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Shoppers in the produce department.

Louie Palu/The Globe and Mail

Even as they grapple with intense competition, major grocers are starting to raise their prices of imported goods to cushion the effects of a weaker Canadian dollar.

On Thursday, executives at Loblaw Cos. Ltd., the country's largest supermarket chain, said the company is passing on to consumers higher costs of purchasing U.S. fresh food and some general merchandise, while at the same time cutting prices of other goods to lure bargain-hungry customers.

Last month, Metro Inc. executives also said the grocer was increasing some fresh produce prices.

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The initiatives underline the reality of today's fierce food fight: As grocers feel the heat to discount their goods and slash expenses amid unprecedented competition from heavyweight U.S. low-cost retailers, they face rising expenses in making purchases in U.S. dollars with a lower loonie.

The challenges for Loblaw and other domestic players show no signs of easing as the U.S.-based titans continue to expand in this country.

"The competitive landscape has fundamentally changed with new competitors growing strongly and incumbents competing to maintain share," Vicente Trius, president of Loblaw, said on Thursday.

U.S. discounters Wal-Mart Stores Inc., Costco Wholesale Corp. and Target Corp. are bolstering their business in this country. The tightening market is forcing domestic players to bulk up with new partners – Loblaw has a $12.4-billion deal to acquire Shoppers Drug Mart Corp. – and run leaner operations to prevent getting beaten at their own game.

Meanwhile, the traditional grocery industry is feeling the strains. The sector suffered its first sales decline in 17 years as a result of stiffer competition and deal-starved consumers, according to a survey from trade publication Canadian Grocer. Sales at traditional grocers (supermarkets and convenience stores) slipped 0.4 per cent to $87.54-billion in 2013 from a year earlier, it said.

Discounters such as Wal-Mart Canada are beneficiaries of the changes. Wal-Mart said on Thursday that its fourth-quarter same-store sales of food and consumer products in Canada rose in the "solid low-single digit" range even as the retailer's overall Canadian same-store sales dropped 1.7 per cent. Wal-Mart Canada picked up 0.45 percentage points of market share in food and consumables in the 12 weeks ended Jan. 25, said David Cheesewright, head of the discounter's international business, citing data from researcher Nielsen Co.

Despite the headwinds, Loblaw is making progress as it works through its protracted information technology and supply chain overhaul while trimming costs and improving its food offerings. Although its fourth-quarter profit dropped 8.6 per cent to $127-million, Loblaw's results surpassed analysts' estimates. It posted a 0.6-per-cent same-store sales gain while Metro's quarterly same-store sales fell 0.5 per cent.

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"Based on our assessment of the current situation and competitive dynamics, we believe momentum in Loblaw financial results should accelerate in 2014-15 as the company reaps the benefits of multiyear supply chain/IT investment," said retail analyst Irene Nattel at RBC Dominion Securities.

Loblaw president Mr. Trius is racing to focus on food – especially fresh food which can generate higher profit margins – and streamline operations. But he also struggles with a weaker Canadian dollar, which raises the cost of buying imported goods in U.S. dollars.

Fresh fruits and vegetables and to a much lesser extent meat are affected by the shifting currency value, as is non-food merchandise and Joe Fresh apparel, said Loblaw spokesman Kevin Groh. "Some prices have already been affected by the higher dollar, but also mitigated by the marketplace," he said.

Mr. Trius, a former Wal-Mart executive, said the company experienced food inflation partly because of the drought in California where the grocer buys produce, and the low levels of cattle herds in North America, which drive up the cost of beef. "Maybe at the beginning not all of the inflation was being passed on," he said. "But we see it manageable in those categories going forward."

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