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Metro feels the heat of 'aggressive' competition

A Metro grocery store in Montreal

Andre Pichette

Despite an overall spike in Canadian food prices last month, one of the country's top grocery chains struggled with food price deflation in its most recent quarter as customers simply avoided purchasing goods whose prices did rise.

The quarterly results at Metro Inc. , the Canada's third-largest supermarket retailer, underscore the intense pressure that Wal-Mart Canada Corp. is putting on grocers as the giant discounter rapidly expands its food offerings.

The competitive landscape and price discounting "was quite aggressive," Eric La Fleche, chief executive officer at Metro, told analysts on a conference call.

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Still, he also said that by the end of Metro's second quarter and in the current period, food inflation returned, although customers remain cautious in their spending.

He said that Metro has increased prices in some commodity-based products, such as bread, passing on cost hikes from its suppliers. But most packaged-goods vendors have refrained from raising their wholesale prices, he said.

And any food price inflation has yet to trickle down to the popular weekly flyer promotions, although that may still surface later this year, he said.

The pressures have mounted as Wal-Mart adds more of its super centres with full supermarkets, while Sobeys, the second-ranked grocer in Canada, invests in converting its discount banners to low-cost Freschco outlets in Ontario. At the same time, Metro and other retailers grapple with higher expenses because of spiralling commodity costs, including gas and wheat prices.

As a result of the flurry of activity, Metro reported that its second-quarter profit rose 3.7 per cent amid a slight dip in revenue - missing analysts' consensus earnings forecast.

The Montreal-based company's quarterly profit was $83.3-million or 80 cents a share in the three month period, up from $80.3-million or 74 cents per share a year earlier. Its latest profit was 2 cents per share below a consensus estimate of 82 cents, compiled by Thomson Reuters.

Metro's sales declined 0.4 per cent to $2.57-billion but within the consensus estimate - due to a drop in pharmacy sales following new generic drug-pricing rules. On a more positive note, same-store sales at outlets open a year or more - a key retailing metric - grew 0.2 per cent.

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Metro said food price deflation in its latest quarter slipped 1 per cent because of competitive strains and the impact of drug reforms in Ontario and Quebec.

"Despite the difficult competitive environment, we are confident that we will continue our growth due to our effective merchandising, loyalty, and cost control programs," Mr. La Fleche said.

He said most price increases have been moderate, although some have been more severe, resulting in sales declines in those products.

On Tuesday, Statistics-Canada said the country's consumer price index in March experienced its biggest monthly increase in two decades. It rose by 1.1 per cent in the month, accelerating from 0.3 per cent in February, and lifting the annual inflation rate to 3.3 per cent. Prices for food bought from stores jumped 3.7 per cent in March, the biggest annual increase in 19 months, as bad weather in Mexico and the southern United States drove up vegetable prices.

Metro is Quebec's leading grocery chain with nearly 34 per cent market share. It has more than 65,000 employees in Quebec and Ontario.

The Montreal-based company operates a network of close to 600 food stores under several banners including Metro, Metro Plus, GP, Super C and Food Basics, as well as over 250 drugstores under the Brunet, Brunet Plus, Clini Plus, The Pharmacy and Drug Basics banners.

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Metro will soon feel even more heat as Wal-Mart prepares to carry a full range of food in its Quebec stores - a phenomenon that already has arrived in other markets including Ontario.

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