METRO PLANS EXPANSION WITH METRO PLUS STORES

Brian Dunn

MONTREAL -- Metro here will continue to invest millions of dollars to defend its market share in Quebec with a new banner while continuing its expansion in Ontario.

Last year, it launched Metro Plus, and now has 13 Metro Plus stores across Quebec. It expects to have 40 by year-end, and 80 by the end of 2005. Ranging in size between 35,000 square feet and 62,000 square feet, Metro Plus features a wider variety of nonfood products, an organic food section, and a health and beauty section.

"It is our answer to Wal-Mart and Sam's Club, which continue to add food products," Metro Chairman Maurice Jodoin explained after the company's annual meeting here last month. "But all retailers, including pharmacies, are adding more food items. So we have to react."

In addition to expanding its operations in Ontario through its Loeb and Super C banners, the grocer is still on the prowl for a major acquisition, according to Metro President Pierre Lessard. Yet, Lessard doesn't expect anything to happen this year. The likely targets are A&P Canada and Safeway Canada, although neither is for sale.

Metro plans to invest $344 million (Cdn. $450 million) in its retail network over the next two years for new-store openings, renovating existing outlets and converting several Ontario Loeb stores to Super C stores, mostly in Northern Ontario, which is dominated by discount operations.

Despite a 0.5% decline in same-store sales, Metro posted its 53rd consecutive quarter of growth, with a net income of $28.8 million, or 29 cents a share, for the first quarter ended Dec. 20, vs. $27 million, or 27 cents a share, a year earlier. Sales rose 3% to $1 billion.

However, analysts were looking for better numbers, pointing out that profit growth slowed to 6.5% in the first quarter, less than half the average of the four previous quarters. The results shaved almost 90 cents off Metro's stock on the Toronto Stock Exchange on Jan. 27.

While Metro "should continue to generate positive earnings growth for shareholders, the rate of growth has slowed substantially as the competitive environment in Quebec intensifies," analyst Irene Nattel of RBC Capital Markets of Toronto said in a report. She said Loblaw is expanding aggressively in Quebec, and reducing prices.

"Their track record is fine, but '04 will be tough on pricing," said Perry Caicco of CIBC World Markets, Toronto. "Margin growth won't be as high, which puts their earnings in jeopardy.

"The strategic question is whether they will continue to guard their home province, or diversify in Ontario to generate growth. They seem to be doing the latter."

However, Super C is facing fierce competition from Loblaw's Maxi banner in Quebec, which Caicco said "has essentially become a Quebec version of No Frills, itself the single most ferocious price competitor in Ontario."

Instead of differentiating itself from Maxi by improving its unique services, leveraging its strong promotional image, increasing its one-off deals and seasonal programs, Super C is attempting to beat Maxi at its own game, which won't be easy, Caicco noted.

"In our opinion, same-store sales at Super C will not recover this year, and margins will decline," he said.