‘Too fast, too high:’ Metro warns inflation could soon eat into profits

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Metro Inc., Canada’s third-largest grocer, is bracing for another wave of cost increases from suppliers as surging food inflation threatens to cut into the company’s profit margins.

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In an earnings update on April 21, Metro reported a 5.3-per-cent increase in quarterly profit but warned that more inflation and labour shortages could force the company to make tough decisions on whether to trim margins or charge more.

Since last year, grocery chains have been facing a flood of requests from suppliers looking for more money to make up for increases in ingredient, transport and packaging costs.

“We’re hearing noises that there will be more coming,” Metro CEO Eric La Flèche told financial analysts on a conference call. “It looks like inflation will be here for a little while longer. How long? I don’t know.”

Too fast, too high, is not good

Metro CEO Eric La Flèche

When suppliers ask for more money, Metro meets with them to determine whether the new price is “justified,” La Flèche said. If the request is fair, the next decision is whether Metro should pass those cost increases onto the consumer, and when. The risk, he said, is that too many increases too quickly will drive sales volume into the arms of Metro’s rivals in Canada’s competitive grocery market. So the company is under pressure to absorb increases with slimmer margins.

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“The acceleration of inflation is not something we like at all. Too fast, too high, is not good,” he said. “We have to manage the cost increases the best we can to protect value for the customers and protect volumes at retail.”

Metro, which also owns Food Basics and the Jean Coutu chain of Quebec pharmacies, decreased gross margin by 10 basis points to 20.1 per cent in the second quarter, from 20.2 in the same period last year.

“We continue to face higher than normal inflationary pressures and labour shortages which, if prolonged, could put pressure on margins,” Metro said in an update on the company’s outlook.

Metro booked quarterly profits of $198 million, up from $188.1 million in Q2 2021, on sales of $4.3 billion. Adjusted earnings per share grew 7.7 per cent to 84 cents, ahead of forecasts of 83 cents, according to a report from Bank of Nova Scotia analyst Patricia Baker. Metro’s same-store sales in food retail — a metric that gives a clearer year-over-year picture by removing results from recently opened or closed stores — grew by 0.8 per cent. Same-store sales in pharmacy grew by 9.4 per cent.

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Operating expenses dropped 5.5 million year over year, mainly due to an easing in pandemic-related expenses — though the company distributed $8-million in store gift cards to staff.

Baker expected Metro to take slightly thinner profit margins in the quarter, passing on “some, but not all, cost increases to consumers to remain competitive.”

The volume of products sold at Metro stores decreased slightly year over year, but the decline was offset by price inflation, leading to the rise in food revenues, Royal Bank analyst Irene Nattel said in a note to investors.

Metro shares were trading at $70.25, down about 2.6 per cent, at around 11 a.m. ET on April 21.

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There is a search for value happening

La Flèche

Metro’s second-quarter update comes amid the worst food inflation in 13 years, with grocery bills up almost 9 per cent in March compared to the previous year, according to Statistics Canada’s latest consumer price index. Metro’s internal gauge on food-basket inflation for the quarter was just below 5 per cent.

La Flèche said inflation continues to force consumers to switch to cheaper options, choosing private label over brand names or discount stores, like Food Basics, over more traditional, “full-service” banners like Metro.

“There is a search for value happening,” he said. “Our discount banners are growing nicely.”

The focus on value has created pent-up demand among shoppers, which is obvious any time Metro starts a promotion for a product that has been acutely impacted by inflation, La Flèche said. For example, beef prices, are up 14.1 per cent year over year, according to Statistic Canada’s April 20 report. And whenever ground beef is on sale in the Metro flyer, “volumes are very, very high.”

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But inflation is also driving up labour costs, he said. Earlier this month, Metro settled a week-long strike with more than 900 workers at its Toronto distribution warehouse. The deal includes an average pay bump of $2.25 per hour in the first year, up more than 8 per cent, according to Unifor, the union representing the Metro staff. Over the course of four and a half years, the deal will increase wages by almost 16 per cent and boost premiums for workers in freezers.

La Flèche said the extra $2.25 in the first year of the agreement was “higher than usual, mainly because of the current high-inflation environment.” But the union said the deal will “raise the bar for warehouse workers across Ontario.”

Metro is also paying higher salaries in general, as a way to retain staff and attract talent in the middle of a labour shortage across the industry. “Everybody is looking for labour,” he said. “It puts added pressure and that contributes to the inflationary picture.”

The strike cost Metro roughly $10 million, including costs for spoiled food, transportation and security at the picket line. The shutdown at the distribution centre in Toronto also meant Metro stores in Ontario were missing products in the lead-up to the Easter holiday.

“A strike is not good. Being short on product is not good,” La Flèche said. “Clearly we lost some sales in a big week.”

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