50 AND READY TO FIGHT

BRIAN DUNN

MONTREAL -- Metro-Richelieu here is gearing for growth under a new set of market conditions as it celebrates its 50th year of business in Canada.

While the wholesale/retail giant has outlasted many of its former competitors, it now faces off against newer rivals including Price Costco and Wal-Mart, and will soon find Loblaw of Toronto entering its core market.

Metro-Richelieu is committed to guarding its market share and may eventually expand beyond its core market. But first the company needs to fine-tune operations ranging from distribution to merchandising, Pierre Lessard, president and chief executive officer, said in an interview with SN.

"Our priority is to increase our store network and to become more efficient in our distribution operations and improve our marketing and merchandising programs," he said.

The company will look at expanding outside Quebec, most likely to Ontario, but not before 2000.

"We're too busy investing in our retail operations to consider anything before then," said Lessard. "And we have to consolidate our position in Quebec because of increased competition."

Among the ways Metro-Richelieu is preparing for continued growth:

Using fresh-foods growth as a way to distinguish itself from grocery-oriented competitors.

Building private label as a way to help brand the store.

Making gains in distribution and efficiencies to cut costs.

Building up the store base through major capital expenditure programs.

Aiming for specific sales and earnings goals over the next few years.

For fiscal 1997, the company earned $46.3 million ($66.2 million Canadian) on sales of $2.40 billion ($3.43 billion Canadian). These figures were up 8.5% and 5.1%, respectively, from the previous year. Fiscal 1998 got off on the right foot with Metro-Richelieu earning $11.9 million for the first quarter, which ended Dec. 20, 1997, an increase of 10.3% from the year-earlier period. Sales rose 4.1% to $591.5 million.

Lessard said his objective between now and 2001 is to increase sales by 5% and net earnings by 10% to 15% per year. First-quarter results have him on track, as do the previous five years, which have seen a 5.5% average annual growth in sales and 28.6% average growth in net earnings.

Metro-Richelieu currently has a 34.2% share of the Quebec food market and expects to reach 35% over the next year or so, the same as Montreal-based Provigo, a longtime rival that has been the market leader.

But Lessard said at the company's recent annual meeting that he's not interested in becoming No. 1 at the expense of profitability.

Investors have endorsed Metro-Richelieu's game plan in recent years. Metro-Richelieu's shares have been outperforming the Toronto Stock Exchange 300 Composite Index and the TSE Food Stores Merchandising Sub-Index for the past five years.

Metro-Richelieu's wholesale operation supplies 446 independent retailers who operate

under the Metro and Richelieu banners and are required to own a specified amount of shares in the company. It also supplies 41 franchised retailers under the Metro and Les 5 Saisons banners in addition to 35 corporately owned discount stores under the Super C banner and 3,000 institutions such as restaurants, hotels, hospitals and schools. It supplies about 300 other small non-affiliated retail stores as well.

To service this vast customer base, Metro-Richelieu operates 14 distribution centers across Quebec, including two meat and frozen-food warehouses, and has a total of 6,500 employees. Its affiliated and franchised retailers employ another 15,000 workers.

Wal-Mart, which has 144 stores across Canada, including 28 in Quebec, recently announced plans to expand its food sections, fueling speculation it's moving further into the supermarket business. Toronto retail analyst Warren Fenton of Eagle & Partners Inc. wrote in a July report that Wal-Mart is a "vicious grocery competitor" and industry insiders say the addition of refrigerated products, including milk, cheese, juice and some meats, is a clear sign the company is testing the idea of importing its supercenter format to Canada.

"It's just a matter of time before the supercenters come to Canada," said one food-retailing executive who requested anonymity. A Wal-Mart Canada official said the company has no immediate plans to build supercenters, but it will add new product lines, including food items, on a store-by-store basis.

To counter such moves, Lessard said, Metro-Richelieu is placing more emphasis on fresh produce, meats, deli and bakery goods.

"Wal-Mart is very competitive on dry goods, which represent about 42% of our sales, but it can't compete on freshness and fresh food," Lessard said. "They're mass merchandisers. That's what differentiates us."

For example, Metro-Richelieu is the only Quebec food retailer to operate its own meat-processing operation -- Boeuf Merite. Between 1993 and 1995, it invested $8.4 million to expand its two Boeuf Merite processing facilities by 15,000 square feet to a total of 200,000 square feet. It also provides its retailers with fresh fish and seafood through its two Pecheries Atlantiques distribution centers, here and in Quebec City.

Metro-Richelieu is placing more emphasis on fresh fish and seafood. For example, one Metro supermarket in the ski area of St. Sauveur, north of here, recently spent $1 million on renovations. A large portion of the investment was spent designing a 130-foot seafood counter built on top of a replica of a miniature train, recalling the days of a ski train. Each train car identifies the product in the counter above it.

"We're also placing more emphasis on prepared foods, a concept we're still developing," Lessard said. One program, called Bon Appetit, features a selection of complete meals prepared at a central kitchen operated by Metro-Richelieu. In addition, many of the recently renovated stores make their own fresh pasta and sausages. Several also have counters that sell a popular line of gourmet cookies called Felix & Norton. Over the next five years, the company plans to add 12 Felix & Norton counters per year to its stores.

The prepared-food category has yet to generate the same levels of excitement in Canada as in the United States, according to some observers. Toronto research company NPD Group Canada attributes the slow growth partly to the lack of ample urban centers to support this concept and its high costs.

The food markets in Quebec and the rest of Canada are very different from the United States, Lessard said. "Canadians eat less fast food and tend not to dine out in restaurants as much as Americans. Quebecers in general tend to buy more deli products and imported foods than other North Americans," he said.

In addition to Wal-Mart, Metro will soon face new competition from Loblaw Cos. of Toronto, which plans to open 10 stores in the Montreal area within the next two years. But the jury is still out whether their arrival will take more business away from Provigo and IGA than Metro-Richelieu.

Analyst Peter Caicco of First Marathon Securities, Toronto, said Metro-Richelieu is better prepared to face Loblaw than its rivals because its franchise stores are more attuned to their neighborhoods and will be able to respond faster to new competition.

Despite all the hype about Loblaw's imminent arrival on his home turf, Lessard isn't too concerned. He predicted they'll get no more than 2% of the $9.8 billion Quebec grocery market with their limited number of planned stores.

"We've known about them coming to Quebec for years and we're ready for them," he said. One of the ways Metro-Richelieu has been preparing is by expanding its private-label business, adding 200 more house brands to its current 1,800, with an emphasis on frozen foods and its Selection Merite premium-brand category. This category features about 50 products including cookies, coffee, tea and jams. The company also offers its own line of beer under the Norois label. Private label represents about 20% of Metro-Richelieu's grocery sales and is still growing.

"We see tremendous potential to further develop our private-label business," Lessard added. Last year, the company introduced a major customer information program called the EconoMetro Plan that features seven different ways consumers can save when shopping at Metro-Richelieu. These include low-budget prices on 4,500 items, a full range of private-label items, weekly discount coupons and hundreds of weekly specials advertised in fliers. The company distributes more than 5.5 million fliers a week to Quebec households, reaching about 85% of the total population.

But Metro-Richelieu has no plans to introduce a frequent-shopper program despite the popularity of that concept in the United States, Lessard said

"They're too expensive to implement and monitor. We prefer to put money into our weekly flier program with their specials," he said.

Maintaining high service levels is one area Lessard won't skimp on. He said Canadians demand better service from their stores. Quebecers, in particular, tend to avoid warehouse stores because of the low level of customer service, he said.

"Metro stores are smaller than most American grocery stores, but they tend to offer better service," he said. "For example, if one of our customers asked a store manager for a certain item that we don't carry, chances are we'll carry it the following week."

Metro-Richelieu offers a number of services to its affiliated retailers on a fee-per-service basis. The services include various merchandising, marketing and advertising programs as well as retail accounting and data processing, store fixturing, insurance programs and other analysis and advisory programs. The company also offers affiliated retailers a range of commercial programs in addition to rebates and loyalty incentives.

The company just completed a three-year modernization and expansion program that cost about $140 million, with Metro picking up $84 million of the tab and the member retailers the remaining $56 million. The program added 800,000 square feet of retail space, boosting Metro-Richelieu's total retail space to 8.1 million square feet.

Metro-Richelieu is spending another $140 million over the next three years for more store upgrades and expansions. About 25% of the budget is earmarked to open four new Metro and four new Super C stores per year. Most of the renovation involves store expansions. Since 1991, the average Metro store has increased from 12,500 square feet to 16,500 square feet today.

To improve distribution and increase operating efficiencies, the company is spending $21 million to upgrade its information systems by installing the SAP R/3 integrated software system from Germany. In addition, it is spending heavily on training of personnel and retailers in the use of advanced technologies.

Metro-Richelieu has had practice at upgrading retail operations. The company's Super C stores were formerly called Super Carnival, the first large-format food stores in Quebec, which Metro-Richelieu supplied before the company purchased them in 1987 from a Toronto real estate developer and changed their name to Super C. At the time, there were only 14 Super Carnivals, which Metro-Richelieu has since increased to 35.

"Their volumes were low and sales were declining," Lessard said. "We positioned them as discount operations by dropping prices and making them look like discount stores with yellow and red banners." The 14 Super Carnival stores had annual sales of $210 million in 1990. Last year, the 35 Super C stores had sales of $630 million.

In 1992, Metro purchased 48 of 120 Steinberg supermarkets (the remaining outlets were sold to Provigo). "They were in terrible shape when we bought them and we had to spend about $50 million just to bring them up to Metro-Richelieu standards," Lessard recalled. "We also had to upgrade the merchandise to keep the clientele from shopping elsewhere."

As for possible expansion into the U.S. market, Lessard said it's out of the question given the current value of the Canadian dollar. "Besides, there's already consolidation going on there in the food-distribution business."

Lessard doesn't hesitate when asked to account for Metro-Richelieu's overall success. "We're close to our customers and give them what they want. Service is a very important part of the grocery business and we're very good at what we do."

Chronology of Growth

In 1947, 19 independent stores formed a buying group called LaSalle Stores that would allow them to offer their customers products at prices comparable to the major food chains.

In 1952, the group, numbering 43 members, changed its name to Les Epiceries LaSalle Groceteria, reflecting changes in the food industry to self-serve stores. The group decided to take advantage of joint advertising to go along with the benefit of their joint buying power. The experience proved so successful, it led to the decision in 1956 to create a new banner -- Metro -- the name of the new subway system being considered for Montreal. By 1961, LaSalle Groceteria had 133 members, of which 31 opted to keep the LaSalle name, while the remainder chose the Metro group. Metro started advertising on radio and published its first color circular in 1962.

In 1967, Metro-LaSalle formed an alliance with another group of retailers, Epiceries Richelieu, to create a jointly managed meat-distribution company.

In 1975, Metro and Richelieu joined again, becoming equal partners in Jardin Merite, a distribution center for fresh fruits and vegetables and frozen products. The following year, the two companies merged to become Metro-Richelieu Inc.

In 1981, Metro-Richelieu announced another merger, this time with Epiciers Unis Inc. (United Grocers). The merged entity united 900 food stores and became the largest association of grocers in Canada.

In 1992, Metro-Richelieu acquired 48 Steinberg stores. There were now 1,200 stores under the Metro-Richelieu umbrella.

In 1994, Metro-Richelieu introduced Norois beer, the first private-label beer in Quebec, and by 1996, its various banners offered 1,850 house-branded food items.