EUR 850.00 For Business Accounts Only

Morningstar | Metro Lacks Competitive Advantage Amid Industry Headwinds

Metro is one of the largest grocery and drugstore operators in Canada; we estimate it has around 10% market share. About 80% of sales are derived from grocery through various banners (Metro, Metro Plus, Super C, and Food Basics) with the remainder from pharmacy. Metro acquired Jean Coutu in fiscal 2018, which expanded its pharmacy presence to around 20% of sales (versus just 10% before the merger) while also enhancing its scale and affording the opportunity to better capitalize on health and beauty trends. However, given the intensely competitive landscape and peers (Walmart, Costco, and Loblaw, to name a few) with vast resources, we expect profitability constraints to persist over our explicit forecast period, and we lack confidence that Metro will outearn its cost of capital throughout the next decade.Metro strives to differentiate its shopping experience by focusing on enhanced fresh and ethnic offerings (purchasing a 55% stake in Premiere Moisson bakery in 2014 and most recently MissFresh, a meal kit provider) and private label (which we estimate around 25% of sales) as well as its loyalty program, Metro & Moi. The firm works with Dunnhumby to glean insights from loyalty program data, not dissimilar to other retailers, but it has only leveraged data since 2009, versus narrow-moat Kroger, which has leveraged customer data for decades. Further, Metro is investing in its supply chain, recently spending CAD 400 million to modernize and automate its facilities. We view this as a prudent means to free up funds to reinvest to spur in-store traffic. However, in the aggregate, we see these investments continuing to make Metro competitive rather than driving a moat source.Metro acts as a franchiser and distributor to pharmacies and operates over 650, including the Jean Coutu acquisition. While the increasing pharmacy exposure boasts some positive aspects for Metro’s business, risks remain. Beyond outsize competition, several of Canada’s provincial governments have extended their control and cut generic drug prices relative to branded fare in 2018, which stands to constrain profitability.