CONSOLIDATION HEATS UP IN CANADA

ELLIOT ZWIEBACH

TORONTO -- It was a big year for Canadian consolidation, and there's still more to come.

Consolidation activities in Canada ramped up late last year, with Loblaw Cos. here making an unsolicited but successful offer to acquire Montreal-based Provigo in December to strengthen its position in Ontario and give it a major presence in the Quebec market.

In a separate transaction, also in December, Loblaw picked up 198 stores and two distribution facilities from Sobeys, Stellarton, Nova Scotia, which extended its reach into the Maritime Provinces for the first time.

A month later Sobeys completed its acquisition of Oshawa Group here, enabling it to move beyond the Maritimes to enter Ontario and Quebec for the first time; and in May Metro-Richelieu, Montreal, picked up 41 Loeb stores in the Ottawa area that were spun off by Loblaw, giving it entry into the Ontario market.

These transactions left Loblaw with 32% of the Canadian market, Sobeys with 17% and Metro-Richelieu with 7%, local sources indicated.

According to securities analysts here, both Loblaw and Sobeys are better operators than either Provigo or Oshawa and they both intend to open larger stores in under-served areas and pump new merchandising life into smaller operations.

"Both companies operate better mousetraps, and they are taking over businesses that had been neglected and poorly run, with little capital infusion," Warren Fenton, an analyst with Dundee Securities Corp. here, told SN. "As a result we should see major improvements in the quality of food stores as both companies spend money to fix up the stores they've acquired.

"And as long as Wal-Mart stays out of the picture, the new ownerships should be able to maintain the kind of price stability that we've had in Canada for the last three or four years," he added.

Metro-Richelieu is also likely to do a better job of execution at the Loeb stores in Ottawa, "but with only two players in that market -- Loblaw and Loeb -- it will be an uphill battle," Fenton said, "and there's a good possibility someone will take Metro-Richelieu out of the picture in the next 12 to 18 months, or even sooner."

However, Dominick Dlouhy, president of Dlouhy Investments, Montreal, said Metro may have a window of opportunity -- while Loblaw and Sobeys are busy upgrading their newly acquired stores -- to improve its sales and margins.

According to both analysts, the conventional Provigo stores and the larger Maxi stores that Provigo operated and the IGA and other banner stores operated by Oshawa tend to average 20,000 square feet or smaller, and the new owners will put money into building larger stores and remodeling older, smaller ones by beefing up their perishables sections.

Loblaw has already begun putting its stamp on its newly acquired stores by introducing its President's Choice private-label line -- a business relatively new to the Quebec market, Fenton pointed out.

Both analysts said they agree the mergers of the past few months have merely set the stage for another round of consolidation in the next few years.

"You still have six large companies left, and it's likely that at some point we'll get down to just two or three players at most," Fenton said.

Besides the two national chains -- Loblaw and Sobeys -- and Metro-Richelieu, the other major players in Canada are Overwaitea Food Group, Langley, British Columbia in western Canada, and two American companies -- Safeway, Pleasanton, Calif., which operates in western Canada and Ontario, and A&P, Montvale, N.J., which operates its Food Basics division in eastern Canada.

Dlouhy said it's possible an outside player from the United States or Europe could form a third national chain by acquiring one of the regional operators and then waiting for others to become available -- perhaps combining Metro-Richelieu, Overwaitea and A&P, he suggested.

"But Canada is like a hot dog -- long and thin, with the population base spread out in more or less of a straight line across the country -- and that has discouraged European companies from coming here," Dlouhy said.

According to Fenton, Loblaw, Sobeys and possibly Safeway are the most likely longterm survivors.

One factor that could create further Canadian consolidation, Dlouhy said, is Wal-Mart, which has already established a Canadian presence and is likely to expand its operations.

However, Wal-Mart's growth in Canada may be limited by a lack of available sites, Dlouhy pointed out, which could prompt it to form strategic alliances with existing players "because it's easier to expand stores that are already built than to find virgin land," he said.

Another option might be for Wal-Mart to buy one of the existing operators, possibly Metro-Richelieu, Dlouhy suggested.

Fenton said Metro-Richelieu might already be for sale, with potential buyers probably coming from the ranks of companies already involved in wholesaling, including Loblaw, Sobeys and A&P. "And Supervalu's name has surfaced in the last six months," he added.

Canadian sources said another possible buyer for Metro-Richelieu is Netherlands-based Ahold, which could expand into Quebec as a natural extension of its East Coast holdings in the United States. Ahold reportedly expressed some interest in Oshawa when it was still available, observers told SN.