01/31/2012 03:09 EST | Updated 04/01/2012 05:12 EDT

Metro to remain in the mix despite heightened Canadian pharmacy competition

MONTREAL - Canadian grocery chain Metro plans to maintain its pharmacy strategy despite industry consolidation and intensifying competition from U.S.-based rivals, its chief executive says.

"It's competitive but as a percentage of total pharmacies out there in Quebec and Ontario, it's not that big a deal," CEO Eric La Fleche said Tuesday in an interview.

"There a hundreds and hundreds of pharmacies out there already today so competition is strong already. It could get even more competitive but it's at the margins."

Retail giant Walmart continues to expand its Canadian presence by adding Supercentres with full pharmacies in Metro's home turf in Quebec.

Target announced plans Monday to operate franchise pharmacies at its Canadian locations next year. And California-based health-care giant McKesson Corp. said it will pay $920 million for part of the retail network of Edmonton pharmacy operator Katz Group of Canada.

McKesson will gain control of 850 stores across Canada that operate mainly under the I.D.A. and Guardian brands. It's also buying Katz's franchise business, which provides services to 160 Medicine Shoppe outlets across the country.

McKesson has been the primary pharmaceutical distributor to both businesses for years.

In addition to competing against Metro, the U.S.-based players will battle with Canadian pharmacy chains such as Jean Coutu (TSX:PJC.A) and Shopper's Drug Mart (TSX:SC), which are also trying to lure independent pharmacists.

Like other pharmacy operators, Montreal-based Metro (TSX:MRU.A), which has more than 250 drug dispensing outlets, has endured pressure from government fee cuts in Ontario and Quebec.

The cuts have hit Metro's revenues but the last of the reductions in generic prices will take place in April. It has adjusted by managing costs.

La Fleche said Metro still sees growth opportunities for the outlets which operate under the Brunet, Brunet Plus, Clini Plus, The Pharmacy and Drug Basics banners.

"It's a business that has a certain growth even with the new legislation that reduced generic prices. People age and use more medications so there's growth and it's a business we would like to grow," he said after Metro's annual meeting where shareholders eliminated the company's dual voting share structure.

The supermarket chain increased its quarterly dividend nearly 12 per cent to 21.5 cents per share after reporting higher profits and revenues in its latest quarter, fuelled by acquisitions and investments.

Metro boosted its first fiscal-quarter profits 8.6 per cent to $103.7 million, or $1.01 a share, beating analyst expectations.

That compared with year-earlier earnings of $95.5 million.

Sales for the quarter ended Dec. 17 rose 3.4 per cent to $2.7 billion from about $2.6 billion.

The company benefited from the acquisition of Adonis ethnic food stores last year and its investment in Alimentation Couche-Tard, Canada's largest convenience store operator.

Metro was expected to earn 97 cents per share on $2.73 billion of revenues, according to analysts polled by Thomson Reuters.

Irene Nattel of RBC Capital Markets described the results as "solid and a tick better than forecast."

Same-store sales for locations open at least a year increased by 1.7 per cent. That's slightly below her forecast and half the rate last quarter but more robust than the first three quarters of last year.

Meanwhile, Vishal Shreedhar of National Bank Financial said the McKesson deal allows the Katz Group to exit the small pharmacy focused independent franchise business which has been impacted the most by government drug reforms.

Katz could then use the proceeds to finance further acquisitions of independent operators as it focuses on its Rexall and Rexall/Pharma Plus stores.

"We believe that the read-through from these transactions is that pharmacy consolidation is underway," Shreedhar wrote in a report.

An adjacent transaction to acquire the 18-store Dell Pharmacies chain in southern Ontario with about $70 million in annual sales suggests Katz has no plans to sell its 420 corporate owned Rexall stores.

Analysts expect the retail food industry to face big challenges in 2012 with intensifying competition from Walmart ahead of the arrival in 2013 of Target.

Metro is a preferred food retailer for many industry observers. But the company's ownership stake in convenience store operator Alimentation Couche-Tard (TSX:ATD.B) is expected to face limited earnings growth because of weak consumer spending and high gas prices.

Canadians are expected to get a break at the supermarket cash register this year as the rise in food prices slows. A University of Guelph study forecast that general food prices will increase about two per cent from Dec. 1 through the end of November 2012.

In December, retail grocery price increases lagged Statistics Canada's food inflation, with Metro reporting 2.5 per cent increase.

The Canadian grocer recently moved to strengthen its appeal to ethnic shoppers by buying a majority stake in Marche Adonis, a Mediterranean-style retailer that's planning to enter the crowded Ontario market.

Metro is Quebec's leading grocery chain with nearly 34 per cent market share. It has more than 65,000 employees in Quebec and Ontario.

The company operates a network of close to 600 food stores under several banners including Metro, Metro Plus, GP, Super C and Food Basics, as well as over 250 drug stores.

On the Toronto Stock Exchange, Metro shares were up $1.10 at $54.26 in afternoon trading Tuesday.