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A Loblaw outlet in downtown Toronto.

What's good for consumers is causing indigestion for grocery retailers.

Mounting competition from giant U.S. chains is forcing supermarkets to lower their prices, a trend that hit grocers Loblaw Cos. Ltd. and Metro Inc. in their latest financial quarter. Basic commodities such as corn and sugar have also fallen this year, meaning there is virtually no inflation pressure in food to help the bottom line.

That combination has sapped the earnings power of Loblaw, the country's largest grocery chain, which said third-quarter profit dropped 29 per cent to $154-million and which lowered its 2013 forecast. Metro reported a larger-than-anticipated 40-per-cent drop in its fourth-quarter profit.

Shares of both companies slid, with Loblaw and Metro shares down about 7.5 per cent and 5.6 per cent, respectively.

The key culprits are discount giants Wal-Mart Canada Corp. and U.S. rival Target Corp., the latter a newcomer to Canada this year. Both are rapidly adding more food to their shelves at a time when spending in the industry is stagnant. Overall supermarket sales slipped 0.5 per cent in the year ended Aug. 31.

Retailers don't expect the competitive situation to ease any time soon.

"Increases in square footage from incumbents and new entrants reached a critical mass," Galen G. Weston, executive chairman of Loblaw, said on a conference call to review its third-quarter results. "This, combined with a shift in consumer expectations, put significant pressure on our business.

"Balancing sales and margins in such a dynamic market is not easy."

To lure customers, the grocers slashed prices, squeezing their bottom lines. At Loblaw, the markdowns helped boost sales at stores open a year or more by 0.4 per cent (about 1 per cent when a shift in the timing of Thanksgiving from a year earlier is taken into account). Same-store sales at Metro, the country's third-largest grocer, fell 1.8 per cent.

Still, tight cost controls helped Metro to increase its gross profit margins while they slipped at Loblaw, despite expense cuts at the retailer

In the critical discount food fight food fight, Metro unveiled a plan to introduce new signs among other changes at its underperforming Food Basics chain. Starting Friday, it will offer a merchandise in-stock guarantee to that chain's customers: if Food Basics runs out of an item promoted in its flyer, the retailer will give shoppers a rain check and a 10-per-cent discount.

Finding that products are out of stock is "the No. 1 complaint of discount shoppers," Eric La Fleche, chief executive officer at Metro, told analysts.

Peter Sklar, retail analyst at BMO Nesbitt Burns, said both grocers' results are disappointing. At Metro, the quarter marks the second consecutive period of declining sales volumes, which is "unsustainable." More price cuts "will inevitably be required for Metro to defend its market position." Sales fell almost 9 per cent to $2.61-billion.

Loblaw, for its part, is slashing prices "ahead of its ability to offset through cost efficiencies," Mr. Sklar said.

Irene Nattel, a retail analyst at RBC Dominion Securities, summed it up by saying it's "tough out there." Still, Loblaw's planned acquisition of Shoppers Drug Mart Corp. by early 2014 will substantially lift its exposure to "more attractive segments of Canadian retail," she said. The takeover will allow Loblaw to gain a foothold in the fast-growing health and wellness fields in downtown urban locations, where the grocer has few stores.

Vicente Trius, president of Loblaw, said the company already is the lowest-price operator in the discount grocery sector with its No Frills chain, which competes head-on with Food Basics. But there's room for Loblaw's conventional supermarkets to contribute more to its overall business, he said. "There is more work to do."

The grocer has shaved more than $100-million of annual costs this year, including letting go 275 employees in October, which will lead to a $30-million fourth-quarter charge and save the company that amount annually.

Metro's fourth-quarter profit fell to $83.6-million or 88 cents a share, from $145.1-million or $1.46 a share a year earlier.

On an adjusted basis, excluding an extra week last year, Metro's fourth-quarter sales fell 1.1 per cent to $2.61-billion. On an adjusted basis, taking account the additional week and a non-recurring $40 million charge for its Ontario restructuring, Metro's profit rose to $113 million or $1.19 a share from $112.8 million or $1.14 a share a year earlier. Last year, the profit included a dilution gain tied to its disposal of part of its investment in Alimentation Couche-Tard.

Follow Marina Strauss on Twitter: @MarinaStraussOpens in a new window

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