MONTREAL — When Metro Chairman Maurice Jodoin opened the floor to questions during the retailer's annual meeting here in January, the first person at the microphone was Yves Michaud, a shareholder rights activist with an axe to grind.
Michaud has a reputation of giving a sermon before asking questions, and he didn't disappoint. Citing Henry Ford, among others — who said the top job shouldn't pay more than 40 times the lowest-paid company worker — Michaud claimed President and Chief Executive Officer Pierre Lessard's 2.2 million unexercised stock options, worth about $31 million, was “stratospheric” and “indecent.”
“There's no one in Quebec, in Canada, smart enough, competent enough, to earn that kind of money,” said Michaud.
Jodoin was quick to defend his CEO, pointing out that Canada's No. 3 grocer by sales was losing money and its bankers were nervous before Lessard joined the company in 1990. Since then, Metro has recorded 17 consecutive years of profitability.
“At first, his options were worth nothing. He was paid less than his peers. He's an entrepreneur who took a risk, and now he is being rewarded,” said Jodoin.
Metro shares are trading around $33, up 28 per cent in the last year. (All figures have been converted from Canadian to U.S. dollars at the current exchange rate.)
And fiscal 2007 got off to a good start, with first-quarter profit up 112% from a year ago.
By contrast, Toronto-based industry leader Loblaw Cos. is trying to reinvent itself countrywide, and Sobeys, based in Nova Scotia, has struggled with its operations in Ontario and is itself involved in an expensive business process change, said Perry Caicco, an analyst for CIBC World Markets in Toronto.
So what is Metro doing right? It's employing a relatively simple formula of being very focused on its customer base, according to Caicco.
“They only run two kinds of store formats — fresh and discount — and do a good job in a limited area. They don't try to go beyond their abilities,” Caicco said. “They also have a little drug and wholesale business, but it's tied into their core business in Quebec, and they've never strayed away from that, until recently with the purchase of A&P's Canadian stores.”
That $1.5 billion acquisition in July 2005 gave Metro 236 A&P and Dominion stores in neighboring Ontario, resulting in bigger synergies than expected. The projected savings over two years was $50 million, but that target has been revised to $67 million.
“They bought a company a lot like theirs — a simple, focused operation,” said Caicco.
“Historically, the parent company has not been in great shape, so A&P Canada had very little capital to work with — so they had to be very good at what they did.”
Metro is also popular with investors, because it frequently exceeds expectations, makes considerable cash and pays down debt very aggressively, sources said.
For the first quarter, which ended Dec. 23, Metro reported a 112% increase in profit, due in part to savings from the integration of the A&P stores. The retailer said it earned $57.5 million, or 49 cents a share, during the period, compared with a profit of $27 million, or 28 cents a share, a year earlier.
Like its major competitors, Metro will be impacted by the arrival of Wal-Mart supercenters in Canada. The Bentonville, Ark.-based retailer has begun opening supercenters in Ontario and is expected to eventually spread to Quebec. But Metro won't be dealt a crippling blow, according to Caicco.
“It has proved it can defend its territory against larger competitors, such as the arrival of Loblaw in Quebec — and they'll do it again using the same strategy, which is to make sure the pricing gap is reasonable, and focus on giving the better customer experience in the fresh stores and a simpler, more convenient customer experience in the discount stores,” Caicco said.
But he cautioned against rushing out to buy Metro shares, since it faces a couple of tough years, as pricing is starting to come down where Wal-Mart has opened supercenters.
“Wal-Mart is not pricing that aggressively compared to the U.S. The issue is square footage, and they're adding a lot of square footage, and people are trying to defend their turf through pricing.”
As far as other acquisitions for Metro are concerned, Caicco said it's a non-starter.
“There's just nothing out there, and if it does happen, it's a long way down the road.”
Another Toronto analyst agreed, noting that the only potential candidates are Safeway and Overwaitea, both in western Canada, but neither is for sale.
“If there's a changing of the guard at Safeway, they may review their Canadian operations. The head of Overwaitea is also getting on in years, but it's a cash cow, so it would be expensive,” said the analyst, who requested anonymity.
As for Loblaw, he said it has floundered by undergoing a significant amount of change in a relatively short period.
“When Loblaw bought Provigo's 130 stores in Quebec, they never figured out how to operate the banner properly,” the analyst said. “In addition, their average size of 21,000 square feet is small compared to the average-size Loblaw store of 85,000 square feet.”
And when Loblaw entered the Quebec market a few years ago with its own banner, the grocer felt the consumer would embrace them and leave Metro and IGA behind, which hasn't happened, the analyst added. “The Quebec consumer has the best choice of fresh offerings of any consumer in North America, because Loblaw set the bar high and others followed.”
Loblaw knows it has problems and plans to fix them. At a February meeting with investors and analysts, Executive Chairman Galen Weston Jr., son of Chairman Galen Weston Sr., said “virtually every key driver” of the retailer's business needs to be improved. He also noted that the availability of merchandise is poor and overpriced compared with the competition. The company plans to draw up a list of 700 items on which it claims it will never be beaten on price.
Loblaw also plans to revamp the Real Canadian Superstore format in Ontario, putting in longer checkout belts to get customers through checkout lines faster, and better supply chain management and inventory control to ensure there are no gaping holes on store shelves, a common complaint lately.
Weston said Loblaw won't build new stores, except for those already on the drawing board, until “the economics of the new store formats are proved.” The retailer wants to see sales growth of 5%, profit growth of 10% and cash flow of $215 million beginning in fiscal 2008.
“Loblaw now concedes it has underinvested in its supply chain and information technology, and the bulk of its investments have been in its stores,” the analyst said. “It has the best stores and best locations, but not the backbone to support them.”
While Canada's conventional supermarket chains appear to be fiercely protective against the arrival of Wal-Mart, some observers don't see Wal-Mart becoming quite a threat to the industry as it became in the U.S.
According to the unnamed analyst, 230 of Wal-Mart's 260 Canadian stores already sell dry groceries, so adding fresh items only represents a small percentage increase. He echoed Caicco's position that Metro will defend its territory vigorously against a larger competitor.
“And the Canadian market is less segmented than the U.S. market, which means Wal-Mart could have a tougher time here,” the analyst added. “In Canada, Loblaw, Metro and Sobeys have about 70% of the market, whereas the big three in the U.S. have no more than 30% market share.
“Wal-Mart is No. 1 in grocery sales in the U.S., compared to just 6% in Canada,” the analyst added. “They're aware of the critical mass in Canada and recognize their opportunities here are more limited. So supercenters could fail here, because they've gone into other markets and have pulled out.”
Regardless how many supercenters Wal-Mart plans to open in Ontario and Quebec, Metro doesn't take any competition lightly, said Eric La Flèche, executive vice president and chief financial officer.
He noted the grocer has two successful store formats: the conventional chain operating under the Metro, A&P and Dominion banners, and the discount banners Super C in Quebec and Food Basics in Ontario.
“Our food basket is very competitive. It's a question of execution, and we have more outlets, so the convenience helps. And most of our Food Basics are located in urban centers, where Wal-Mart is not located.
“But they're still additional competition, so we have to be sharp and focused, which is what we're known for.”
