Metro says food basket inflation hit 5 per cent in second quarter; CEO warns of more price pain to come

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Canadian shoppers have been making more trips to discount stores, buying cheaper cuts of meat, and trading brand-name products for store brands as they try to stretch their dollars further and fight the sting of inflation. But there is more pain to come, as prices will continue to rise, the chief executive officer of one of Canada’s largest grocers says.

“What we’re seeing or hearing from our suppliers, we have experienced cost increases over the last several months, and we are hearing noise that there will be more coming,” Metro Inc. CEO Eric La Flèche said on a conference call with analysts on Thursday to discuss the company’s financial results.

Metro reported on Thursday that food basket inflation at its stores was 5 per cent in the second quarter, up from 3.5 per cent in the prior quarter.

The results came the day after Statistics Canada reported its latest inflation numbers on Wednesday, showing the consumer price index rose by 6.7 per cent in March, compared with a year earlier, the highest rate in 31 years. The price of groceries rose 8.7 per cent in March, according to Statistics Canada, which was the largest increase in 13 years. Metro’s quarterly numbers reflect the 12-week period ended March 12.

The Montreal-based grocer is not alone in facing price increases. Discount retailer Dollarama Inc. recently said it was raising prices on some items, and announced it would introduce new price points up to $5, a hike from its previous $4 maximum. Grocers and suppliers have been in sometimes-tense negotiations in recent months over how to shoulder the burden of rising costs, as prices for raw materials have risen, shipping-container shortages have pushed up the cost of ocean freight, and prices have also increased for both fuel and labour to ship goods by truck.

Those tensions came to light in February when a dispute between Loblaw Cos. Ltd. and snack-food giant Frito-Lay became public. With an impasse in talks over cost increases, the PepsiCo-owned manufacturer stopped shipping products such as potato chips to the country’s largest grocer. The dispute was recently resolved.

Last month, Michael Medline, CEO of Sobeys owner Empire Co. Ltd., said the number of price-increase requests from suppliers had reached a higher level than retail executives have seen in their careers – but in many cases the requests have been justifiable, he added.

On Thursday, Metro’s Mr. La Flèche said that the cost pressures affect everyone.

“We will sit down with our suppliers, we will see exactly what’s justified and how fast, and what can be done,” he said. “It’s a difficult environment. … We have to manage the cost increases as best we can to protect value for the customers, and protect volumes at retail.”

In its earnings release, the company warned that inflationary pressures and labour shortages could put pressure on profit margins if they are prolonged. Its gross margin for the second quarter stayed relatively steady at 20.1 per cent, compared with 20.2 per cent in the same period the prior year.

“Although inflation has been a tailwind for grocers’ top-line growth, it will be important to monitor how much of higher cost of goods they are able to pass through to consumers and the impact of higher prices on consumer behaviour, trading down within categories, from fresh to frozen and perhaps a heightened shift to private label,” Bank of Nova Scotia analyst Patricia Baker wrote in a note on Wednesday, in response to the Statscan report.

Metro’s net earnings grew to $198.1-million or 82 cents a share in the second quarter, compared with $188.1-million or 75 cents the prior year.

The company, which owns grocery chains including Metro, Super C and Food Basics, as well as pharmacy chain Jean Coutu, reported that sales grew by 1.9 per cent in the quarter to $4.3-billion.

Same-store sales – an important metric that tracks sales growth not tied to new store openings – rose by 0.8 per cent at the company’s grocery stores in the quarter. That modest increase follows gains made in the same quarter last year, when the company reported a 5.5-per-cent increase in same-store sales compared to 2020 thanks to a higher-than usual level of sales during the pandemic. Metro’s online food sales also grew by 5 per cent in the quarter, compared to a prior-year quarter when online sales surged by 240 per cent.

The company reported pharmacy same-store sales grew by 9.4 per cent, driven by higher prescription drug sales, COVID-related services such as distributing rapid tests, and stronger demand for products during the cough-and-cold season than in the prior year. The results compared with a period in 2021 when sales were affected by a ban on sales of non-essential products.

Last week, Metro resolved a labour dispute at a distribution centre in Toronto, reaching an agreement after a one-week strike. More than 900 workers ratified a new collective agreement that will result in average wage increases of 15.8 per cent over 4.5 years. On Thursday Metro reported that the costs of the strike and the new agreement will have an estimated $10-million pretax impact on its third-quarter results.

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