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As experts wait for a big move, Metro makes two smaller ones

Metro inks drugstore deal with Target, converts some Ontario stores to discount

Ever since Sobeys purchase of Canada Safeway in June, and Loblaw’s buyout of Shoppers Drug Mart in July, industry insiders have been waiting for Canada’s other top grocery chain, Metro Inc., to make a big move to bolster market share.

Yesterday the company made two moves. Neither were the acquisition-type game changers experts had been waiting for. But in their own way both announcements are significant.

In a nutshell, Metro is reorganizing its Ontario grocery store network and will also become the exclusive operator of Target's pharmacies in Quebec.

The Montreal-based company said that in Ontario 15 stores would be affected, including six Metro stores that will be converted to the Food Basics discount banner and up to three underperforming locations that will be closed over the coming months.

Metro said it will also offer buyouts to an unspecified number of unionized employees at the other Ontario stores affected as it aims to reduce its labour costs. It declined to say how much will be saved or how many people will be let go.

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``I am confident that this reorganization and investment will allow us to better meet customer needs, reduce operating costs and improve our performance,'' CEO Eric La Flèche said during a conference call with analysts Wednesday.

La Flèche said that stores affected by the reorganization were underperforming. In certain markets it makes more sense to operate under the Food Basics discount banner rather than the conventional Metro banner.

This past spring, two Metro stores, in London and Niagara Falls, Ont., were converted to Food Basics, with positive results.

That spurred Metro to examine which other conventional stores in Ontario might perform better as discounters.

“We’re satisfied that these are the right investments at the right time,” La Flèche said.

Stores converted to Food Basics will be closed for six to 12 weeks while renovations are done.

The company, which has some 150 Metro stores and 114 Food Basics in Ontario, said it will take a $40-million restructuring charge in its next quarter related to the reorganization.

A spokesperson for the United Food and Commercial Workers Local 175, Al McLean, said his union had not been told yet how many jobs will be affected or which Metro stores are to be converted to Food Basics.

However, he noted that under the collective agreement, Metro employees at stores that will be converted to Food Basics will have the option to take a buyout, move to another Metro store if they have sufficient seniority or continue working at the new Food Basics.

Employees at Food Basics stores earn less than those at Metro stores and have fewer benefits so workers who stay at converted stores will also receive a one-time payout equal to one and a half weeks pay for every year of seniority.

The bulk of unionized Metro store employees in Ontario belong to UFCW. Some are also represented by the Canadian Auto Workers union.

Meanwhile, Target Corp. will partner with a Metro subsidiary under an agreement announced Wednesday that will see Metro's pharmacy banner, Brunet, own and operate 18 pharmacies that Target will open next summer in Quebec.

The deal will raise its Brunet store count to 168 and nearly double its presence on the island of Montreal.

``This strategic partnership will enable us to significantly increase the presence of Brunet in Greater Montreal and represents a solid growth platform for our pharmacy business,'' La Flèche told analysts.

Metro has said it is interested in growing its pharmacy division, especially in Quebec. La Flèche said it will consider other expansion opportunities should they become available.

Minneapolis-based Target, which has acquired much of the space formerly occupied by Zellers, said it plans to open its first 25 stores in Quebec this fall.

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Only 18 will have pharmacies, but Metro will have the exclusive right to add other Brunet locations as Target expands its presence in the province.

Under Quebec law, individual pharmacists must own pharmacies.

Independent pharmacists supplied by Metro’s McMahon subsidiary, which also distributes pharmaceutical products, will run the Brunet locations inside Target stores.

McMahon will supply the prescription drugs and over-the-counter medicines while Target will provide its private-label brands.

Target consumers will also be able to access the Brunet banner’s exclusive MaSanté online tool, which provides personalized options to access their personal file online.

“Brunet’s reputation as a leader in promoting patient health and well-being, combined with its specialized product offering, makes Brunet the ideal strategic partner to help us deliver outstanding patient care in Quebec,” Tony Fisher, president of Target Canada, said in a statement.

Metro is the second major Canadian grocery chain with which Target has inked a deal. Frozen, dairy and other grocery items at Target's Canadian stores are supplied through an agreement with Sobeys.

Financial details of the Metro-Target deal were not disclosed.

Metro is facing increased pressure to expand following the recent deals by Loblaw to purchase Shoppers Drug Mart and Sobeys to buy Safeway in Western Canada.

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Quebec-based drugstore chain Jean Coutu Group and B.C-based grocer Overwaitea have been named as likely takeover targets, though it is not clear that these companies are even willing to be sold.

In a research note Thursday, Credit Suisse analysts David Hartley and Daniel Battison calculated that Metro would pay $1.1 billion for Overwaitea, including its stores and parent company's distribution business and stake in the Quality Foods chain, but excluding real estate. Overwaitea is owned by the privately held Pattison Group.

Experts have pointed out that the Sobeys-Safeway deal and Loblaw-Shoppers Drug Mart put Metro at a disadvantage. The company’s buying power is now much smaller than that of its two larger supermarket rivals.

Safeway, for instance, is part of the UGI buying group to which Metro also belongs. Once Sobeys wraps up its acquisition, Safeway will undoubtedly exit that group.

Speaking to analysts yesterday, La Flèche described the impact of Safeway leaving UGI as small. “And we are working to mitigate that impact.”

Metro's changes were announced Wednesday as it reported a third-quarter profit of $149.8 million or $1.55 per share, up from $144.4 million or $1.43 per diluted share a year ago.

However, sales slipped to $3.57 billion for the quarter ended July 6 compared with $3.6 billion a year ago.

Same-store sales decreased 0.9 per cent, but were flat excluding the loss of a day of business because Canada Day was in the third quarter this year.

``Top line growth is obviously a challenge in the current environment with no inflation in our basket, competitors adding square footage at a rapid pace and consumers shopping around more than ever,'' said La Flèche.

“We have to work very hard to get the full basket,” he added.

Analyst Irene Nattel of RBC Capital Markets said Metro delivered ``solid results,'' growing profits despite a same-store sales decrease.

She said investors will likely view Metro's announcement about Target ``as a signal that it is keep to grow the business.''

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La Flèche also pointed to investments the company is making, including in its Food Basics network in Ontario. By the end of the year, for instance, all Food Basics stores will have been upgraded to the company’s new produce merchandising program.

All other Metro stores and Super C discount stores in Quebec have already been converted to the program.

The Mediterranean grocery chain Marche Adonis (which Metro owns a majority stake in) opened its first store in Ontario just a few months ago and also recently added an urban store in downtown Montreal. Metro's Les 5 Saisons banner is also adding a new-format store in Montreal this week.

A digital coupon strategy is also being launched by Metro.

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