BUSINESS

Metro to offer in-stock guarantee to lure discount customers to Food Basics

11/13/2013 10:39 EST | Updated 01/23/2014 06:58 EST
MONTREAL - Metro is launching a new in-stock guarantee this week to attract cost-conscious customers to its Food Basics chain in Ontario and better compete against the growing presence of discount rivals.

The supermarket chain is addressing a chief complaint of discount shoppers by becoming the first to offer a 10 per cent discount and rain check if items in the weekly flyer are out of stock.

The plan also promotes an existing refund policy if produce isn't fresh and will be accompanied by simpler pricing signage and a revamped circular backed up by a radio advertising campaign.

Food Basics is the second-largest discount grocery chain in Ontario with 116 locations, a number that is expected to grow to 124 by next September with the conversion of a number of Metro locations.

CEO Eric La Fleche said the discount program has been in the works for about six months in response to the growing competition.

"Are we late in the game? Maybe we could have done that earlier," he said in an interview after releasing fourth-quarter results. "It's a sign of competitive reality and we want to do better. Desperation I don't think that's the right word."

Metro Inc. (TSX:MRU) is trading near a nine-month low after the Montreal-based supermarket operator and one of its biggest rivals issued quarterly results showing the impact of intense competition.

Metro (TSX:MRU) shares fell $3.71 or 5.65 per cent to $62 after the company posted weaker quarterly earnings that missed expectations.

The supermarket chain, as well as long-time rival Loblaw Co. (TSX:L), said in separate financial reports Wednesday that they were being pressed by increased competition, especially in Ontario by as rivals such as Walmart, Target, Sobey's (TSX:EMP), Costco and others.

La Fleche said Metro's Food Basics strategy labelled "always fresh, always in stock and always great prices" should deliver stronger results going forward and help it to capture a "fair share" of the discount market.

Offering the in-stock guarantee requires that Metro gets its "ducks lined up" by ensuring that its supply chain operates smoothly to fill shelves, he said.

While Metro struggles amid tight competition in Ontario, the chain said it was maintaining its leadership position in Quebec, where it offers Super C discount stores, full-service Metro stores and the new Adonis banner selling Mediterranean foods.

Walmart and other discount competitors are less of a presence in Quebec where Metro holds about 33 per cent market share among grocers and 23 per cent among all retailers selling food. That compares with about 22 and 14 per cent respectively in Ontario.

"There's nothing happening in Quebec that should cause too much concern. The concern for me is more Ontario," La Fleche said during a conference call with analysts.

Still, he said the company is reviewing whether to add the in-stock guarantee to its discount banner in Quebec.

"We're going to see how it does in Ontario. It's an aggressive program. We'll see how we do, how much it costs and how much it resonates with customers and stay tuned," he added in the interview.

Metro expressed confidence in its efforts to control costs and reorganize its store network but its fourth-quarter results for the 12 weeks ended Sept. 28 were below analyst estimates.

It reported $83.6 million or 88 cents per diluted share of net income under standard accounting for the quarter, which had one week less than usual.

After adjustments, Metro earned $113 million or $1.19 per share from continuing operations, which was improved from last year but three cents short of analyst forecasts polled by Thomson Reuters.

In the comparable period of 2012, Metro earned $145.1 million or $1.46 per share during 13 weeks. Over 12 weeks, the adjusted profit in the 2012 fourth quarter was $112.8 million or $1.14 per share.

Metro's revenues were $2.61 billion in this year's fourth quarter. Adjusting the year-earlier results, the revenue was down 1.1 per cent from the fourth quarter of 2012.

For the full year, Metro earned $721.6 million including a $266.4-million gain from the sale of shares in Alimentation Couche-Tard. Adjusted profits from continuing operations were $478.4 million or $4.92 per share. That compared to $471.5 million or $4.66 per share a year earlier or $460.5 million and $4.55 per share for 52 weeks of activity.

Annual revenues for 2013 were $11.4 billion, down 2.3 per cent from $11.67 billion in 53 weeks of business a year earlier.

Irene Nattel of RBC Capital Markets said Metro's same-store sales decrease of 1.8 per cent was a sharp decrease from the third quarter as it lagged industry leader Loblaw (TSX:L).

"Metro's strong management of its cost structure enabled the company to moderate impact of negative operating leverage and deliver adjusted EBITDA close to in line despite weaker than anticipated top line performance," she wrote in a report.