Quebec Grocery Share Leader Metro Inc Losing Ground To Competitors

Competition in Quebec's grocery industry is fierce and it's only going to intensify going forward.  This year, Sobeys got a bit more competitive with its acquisition of Shell's gas stations in the province followed by a late deal struck with Target making Sobeys its primary food supplier for the time being. 

Sobeys has also successfully maintained its foothold in the province with locations of IGA (318 -> 308 .. reason for the decline in number due to the larger full-service stores IGA Extra replacing smaller IGA grocery stores in rural areas), Bonichoix (+2 -> 90 locations), Le Marche Tradition (steady at 28 stores), Rachelle-Berry (-1 -> 19 stores) remaining stable... this contrasts with Metro which last quarter reported that it closed more stores than it opened this year.  Granted some of those locations converted over to Food Basics (discount banner means lower profit margins) however many others were closed outright.  Metro did secure a deal with Target to operate its instore pharmacies.. that will inevitably boost margins for Metro (pharmacy margins much higher than for food) but does little to help its food business (private labels Irresistibles, Le Petit Charcutier, Selections). 

Meanwhile Wal-Mart is entering the fray by transforming into a full service hypermarket Supercenter (food accounts for 55% of sales at these locations in contrast with <25% at the older stores).  and now Loblaw Companies owns Pharmaprix !!  You can be sure that Loblaws is going to attempt to leverage its own food sales by boosting sales of grocery store products at Shoppers Drug Mart locations (currently it's less than 15%).

In its latest quarterly report (12 weeks September 28) Metro Inc reported a steep decline in same-store sales (-1.8% vs +1.1% last year) with overall revenue down -1.1% ($2,640.7m -> $2,611.6m when adjusted for the extra week). more info at Metro Inc Quarterly Financial Results  The Canadian consumer price index rose by 0.9% meaning there was some inflation in food prices so how did Metro lose revenue ?  A couple reasons..

enter TARGET

In the last 13 weeks Target Canada opened 23 new stores bringing the national total up to 122.  Those 122 stores reported sales of $333m with a gross margin of $49m or 14.8% (contrast that with the US segment where gross margin is 30.0%).  20% of locations are in Quebec (25 of 122) translating into more than $65 million in sales province-wide.  For the six months ended August 3, 2013 food and pet supplies accounted for one-fifth (21%) of total sales ranking second behind household essentials (steady at 27%).  This means that in Quebec Target alone ate up between $13 million and $14 million of grocery sales that likely would've otherwise gone to Metro Inc or Sobeys.  However, Metro Inc should be more concerned with Sobeys and here's why  i) Sobeys is the primary private label food supplier of Target thanks to a deal reached last year.  This means that some of that revenue is indirectly going back to Sobeys  ii)   In Sobeys' latest quarterly report (13 weeks) same-store sales Canada-wide are down by only -0.1% versus the staggering -1.8% decline at Metro.  Granted, Sobeys gets only a fraction of its revenue from Quebec, the bulk of its locations are mid sized grocery stores in rural regions where Walmart Supercenters and Target aren't yet major players (IGA, Benichoix, Tradition Markets.. in a way Sobeys has a horizontally integrated business).  Also, Sobeys owns all Shell gas stations in the province (over 150 of them) giving them leverage for gas bar food sales.

enter WALMART

Bigger locations equal not only more sales but more food sales !  Supercenters receive on average 55% of their revenue from grocery items which is double what the previous concept store would've made.  Wal-Mart is opening new stores as well - 2011 through 2013 number of locations up by 58 (330 to 388).  Fraction of locations that are Supercenters: December 2012:  55%  December 2013:  63%.

The Sobeys Factor

Sobeys present in rural markets so competition from US-based retailers not as much a factor - Sobeys now has a large gas bar business which it didn't have last year.  Sobeys can use that to leverage food sales much like Couche-Tard's business model (Couche-Tard founder Bouchard family wealth up +50% last year per Nov 22 report).

Can't forget about LOBLAW COMPANIES

Loblaw Companies now owns Shoppers Drug Mart known as Pharmaprix in Quebec.  Shoppers Drug Mart has a presence in both rural and urban areas giving Loblaws a unique competitive advantage.

So where does that leave Metro ?  I say follow the leader !  In Canada that would be Loblaw Companies which recently acquired independent pharmacy chain Shoppers Drug Mart.  Jean Coutu is still available, as an independent pharmacy chain Jean Coutu would give Metro a chance to sell more of its own food products, then there's also the opportunity to attract more members to its loyalty program !  pharmacy purchases result in points to be redeemed for food at other fine Metro locations ?  Metro Inc, every one of your competitors made a big move, now it's your turn.

 

sincerely, Seraphim Blentzas

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