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Weak loonie leaves Metro hard-pressed to outperform larger rivals

A woman walks into a Metro grocery store in downtown Montreal, January 28, 2014.

Christinne Muschi/The Globe and Mail

Metro Inc. is facing off with two bigger rivals in an increasingly competitive grocery field that is feeling the pain of a weaker dollar.

Late last month, Loblaw Cos. Ltd., the country's largest grocer, sealed a $12.4-billion deal to buy Shoppers Drug Mart Corp. In November, Sobeys Inc., the second-biggest grocer, picked up Safeway Canada for $5.8-billion.

Now Metro, the third-ranked grocer, has to ensure it doesn't lose out in dealing with its suppliers because of its smaller size and fewer economies of scale. It also needs to keep an eye out for a potential acquisition to take on its rivals.

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"We think we have the size and the scope to execute really well and compete effectively," Eric La Fleche, chief executive officer of Metro, told a conference last month. "Our terms with our suppliers are very competitive. We are not known to be easy negotiators."

He has to be tough in a market feeling the pinch of a weaker dollar. The decline of the loonie has increased the cost of imported goods, such as fruits and vegetables, purchased in U.S. dollars. It's forcing Metro and others to raise some prices while still cutting others to attract budget-conscious consumers.

On Wednesday, when Montreal-based Metro releases its second-quarter results, it is expected to provide a better idea of how the currency shift is affecting its profit margins.

As much as 25 per cent of its winter purchases come from the U.S., according to estimates. Some analysts say the currency factor could shave the grocer's second-quarter gross margins by more than 0.2 per cent.

In addition, the recent acquisitions by Metro's bigger rivals may increase the pressure on Mr. La Fleche to find a partner for the grocer.

Some investors have pushed up Metro's stock on the belief the retailer could lever its balance sheet to execute an aggressive share buyback plan, according to analysts.

"We do not subscribe to this theory, as we cannot see the company hampering its ability to make acquisitions," said Perry Caicco, retail analyst at CIBC World Markets.

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"Metro remains hard pressed to outperform given fewer opportunities to drive sales, cost savings and efficiencies, as well as the lack of available acquisitions to help offset tough industry conditions," said Michael Van Aelst, retail analyst at TD Securities.

Mr. La Fleche said making an acquisition is not essential. "We don't see it as acquire or die," he told investors. The company will take the leap "if and when it makes sense for us long term at the right price."

The weak loonie is "having an impact short term," he said. "It's not necessarily dramatic news. Longer term it should translate into a bit of inflation in the business."

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About the Author
Retailing Reporter

Marina Strauss covers retailing for The Globe and Mail's Report on Business. She follows a wide range of topics in the sector, from the fallout of foreign retailers invading Canada to how a merchant such as the Swedish Ikea gets its mojo. She has probed the rise and fall (and revival efforts) of Loblaw Cos., Hudson's Bay and others. More

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