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CANADA OUTLOOK

MONTREAL (FNS) -- Speculation continues to swirl around Metro here that it will soon be bought by another grocery giant outside Canada as part of the next phase of grocery consolidation north of the border.The most often mentioned names are Supervalu, Minneapolis, and Ahold, Zaandam, the Netherlands, which denies being interested in Metro.Why the speculation?"Metro [formerly Metro-Richelieu] cannot

Brian Dunn

April 24, 2000

3 Min Read
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BRIAN DUNN

MONTREAL (FNS) -- Speculation continues to swirl around Metro here that it will soon be bought by another grocery giant outside Canada as part of the next phase of grocery consolidation north of the border.

The most often mentioned names are Supervalu, Minneapolis, and Ahold, Zaandam, the Netherlands, which denies being interested in Metro.

Why the speculation?

"Metro [formerly Metro-Richelieu] cannot survive long as a regional player with minimal buying power, limited capital resources, small store sizes and big systems," said financial analyst Perry Caicco of National Bank Financial, Toronto. He said an outsider would probably buy Metro because Canadian competition laws would make it difficult for Canada Safeway, Loblaw Cos., Toronto, or Sobeys, Stellarton, Nova Scotia, to make a bid.

Caicco said Supervalu would be a better fit because of Metro's wholesale operations combined with its strong retail banners.

"It's a good corporate mix. Even at a price at 50% above the current share price, Metro would still offer good value," he said.

Overwaitea Foods, a privately owned regional grocer in British Columbia, also makes an attractive target for another regional player such as Sobeys that lacks a strong western presence, Caicco suggested.

Despite its orphan image after being ignored in recent Canadian food industry mergers, Metro continues to outperform the competition in Quebec. In the latest quarter, its same-store sales grew by 5% compared to 4% for its competitors, according to industry analyst David Rowen of Dlouhy Investments Inc. here.

In addition, there is no pricing pressure within the Quebec grocery industry, said Rowen, as both Loblaw and Sobeys are focusing on integrating their respective acquisitions of Provigo Inc. and Oshawa Group Inc. as well as their respective capital expenditure programs.

But like Caicco, Rowen warns that worldwide consolidation in the grocery industry that will eventually hit Canada will make Metro "an ideal beachhead for an American or European grocer seeking to acquire a well-managed network with a solid track record and, at a cheap price."

Rowen lists possible suitors as Ahold; Tesco and J. Sainsbury of the United Kingdom; Carrefour of France; Albertson's, Boise, Idaho; Kroger, Cincinatti; Safeway, Pleasanton, Calif.; and A&P, Montvale, N.J. He said further Canadian consolidation could include any combination of Overwaitea, and A&P Canada, Canada Safeway and Metro.

But any suitor eyeing Metro would have to accept the company's mix of corporate and franchised stores, which might not appeal to everyone, Rowen suggested.

While Metro is the star performer in Quebec, Loblaw is the pick in the rest of Canada, according to Joelle Verdon of CIBC World Markets here. She likes Loblaw's strong market dominance with a 33% share of the estimated $37 billion (Cdn. $54.4 billion) Canadian grocery market, its leading position in private label with President's Choice and the company's head-start in the less capital-intensive financial services business with its PC financial banking operations.

Loblaw also has gained tremendous upside in Quebec through Provigo, which is performing better under its ownership, according to Caicco, who noted its private-label program still has a long way to grow in Quebec.

Despite its market dominance, Loblaw does have some weaknesses, said Caicco.

"They're not strong on customer service, which is where independents have a leg up. And many independents also do a better job in produce and meat."

However, none of Canada's grocery chains should be threatened by Wal-Mart Canada, which has no immediate plans to introduce its supercenter format here.

The company has 166 stores in Canada and plans to open 14 more this year, all traditional formats.

"We have no plans for supercenters or Sam's Clubs. We feel we have a lot of room to expand our current format," said Wal-Mart Canada spokesman Andrew Pelletier.

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