It's not a particularly appetizing time to be in the food retailing business.
Major grocers are struggling to make sales gains as they're forced to lower prices to lure shoppers from rivals – a situation that isn't expected to get better this year amid moderating price increases and stepped-up competition.
But the most immediate threat isn't so much the newest player, discounter Target Corp., which is getting a lot of attention as it opens its first stores here, but rather low-cost titan Wal-Mart Canada Corp. It has launched an aggressive $450-million expansion this year after snapping up former Zellers stores from Target, building up full food offerings in Wal-Mart supercentres while Target offers only a limited fresh food selection.
On Wednesday, Montreal-based grocer Metro Inc. underscored the extent to which the Wal-Mart effect is eating into its growth prospects. In its second quarter, Metro reported lower sales while profits rose following the closings of unprofitable stores. Metro chief executive Eric La Fleche singled out the pressure from the openings of 40 new stores in Ontario, about half of them Wal-Mart outlets.
"We experienced an unprecedented level of store openings in the last six months, especially in Ontario, and that impacted our sales growth," Mr. La Fleche said. "The competitive environment is pretty intense."
Ontario is ground zero for the fiercest food fight in years after Wal-Mart rushed last fall to open its new supercentres before Target rolled out its first 24 outlets in that province last month, with 100 more opening across the country in 2013.
An uncertain economy has put pressure on supermarkets such as Metro and industry leader Loblaw Cos. Ltd. to find new avenues of growth, including the burgeoning ethnic market.
"Accelerated new store openings, primarily in Ontario, in the past six months continue to put pressure on that market," said Irene Nattel, analyst at RBC Capital Markets. "Consumers remain extremely value-conscious, and proportion of transactions on promotion continues to rise.
Both Metro and, to an even greater degree, Loblaw have been racing to expand their ethnic offerings to cater to a growing and lucrative population of new Canadians. Loblaw, which acquired T&T Supermarkets a few years ago, is adding new stores as well as boosting Asian offerings in its mainstream outlets.
Metro bought Adonis, a Mideast grocery chain, and last week opened its first Adonis store outside of Quebec, with more to come, Mr. La Fleche said. "We see it clearly as a good growth opportunity."
The grocers are also focused on improving their fresh offerings to serve as a key differentiator, investing in its distribution to ensure that products get to stores faster and stay fresh longer.
And they're betting more on loyalty programs, trying to sway customers by offering them deals that are personalized for them, and in the process collect more data to monitor customer demands more precisely. Acquisitions are another way to grow, and analysts say Safeway's Canadian division is a potential target.
Still, Metro "continues to enjoy above-average profitability driven by in-store execution and customer loyalty," Ms. Nattel said.
In its second quarter, Metro more than tripled its profit with the help of an after-tax one-time gain of $266.4-million tied to the sale of 10 million shares of Alimentation Couche-Tard Inc.
The grocer's profit rose to $366.8-million or $3.77 per share from $96.1-million or 94 cents per share, a year earlier. On an adjusted basis, the company earned $1.02 from continuing operations. Sales fell 3 per cent to $2.51-billion. Metro said in January it would sell nearly half its stake in Alimentation, a convenience store and gasoline station operator, for nearly $479-million.