METRO DRIVES SYNERGIES WITH A&P

MONTREAL -- Three months after acquiring 356 stores in Ontario from A&P Canada, Metro here said last week it is on track to achieve synergies of $35 million Canadian by the end of its 2006 fiscal year and a total of $60 million a year later.In U.S. dollars, those savings would amount to $29.4 million over the next 12 months and $50.4 million over the 24-month period.When Metro closed the A&P deal

MONTREAL -- Three months after acquiring 356 stores in Ontario from A&P Canada, Metro here said last week it is on track to achieve synergies of $35 million Canadian by the end of its 2006 fiscal year and a total of $60 million a year later.

In U.S. dollars, those savings would amount to $29.4 million over the next 12 months and $50.4 million over the 24-month period.

When Metro closed the A&P deal in mid-August, it said it was anticipating synergies of $50 million Canadian ($42 million U.S.) over the two-year period.

Serge Gadbois, Metro's chief financial officer, told SN the company expects first-year synergies to come primarily from procurement improvements, while synergies in the second year will come from a combination of better operations at the A&P, Dominion and Food Basics stores, best practices across the company and additional procurement improvements.

Metro expects to complete the integration process before trying to improve store-level operations at the acquired stores, the company said. According to Pierre H. Lessard, chairman and chief executive officer, sales at the A&P stores are virtually unchanged from where they were when they were acquired. "At this stage, we're working on integrating those stores rather than boosting sales," he told analysts during a conference call to discuss financial results for the year and fourth quarter ended Sept. 24.

Speaking on the same call, Eric Richer La Fleche, executive vice president and chief operating officer, said Metro is concentrating most of its efforts right now on working with suppliers to reconcile any price differences between what Metro and A&P have been paying for the same products.

"There are instances of [supplier] resistance, for sure," La Fleche said. "But at this point we're only comparing costs between the two organizations. We're not asking for more than that at this stage, though in the next stage we will attempt to leverage our new volume and see what we can get."

The process of comparing prices is expected to take up to a year, La Fleche said, while efforts to achieve better pricing will come in the second year.

He said it would not be fair to indicate which chain was getting better pricing.

Gadbois told SN that Metro held meetings in early September with about 700 suppliers here and 1,000 suppliers in Ontario to make them aware of how it intended to proceed. He said the process of reconciliation could take up to a year "because some suppliers tell us different markets require different pricing or different transportation costs, whereas we want to pay a single price. So it's a process of negotiation."

La Fleche said he does not anticipate much store rationalization because of minimal overlap between the A&P and Metro stores. He said Metro expects to begin converting its Super C stores in Ontario to A&P's Food Basics banner starting in the second quarter. Super C currently operates with a combination of everyday-low and promotional prices.

Metro has no plans to convert its Super C stores in Quebec to the Food Basics banner "at this stage," La Fleche said. "We will learn what we can from Food Basics that we can transfer to Super C [in Quebec], but at this stage we have no plans to import all Food Basics offerings to those stores."

As for Metro's Loeb banner stores, La Fleche told analysts the company will retain the Loeb name in Ontario, although it does plan to remerchandise the stores late in 2006 to bring them more in line with A&P's Dominion banner. Gadbois told SN the company has not yet decided whether to convert the Loeb stores in Ontario to Dominion's high-low pricing program or to convert the Dominions to Loeb's combination of EDLP and promotional pricing.

In Ottawa, where Metro operates nearly 25 Loeb stores and only two A&P's, it will retain the Loeb banner "for the foreseeable future," La Fleche told analysts.

Metro will retain its three distribution centers in Ottawa for the Loeb business and some of the A&P and Food Basics volume, he said.

Gadbois noted there is sufficient capacity at those facilities to add more volume. Metro is also retaining five A&P distribution centers in Toronto, he said.

Metro has a two-year service agreement with A&P, at a cost of $20 million a year, to disengage the Canadian operations from A&P's U.S. information technology systems.

LaFleche said Metro is attempting to move some best practices from its stores to the A&P banners and vice versa. "For example, the in-store chef program at Metro will be installed at A&P under the name Fresh to Go, and A&P's 'Fresh Obsession' perishables program will be implemented at Loeb and some Metro-banner stores," he explained.

According to La Fleche, Metro has moved Alain Brisbois, senior vice president, procurement, to work with A&P's management team in Toronto and recruited Roland Goudrau, who worked at A&P before spending seven years at Wal-Mart Stores, to oversee the A&P operations in Ontario.

Metro said A&P contributed sales of $439 million U.S. during the last six weeks of the fourth quarter.

For the year ended Sept. 24, Metro said sales rose 16.6% to $5.9 billion U.S., with net income rising 12.8% to $159.6 million and same-store sales up 3.3%. For the 12-week fourth quarter, sales rose 39.3% to $1.6 billion, with net income up 11.1% to $42.1 million and comps up 3%.