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The fierce retail war in Ontario threatens to spill over into Quebec and beyond – and grocers are feeling much of the brunt of it.MARK BLINCH/Reuters

The fierce retail war in Ontario threatens to spill over into Quebec and beyond – and grocers are feeling much of the brunt of it.

As discounter Wal-Mart Canada Corp. ramps up its food aisles and U. S. archrival Target Corp. expands in this country, conventional chains such as Loblaw Cos. Ltd. and Metro Inc. feel the mounting pressure.

In September, Robert Sawyer, a former Metro executive and now chief executive of Rona Inc., described the Ontario retail landscape as a "bloodbath." Others echo the sentiment, if not in such extreme words.

"Ontario is a pricing battlefield and Quebec is beginning to heat up," Perry Caicco, retail analyst at CIBC World Markets, said in a report last week.

When Loblaw and Metro release their third-quarter financial results on Wednesday, they may shed more light on winners and losers in the combat zone. But amid tight-fisted consumers and heated competition, grocers need to find creative ways to lure customers.

They are focusing on new areas of growth, such as health-related products, shoring up their loyalty programs to keep shoppers coming back and cutting costs. To gain economies of scale and a foothold in the health field, Loblaw is buying Shoppers Drug Mart Corp. in a $12.4-billion deal. Rival Sobeys Inc., the country's second largest chain after Loblaw, has swallowed Safeway Canada in a $5.8-billion agreement that closed this month.

But grocers' profit margins may be squeezed as Wal-Mart and Target shore up their positions here. Michael Van Aelst, retail analyst at TD Securities, recently trimmed his forecasts for Metro, Loblaw and Empire Co. Ltd., which owns Sobeys.

"The next 12 months have the potential to be among the toughest in recent history for Canadian supermarkets," Mr. Van Aelst said in a report. The sheer amount of space that Target is adding to the grocery sector is "enough to make life difficult among the incumbents."

To add to the warfare, Wal-Mart Canada and recently rolled out food offerings on their e-commerce sites. introduced 15,000 non-refrigerated food products, while carries about 2,000 and is adding 1,000 items monthly, racing to catch up.

And while Wal-Mart executives say its Canadian division is growing faster than the overall market – stealing business from rivals – they also have struggled to increase sales at stores open a year or more.

In its second quarter, those same-store sales at Wal-Mart Canada slipped 0.4 per cent while traffic to its stores fell 0.6 per cent, its U.S. parent company reported in August.

There's "an awful lot going on in Canada over the last couple of years," David Cheesewright, president of the Wal-Mart region that includes Canada, told a conference last month.

"Lots of the times, the competitors coming in [are] really helping us become a better business," he added. "Market share gains have remained very, very consistent through the entry of new players. So we're pretty happy with the performance there at the moment."

But Wal-Mart's performance, particularly as it focuses more on food, threatens to pinch rival supermarkets. Their same-store sales have been stalled or dropping, although those at Loblaw grew 1.1 per cent in its second quarter.

Loblaw may be best placed among traditional grocers in the food fight, partly because it has been slower to carry out its key initiatives from which its peers have already benefited, such as improving merchandising and containing costs, Mr. Van Aelst said.

Metro, for its part, is mulling a drugstore expansion of its own, feeling the heat to bulk up in the face of takeovers by Loblaw and Sobeys. It recently struck a deal with Target to operate its pharmacies in Quebec. To improve its supermarket performance, Metro already is restructuring or closing under-performing stores – taking a $40-million charge – and revamping its discount Food Basics chain.

Eric La Fleche, chief executive at Metro, said it doesn't need more national economies of scale to efficiently run its supermarket business, which operates in Quebec and Ontario. "We have enough size to compete and do very well," he said in September.

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