 25 stores in that province this fall and will have 124 across the country by year's end.

With Ontario being Ground Zero of the food fight, Metro is moving quickly to improve its operations there. It said it will take a $40-million restructuring charge to close a few Metro stores and convert about 12 or more of them to its discount Food Basics banner.

Ontario is "where we would like to have a better performance," Mr. La Fleche said. "Food Basics can do better ... Everybody has upgraded. Everybody has invested. We have also invested, perhaps not at the same pace as others. We will accelerate that pace."