Métro Inc.

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Métro Inc.

11011 boul. Maurice-Duplessis
Montreal, Quebec H1C 1V6
Canada
Telephone: (514) 643-1000
Fax: (514) 643-1215
Web site: http://www.metro.ca

Public Company
Incorporated: 1947 as Magasins La Salle Stores Limitée
Employees: 10,500
Sales: CAD 6.69 billion ($5.76 billion) (2005)
Stock Exchanges: Montreal Toronto
Ticker Symbol: MRU.SV.A
NAIC: 445110 Supermarkets and Other Grocery (Except Convenience) Stores

Métro Inc. has emerged as a driving force in the consolidation of Canada's retail food sector. The Quebec-based company, the number two food retailer in that market, has successfully expanded outside of its home region to become Canada's fifth largest supermarket group. Since its acquisition of The Great Atlantic & Pacific Tea Company of Canada (A&P Canada) in 2005, the company also ranks number two in the Ontario market. Formerly known as Métro-Richelieu, the company's retail network includes nearly 575 stores under the following main banners: Métro, Métro Plus, Loeb, A&P, Dominion, and The Barn Markets, as well as discount store brands Super C and Food Basics. Métro supports its retail operation with its own range of private-label goods, under the Merit Selection, Irresistible, and Super C brands, as well as its own meat processing facility. The company is also a major pharmacy operator, with 256 Brunet, Clini Plus, The Pharmacy, and Drug Basics pharmacies. Métro has set a goal of building its position to number two in Canada during the 2000s. The company is listed on the Ontario and Montreal Stock Exchanges. Métro is led by Chairman Maurice Jodoin, and President and CEO Pierre Lessard. In 2005, the company's revenues reached CAD 6.7 billion ($5.76 billion). Following the integration of the A&P Canada operation, however, Métro's sales were expected to top CAD 11 billion.

COOPERATIVE ROOTS IN THE 1940S

Although Métro-Richelieu has diversified from its historical focus on wholesaling, it retained vestiges of its cooperative roots. Retailers who operated under the Métro and Marché Richelieu marquees were required to invest in Métro-Richelieu Inc. stock. In the early 1990s, more than half of the 480 independent retailers affiliated with its wholesale business were also shareholders with privileged voting rights and a significant enough stake in the company to control its board of directors.

The company was incorporated in 1947 as Magasins la Salle Stores Limitée. Later known as Métro Food Stores Ltd., the firm evolved in the late 1970s and early 1980s into a leading competitor in Quebec's retail food industry through a series of mergers uniting several grocery cooperatives. In 1976, the group merged with Épiceries Richelieu Limitée to form Métro-Richelieu Inc. The name changed to Métro-Richelieu Group Inc. in 1979. In 1982, Métro-Richelieu acquired and merged with United Grocers Inc. to form United Grocers Métro-Richelieu Group Inc. These amalgamations created Quebec's third largest grocery company, a firm with 75 percent of its volume concentrated in wholesale distribution for its 660 affiliate-shareholders.

The formation of these cooperatives helped independent supermarketers retain their autonomy while enabling them to compete with such larger rivals as Loblaw Co. Ltd. and Provigo Inc. Co-ops pooled warehousing and distribution, thereby eliminating the middleman and cutting overhead. Shared promotions saved money and increased marketing and advertising clout. Since affiliates were required to own stock in the cooperative, they also were entitled to a share of its profits.

The evolution and growth of Métro-Richelieu Inc. (the name was shortened in 1986) was a manifestation of declining population growth in the province, the maturation of the region's food distribution market, and the intensified competition that resulted. By the early 1980s, Métro's merger strategy had earned it a third-place ranking among Quebec's wholesale food companies. By that time, the wholesaler was racking up more than $1 billion in sales and $2.5 million in profits.

In spite of its efforts to build up a strong presence, Métro-Richelieu suffered a stunning reversal in 1985, losing $417,000 on sales of $1.3 billion. Jacques Maltais, a relative newcomer to Métro with only three years' experience, advanced to the wholesaler's presidency that year. Maltais proposed a sweeping "modernization program" that encompassed Métro's organizational scheme, its operations, and its growth strategy. The first part of Maltais's plan entailed the partial dissolution of the cooperative organizational scheme. The company went public with the sale of $27.5 million in subordinate voting stock, but remained under the control of its grocer-affiliates. Part of this capital infusion went toward technological upgrades, including the installation of electronic point-of-sale systems, store renovations and expansions, and other enhancements.

Following the lead of Quebec grocery industry leader Provigo, Inc., Métro-Richelieu also undertook a diversification program in the late 1980s. Maltais reasoned that geographic and product diversification would shelter the food company from economic cycles and supplement its skinny, but typical, 1 percent profit margins. According to a December 1986 Globe and Mail article, the new leader's plan enjoyed "a clear mandate from his controlling shareholders." Over the course of just one year, 1987, the company bought into restaurant and sporting goods chains, pharmaceutical wholesaling and retailing, institutional foodservice, and its own chain of retail supermarkets.

Analysts (who enjoyed the 20-20 vision of hindsight) later characterized the diversification program as a miserable failure. Four of the seven acquisitions were divested within five years of their purchase, and Métro-Richelieu incurred back-to-back losses in fiscal years 1989 and 1990 totaling more than $25 million. The acquisition policy also cost President Maltais his job; he quit early in 1990. Marcel Guertin, who had maintained his position as chairman throughout the crisis, assumed the additional role of interim CEO, and Jacques Obry became president and chief operating officer.

COMPANY PERSPECTIVES

Our vision is to create, over time, value for our shareholders. Increased earnings, dividends and share value constitute the heart of this vision. Our strategies extend across several axes: Maintaining a retail network ranking among the most modern and competitive in the various segments in which we operate; Establishing management and operational methods to increase both our efficiency and our profitability; Training and developing our employees in order to ensure our continuity and expansion; Aiming for a solid financial position; Remaining poised to take advantage of opportunities to expand our share of the food and pharmaceutical markets.

Métro-Richelieu recruited two former executives of its primary competitor, Provigo Inc., and hired them in the fall of 1990. Pierre Lessard had served as Provigo's president for nine years when he resigned in 1985 after being "passed over" when the CEO's position came open. Lessard was characterized as a "cautious, conservative" leader who focused on the basics of the grocery industry: increasing volume and returns. In fact, some industry observers correlated his lack of daring with his lack of progress at Provigo, but by the early 1990s that "flaw" had become a virtue. H. Paul Gobeil formed the other half of the new management team. Gobeil did "doubleduty" during the early 1990s, dividing his work week between Métro-Richelieu's vice-chairmanship and his previously held chairmanship of Royal Trust Co. Called "a firm believer in deficit reduction," Gobeil was put in charge of financial planning. Both aged 48, the partners had worked together at Provigo for almost a decade before going their separate ways in 1985.

NEW DIRECTION IN THE 1990S

Under new direction, the company divested its restaurant and retail sporting goods interests to concentrate on the food and drug businesses. The companies that Métro retained from its ill-fated diversification evolved into vital contributors to the parent company's bottom line. La Ferme Carnaval Inc. had been acquired from Burnac Corp. for $135 million (half cash, half shares) in 1987. Founded in Quebec City in 1982, it had previously been a customer of Métro's warehouse operations. Within just five years, the supermarket chain had captured 20 percent of its hometown retail food market and expanded into Montreal. Although La Ferme Carnaval had been partly to blame for Métro's poor performance, Lessard and Gobeil elected to keep the discount grocery chain. Its positive contributions included the addition of 12 Super Carnaval stores. Carnaval also gave Métro a foothold in the fledgling warehouse/discount sector and vaulted over struggling rival Steinberg Inc. to become Quebec's second largest food retailer.

McMahon-Essaim Inc., a wholesale pharmaceutical distributor acquired for $6 million in 1986, also grew under Métro-Richelieu's custody. Over the course of its eight years in the Métro family, the company's sales increased from about $50 million to $186.3 million. An aggressive franchising program for the division's Brunet drugstores helped it evolve into the second largest player in the provincial pharmacy market by the early 1990s.

In 1992, the tough Quebec food market claimed a major victim, number three chain Steinberg Inc. The three largest remaining competitors (according to rank)—Provigo (which was renamed Univa, Inc. that year), Métro-Richelieu, and Oshawa Group Ltd.'s Hudon et Deaudelin Inc.—divided the spoils of the decade-long battle for the provincial market among them. Métro-Richelieu bought 46 of Steinberg's 102 stores for slightly more than $100 million. The new locations were an instant boon; Métro-Richelieu's profit rose 153 percent in the first quarter of 1993.

From 1990 to 1994, in fact, Métro-Richelieu's sales increased 33 percent, from $2.19 billion to $2.91 billion. Net earnings quadrupled during the same period, from a deficit of $9 million to a $37.2 million profit. The company also was able to reduce its long-term debt load by almost 75 percent, from $184.4 million to $46.7 million, thereby freeing up funds for capital investment. Part of the company's success was attributed to an advertising campaign begun in 1991. The ads, which featured the tagline, "Métro, grocers by profession," won numerous accolades from regional, national, and even international industry organizations.

KEY DATES

1947:: Magasins la Salle Stores Limitée is created (later known as Métro Food Stores Ltd.).
1976:: The company merges with Épiceries Richelieu Limitée and becomes Métro-Richelieu Inc.
1982:: The company acquires United Grocers Inc. and changes its name to United Grocers Métro-Richelieu.
1986:: The name is shortened to Métro-Richelieu and the company launches a diversification strategy into the restaurant sector and retail sporting goods, leading to several years of losses.
1987:: The company acquires discount grocery chain La Ferme Carnaval, including Super Carnaval stores.
1990:: New management ends the diversification effort, selling off the restaurant and sporting goods holdings to refocus the company on food and pharmacy operations.
1992:: The company acquires 46 stores from the failed supermarket chain Steinberg.
1994:: The company launches private-label brands, including Norois beer.
1999:: The company acquires 51 Loeb stores, marking its first entry into the Ontario market.
2000:: The name is changed to Métro Inc. as part of a new strategy to develop into a national Canadian supermarket leader.
2002:: The company acquires Grossiste Sue Shang, a wholesale distributor in Quebec.
2003:: The company acquires Alexandre Gaudet Ltee., a wholesaler serving the small format grocer circuit; the new store format Maxi Plus is launched.
2004:: The company acquires 15 Gargon stores in Quebec City area.
2005:: A&P Canada is acquired, boosting sales by more than CAD 4.6 billion.

Métro placed increased emphasis on its private label (or house brand) program in the 1990s. Private-label products enable retailers to offer their customers a consistently low-priced product, yet retain higher profit margins for themselves. By the early 1990s, Métro-Richelieu's own-label program included more than 1,500 products. In 1994, the company launched two new private lines: Éconochoix bargain-priced items and the controversial Norois Premium beer. Retailing at 12 percent less than its next-lowest-priced competitor, Métro's brew was the lowest-priced beer in the province. But Canada's beer establishment was quick to counter this incursion. Molson, Labatt, and the Quebec Brewers' Association filed a lawsuit to stop sales of the beer. Although sales of the brew were halted in 1994, an intermediate ruling allowed Métro to resume sales in 1995 pending a final decision. By mid-year, it was estimated that Norois had captured 2 percent of home consumption sales in the province.

CONSOLIDATION LEADER FOR THE NEW CENTURY

Métro-Richelieu entered 1995 with a bankroll of $32 million intended for renovations, store expansions, and construction of new stores. The company was in a strong competitive position, having increased its market share from 25 percent in 1990 to 32 percent in 1995. It appeared poised to capture the top position in the provincial food market from longtime rival Univa, which remained hobbled by heavy diversification-related debt. By the spring of 1995, Lessard was confident enough to reinstate the company's dividend for the first time since 1990.

The company soon faced a new threat, however, as another of Canada's major supermarket groups, Loblaw, based in Toronto, announced its intention to enter the Quebec market. That occurred in 1998, when Loblaw acquired Provigo Inc., which operated under the Maxi and Maxi & Co. banners. Provigo also operated some 90 stores under the Loeb banner outside of Quebec. That same year, another major, Sobeys, took over Quebec's Oshawa Group, and its IGA store network.

Lessard recognized that Métro would have to launch its own expansion effort, and especially position itself as a leading player outside of the Quebec region. This led the company to buy part of the Loeb supermarket chain in 1999, paying Provigo CAD 85 million for 51 stores in Ottawa and northeastern Ontario, as well as the exclusive rights to the Loeb name, and a number of distribution centers in the region. The move represented Métro-Richelieu's first entry into the most populated region in Canada. As a result of the company's expansion outside of Quebec, and in confirmation of its determination to build itself into one of the top Canadian supermarket groups, the company changed its name to Métro Inc. in 2000.

By then, Métro had also expanded its range of private-label foods, rapidly building its portfolio beyond the Norois beer brand to include a range of some 1,000 products. In keeping with the group's national ambitions, the private-label lines, originally branded as Le Choix Evident and Marche Richelieu, were rebranded under the single Merit Selection name. At the same time, Métro began redeveloping the Super Carnaval format as a discount format, Super C. The company began opening Super C stores in the Ontario market as well, converting a number of Loeb stores there.

Into the mid-2000s, Métro emerged as a driving force behind Canada's continuing grocery sector consolidation. In 2002, the company bought up Grossiste Sue Shang Inc., a Quebec-area wholesale grocery distributor serving the independent grocery circuit. The following year, Métro purchased Alexandre Gaudet Ltee., another wholesale distributor serving primarily smaller grocery shops. That acquisition boosted to 2,000 the number of stores supplied by Métro's wholesale division. Meanwhile, Métro launched a new store format in 2003, the Maxi Plus, featuring an "ultra-modern" format including specialty shops, as well as an extensive organic food section. The format proved successful, leading to a rapid rollout, including 12 new Maxi Plus stores in 2004 alone.

Métro continued acquiring scale into the mid-decade. In 2004, for example, the company purchased 15 Gargon stores in the Quebec City area, adding another CAD 165 million in sales to its Quebec operations. While that purchase was relatively modest, the company was already preparing a greater coup. In 2003, the company announced its interest in acquiring the Canadian operation of the Great Atlantic and Pacific Tea Company Ltd., more popularly known as A&P, should its U.S. parent ever consider a sale.

By 2005, Métro had its way, and the company acquired A&P Canada in a deal worth some CAD 1.7 billion. Through that purchase, Métro gained some CAD 4.6 billion in additional turnover, through a nationally operating network of 234 stores. The company's newly expanded operation included 132 Dominion, A&P, and The Barn Markets supermarkets, and 102 stores under the Food Basics discount format. The addition of A&P was expected to boost Métro's total sales past CAD 11 billion, while providing operational synergies of as much as CAD 60 million per year. Métro had emerged as one of Canada's true supermarket leaders for the new century.

PRINCIPAL SUBSIDIARIES

Épiciers Unis Métro-Richelieu Inc.; La Ferme Carnaval Inc.; McMahon-Essaim Inc.; Alimentation Dallaire St.-Romuald Inc.

PRINCIPAL COMPETITORS

Empire Company Ltd.; Sobeys Inc.; Alimentation Couche-Tard Inc.; Costco Wholesale Canada Ltd.; Canada Safeway Ltd.; Westfair Foods Ltd.; North West Company Fund; Calgary Co.-Operative Association Ltd.